e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
|
|
|
þ |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008, or
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 0-10587
FULTON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
|
|
|
PENNSYLVANIA
|
|
23-2195389 |
|
(State or other jurisdiction of
|
|
(I.R.S. Employer |
incorporation or organization)
|
|
Identification No.) |
|
|
|
One Penn Square, P. O. Box 4887, Lancaster, Pennsylvania
|
|
17604 |
|
(Address of principal executive offices)
|
|
(Zip Code) |
(717) 291-2411
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
|
|
Title of each class
|
|
Name of exchange on which registered |
|
|
|
Common Stock, $2.50 par value
|
|
The NASDAQ Stock Market, LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer þ |
|
Accelerated filer o |
|
Non-accelerated filer o
(Do not check if a smaller reporting company) |
|
Smaller reporting company 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, 2008, the last business day of the
registrants most recently completed second fiscal quarter, was approximately $1.7 billion. The
number of shares of the registrants Common Stock outstanding on January 31, 2009 was 175,432,000.
Portions of the Definitive Proxy Statement of the Registrant for the Annual Meeting of Shareholders
to be held on April 29, 2009 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 ten
community banks, two financial services companies and eleven non-bank entities. As of December 31,
2008, the Corporation had approximately 3,630 full-time equivalent employees.
The common stock of Fulton Financial Corporation is listed for quotation on the Global Select
Market of The NASDAQ Stock Market under the symbol FULT. The Corporations internet address is
www.fult.com. Electronic copies of the Corporations 2008 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 ten subsidiary banks are located primarily in suburban or semi-rural geographical
markets throughout a five state region (Pennsylvania, Delaware, Maryland, New Jersey 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 subsidiary bank into
another subsidiary bank creates operating and marketing efficiencies by leveraging existing brand
awareness over a larger geographic area. In March 2008, the former Resource Bank subsidiary
consolidated with Fulton Bank. In addition, during 2008, the Corporation announced the
consolidation of its Maryland banking subsidiaries. The consolidation, which is expected to take
place in 2009, will merge the Corporations Hagerstown Trust Company and Peoples Bank of Elkton
subsidiaries into its Columbia Bank subsidiary.
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 account and savings deposit
products, certificates of deposit and individual retirement accounts. The subsidiary banks offer a
variety of consumer lending products to creditworthy customers in their market areas. Secured loan
products include home equity loans and lines of credit, which are underwritten based on
loan-to-value limits specified in the lending policy. Subsidiary banks also offer a variety of
fixed and variable-rate products, including construction loans and jumbo loans. Residential
mortgages are offered through Fulton Mortgage Company which operates as a division of each
subsidiary bank (except for The Columbia Bank, which maintains its own mortgage lending operation).
Consumer loan products also include automobile loans, automobile and equipment leases, personal
lines of credit, credit cards and checking account overdraft protection.
Commercial banking services are provided to small and medium sized businesses (generally with sales
of less than $100 million) in the subsidiary banks market areas. The maximum total lending
commitment to an individual borrower was $33 million as of December 31, 2008, which is below the Corporations
regulatory lending limit. Commercial lending options include commercial, financial, 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 the London Interbank Offering Rate. The
Corporations commercial lending policy encourages relationship banking and provides strict
guidelines related to customer creditworthiness and collateral requirements. In addition,
construction lending, equipment leasing, credit cards, letters of credit, cash management services
and traditional deposit products are offered to commercial customers.
Through its financial services subsidiaries, the Corporation offers investment management, trust,
brokerage, insurance and investment advisory services in the market areas serviced by the
subsidiary banks.
3
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, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Main Office |
|
Total |
|
Total |
|
|
Subsidiary |
|
Location |
|
Assets |
|
Deposits |
|
Branches (1) |
|
|
|
|
(dollars in millions) |
|
|
|
|
Fulton Bank |
|
Lancaster, PA |
|
$ |
7,936 |
|
|
$ |
4,854 |
|
|
|
102 |
|
The Bank |
|
Woodbury, NJ |
|
|
2,036 |
|
|
|
1,567 |
|
|
|
51 |
|
The Columbia Bank |
|
Columbia, MD |
|
|
1,679 |
|
|
|
1,128 |
|
|
|
26 |
|
Lafayette Ambassador Bank |
|
Easton, PA |
|
|
1,418 |
|
|
|
1,042 |
|
|
|
25 |
|
Skylands Community Bank |
|
Hackettstown, NJ |
|
|
1,276 |
|
|
|
956 |
|
|
|
27 |
|
Hagerstown Trust Company |
|
Hagerstown, MD |
|
|
527 |
|
|
|
423 |
|
|
|
12 |
|
Delaware National Bank |
|
Georgetown, DE |
|
|
469 |
|
|
|
319 |
|
|
|
12 |
|
FNB Bank, N.A. |
|
Danville, PA |
|
|
364 |
|
|
|
273 |
|
|
|
10 |
|
Swineford National Bank |
|
Hummels Wharf, PA |
|
|
296 |
|
|
|
225 |
|
|
|
7 |
|
The Peoples Bank of Elkton |
|
Elkton, MD |
|
|
140 |
|
|
|
123 |
|
|
|
2 |
|
Fulton Financial Advisors, N.A. and
Fulton Insurance Services Group, Inc. |
|
Lancaster, PA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Remote service facilities (mainly stand-alone automated teller
machines) are excluded. See additional information in Item 2. Properties. |
Non-Bank Subsidiaries
The Corporation owns 100% of the common stock of five non-bank subsidiaries which are consolidated
for financial reporting purposes: (i) Fulton Reinsurance Company, LTD, which engages in the
business of reinsuring credit life and accident and health insurance directly related to extensions
of credit by the banking subsidiaries of the Corporation; (ii) Fulton Financial Realty Company,
which holds title to or leases certain properties upon which Corporation branch offices and other
facilities are located; (iii) Central Pennsylvania Financial Corp., which owns certain limited
partnership interests in partnerships invested in low and moderate income housing projects; (iv)
FFC Management, Inc., which owns certain investment securities and other passive investments; and
(v) 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 six non-bank subsidiaries which are not
consolidated for financial reporting purposes. The following table provides information for these
non-bank subsidiaries, whose sole assets consist of junior subordinated deferrable interest
debentures issued by the Corporation, as of December 31, 2008:
|
|
|
|
|
|
|
Subsidiary |
|
State of Incorporation |
|
Total Assets (in thousands) |
Fulton Capital Trust I |
|
Pennsylvania |
|
$ |
154,640 |
|
SVB Bald Eagle Statutory Trust I |
|
Connecticut |
|
|
4,124 |
|
Columbia Bancorp Statutory Trust |
|
Delaware |
|
|
6,186 |
|
Columbia Bancorp Statutory Trust II |
|
Delaware |
|
|
4,124 |
|
Columbia Bancorp Statutory Trust III |
|
Delaware |
|
|
6,186 |
|
PBI Capital Trust |
|
Delaware |
|
|
10,310 |
|
4
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 that do not have a physical presence in the Corporations geographical
markets.
The industry is also highly competitive due to the GLB Act. Under the GLB Act, banks, insurance
companies or securities firms may affiliate under a financial holding company structure, allowing
expansion into non-banking financial services activities that were previously restricted. These
include a full range of banking, securities and insurance activities, including securities and
insurance underwriting, issuing and selling annuities and merchant banking activities. While the
Corporation does not currently engage in all of these activities, the ability to do so without
separate approval from the Federal Reserve Board (FRB) enhances the ability of the Corporation
and financial holding companies in general to compete more effectively in all areas of financial
services.
As a result of the GLB Act, there is a great deal of competition for customers that were
traditionally served by the banking industry. While the GLB Act increased competition, it also
provided opportunities for the Corporation to expand its financial services offerings, 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 53 counties across five states. In nine of these
counties, the Corporation ranked in the top three in deposit market share (based on deposits as of
June 30, 2008). The following table summarizes information about the counties in which the
Corporation has branch offices and its market position in each county.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No. of Financial |
|
Deposit Market Share |
|
|
|
|
|
|
|
|
|
|
Institutions |
|
(June 30, 2008) |
|
|
|
|
Population |
|
|
|
Banks/ |
|
Credit |
|
|
|
|
County |
|
State |
|
(2008 Est.) |
|
Banking Subsidiary |
|
Thrifts |
|
Unions |
|
Rank |
|
% |
Lancaster |
|
PA |
|
|
500,000 |
|
|
Fulton Bank |
|
|
19 |
|
|
|
13 |
|
|
|
1 |
|
|
|
19.4 |
% |
Berks |
|
PA |
|
|
408,000 |
|
|
Fulton Bank |
|
|
21 |
|
|
|
12 |
|
|
|
9 |
|
|
|
2.9 |
% |
Bucks |
|
PA |
|
|
628,000 |
|
|
Fulton Bank |
|
|
37 |
|
|
|
16 |
|
|
|
17 |
|
|
|
1.9 |
% |
Centre |
|
PA |
|
|
142,000 |
|
|
Fulton Bank |
|
|
15 |
|
|
|
4 |
|
|
|
18 |
|
|
|
0.4 |
% |
Chester |
|
PA |
|
|
493,000 |
|
|
Fulton Bank |
|
|
42 |
|
|
|
5 |
|
|
|
15 |
|
|
|
1.4 |
% |
Columbia |
|
PA |
|
|
65,000 |
|
|
FNB Bank, N.A. |
|
|
7 |
|
|
|
|
|
|
|
6 |
|
|
|
5.1 |
% |
Cumberland |
|
PA |
|
|
229,000 |
|
|
Fulton Bank |
|
|
22 |
|
|
|
5 |
|
|
|
15 |
|
|
|
1.3 |
% |
Dauphin |
|
PA |
|
|
255,000 |
|
|
Fulton Bank |
|
|
19 |
|
|
|
9 |
|
|
|
7 |
|
|
|
3.0 |
% |
Delaware |
|
PA |
|
|
557,000 |
|
|
Fulton Bank |
|
|
43 |
|
|
|
16 |
|
|
|
42 |
|
|
|
0.1 |
% |
Lebanon |
|
PA |
|
|
129,000 |
|
|
Fulton Bank |
|
|
10 |
|
|
|
2 |
|
|
|
1 |
|
|
|
26.7 |
% |
Lehigh |
|
PA |
|
|
342,000 |
|
|
Lafayette Ambassador Bank |
|
|
19 |
|
|
|
13 |
|
|
|
9 |
|
|
|
3.5 |
% |
Lycoming |
|
PA |
|
|
117,000 |
|
|
FNB Bank, N.A. |
|
|
11 |
|
|
|
10 |
|
|
|
14 |
|
|
|
0.8 |
% |
Montgomery |
|
PA |
|
|
779,000 |
|
|
Fulton Bank |
|
|
50 |
|
|
|
23 |
|
|
|
34 |
|
|
|
0.3 |
% |
Montour |
|
PA |
|
|
18,000 |
|
|
FNB Bank, N.A. |
|
|
4 |
|
|
|
3 |
|
|
|
1 |
|
|
|
29.3 |
% |
Northampton |
|
PA |
|
|
297,000 |
|
|
Lafayette Ambassador Bank |
|
|
17 |
|
|
|
13 |
|
|
|
3 |
|
|
|
13.6 |
% |
Northumberland |
|
PA |
|
|
91,000 |
|
|
Swineford National Bank |
|
|
18 |
|
|
|
3 |
|
|
|
14 |
|
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
FNB Bank, N.A. |
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
4.8 |
% |
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No. of Financial |
|
Deposit Market Share |
|
|
|
|
|
|
|
|
|
|
Institutions |
|
(June 30, 2008) |
|
|
|
|
Population |
|
|
|
Banks/ |
|
Credit |
|
|
|
|
County |
|
State |
|
(2008 Est.) |
|
Banking Subsidiary |
|
Thrifts |
|
Unions |
|
Rank |
|
% |
Schuylkill |
|
PA |
|
|
147,000 |
|
|
Fulton Bank |
|
|
20 |
|
|
|
4 |
|
|
|
10 |
|
|
|
3.5 |
% |
Snyder |
|
PA |
|
|
38,000 |
|
|
Swineford National Bank |
|
|
8 |
|
|
|
|
|
|
|
1 |
|
|
|
28.8 |
% |
Union |
|
PA |
|
|
44,000 |
|
|
Swineford National Bank |
|
|
8 |
|
|
|
1 |
|
|
|
6 |
|
|
|
6.0 |
% |
York |
|
PA |
|
|
426,000 |
|
|
Fulton Bank |
|
|
18 |
|
|
|
16 |
|
|
|
5 |
|
|
|
8.7 |
% |
New Castle |
|
DE |
|
|
531,000 |
|
|
Delaware National Bank |
|
|
31 |
|
|
|
24 |
|
|
|
24 |
|
|
|
0.1 |
% |
Sussex |
|
DE |
|
|
186,000 |
|
|
Delaware National Bank |
|
|
16 |
|
|
|
4 |
|
|
|
6 |
|
|
|
0.7 |
% |
Anne Arundel |
|
MD |
|
|
512,000 |
|
|
The Columbia Bank |
|
|
32 |
|
|
|
8 |
|
|
|
37 |
|
|
|
|
|
Baltimore |
|
MD |
|
|
794,000 |
|
|
The Columbia Bank |
|
|
44 |
|
|
|
18 |
|
|
|
24 |
|
|
|
0.9 |
% |
Baltimore City |
|
MD |
|
|
639,000 |
|
|
The Columbia Bank |
|
|
40 |
|
|
|
16 |
|
|
|
25 |
|
|
|
0.3 |
% |
Cecil |
|
MD |
|
|
103,000 |
|
|
Peoples Bank of Elkton |
|
|
8 |
|
|
|
3 |
|
|
|
5 |
|
|
|
10.3 |
% |
Frederick |
|
MD |
|
|
228,000 |
|
|
The Columbia Bank |
|
|
18 |
|
|
|
2 |
|
|
|
16 |
|
|
|
0.5 |
% |
Howard |
|
MD |
|
|
277,000 |
|
|
The Columbia Bank |
|
|
20 |
|
|
|
3 |
|
|
|
2 |
|
|
|
13.2 |
% |
Montgomery |
|
MD |
|
|
941,000 |
|
|
The Columbia Bank |
|
|
36 |
|
|
|
20 |
|
|
|
33 |
|
|
|
0.3 |
% |
Prince Georges |
|
MD |
|
|
846,000 |
|
|
The Columbia Bank |
|
|
23 |
|
|
|
20 |
|
|
|
14 |
|
|
|
1.5 |
% |
Washington |
|
MD |
|
|
147,000 |
|
|
Hagerstown Trust Company |
|
|
13 |
|
|
|
3 |
|
|
|
2 |
|
|
|
18.8 |
% |
Atlantic |
|
NJ |
|
|
275,000 |
|
|
The Bank |
|
|
15 |
|
|
|
6 |
|
|
|
15 |
|
|
|
0.9 |
% |
Burlington |
|
NJ |
|
|
454,000 |
|
|
The Bank |
|
|
23 |
|
|
|
10 |
|
|
|
23 |
|
|
|
0.2 |
% |
Camden |
|
NJ |
|
|
519,000 |
|
|
The Bank |
|
|
21 |
|
|
|
8 |
|
|
|
12 |
|
|
|
1.5 |
% |
Cumberland |
|
NJ |
|
|
157,000 |
|
|
The Bank |
|
|
12 |
|
|
|
4 |
|
|
|
9 |
|
|
|
2.4 |
% |
Gloucester |
|
NJ |
|
|
288,000 |
|
|
The Bank |
|
|
22 |
|
|
|
4 |
|
|
|
2 |
|
|
|
13.4 |
% |
Hunterdon |
|
NJ |
|
|
132,000 |
|
|
Skylands Community Bank |
|
|
14 |
|
|
|
3 |
|
|
|
12 |
|
|
|
2.1 |
% |
Mercer |
|
NJ |
|
|
371,000 |
|
|
The Bank |
|
|
27 |
|
|
|
19 |
|
|
|
18 |
|
|
|
0.6 |
% |
Middlesex |
|
NJ |
|
|
791,000 |
|
|
Skylands Community Bank |
|
|
44 |
|
|
|
25 |
|
|
|
38 |
|
|
|
0.2 |
% |
Monmouth |
|
NJ |
|
|
637,000 |
|
|
The Bank |
|
|
27 |
|
|
|
9 |
|
|
|
24 |
|
|
|
0.7 |
% |
Morris |
|
NJ |
|
|
498,000 |
|
|
Skylands Community Bank |
|
|
33 |
|
|
|
10 |
|
|
|
17 |
|
|
|
1.4 |
% |
Ocean |
|
NJ |
|
|
571,000 |
|
|
The Bank |
|
|
23 |
|
|
|
6 |
|
|
|
16 |
|
|
|
0.8 |
% |
Salem |
|
NJ |
|
|
67,000 |
|
|
The Bank |
|
|
8 |
|
|
|
4 |
|
|
|
1 |
|
|
|
27.6 |
% |
Somerset |
|
NJ |
|
|
330,000 |
|
|
Skylands Community Bank |
|
|
26 |
|
|
|
7 |
|
|
|
8 |
|
|
|
3.4 |
% |
Sussex |
|
NJ |
|
|
155,000 |
|
|
Skylands Community Bank |
|
|
14 |
|
|
|
1 |
|
|
|
13 |
|
|
|
0.7 |
% |
Warren |
|
NJ |
|
|
112,000 |
|
|
Skylands Community Bank |
|
|
14 |
|
|
|
2 |
|
|
|
5 |
|
|
|
10.1 |
% |
Chesapeake |
|
VA |
|
|
222,000 |
|
|
Fulton Bank |
|
|
14 |
|
|
|
6 |
|
|
|
14 |
|
|
|
1.4 |
% |
Fairfax |
|
VA |
|
|
1,022,000 |
|
|
Fulton Bank |
|
|
40 |
|
|
|
14 |
|
|
|
25 |
|
|
|
0.2 |
% |
Henrico |
|
VA |
|
|
291,000 |
|
|
Fulton Bank |
|
|
24 |
|
|
|
10 |
|
|
|
25 |
|
|
|
0.1 |
% |
Manassas |
|
VA |
|
|
37,000 |
|
|
Fulton Bank |
|
|
14 |
|
|
|
1 |
|
|
|
10 |
|
|
|
1.9 |
% |
Newport News |
|
VA |
|
|
180,000 |
|
|
Fulton Bank |
|
|
12 |
|
|
|
7 |
|
|
|
15 |
|
|
|
0.8 |
% |
Richmond City |
|
VA |
|
|
192,000 |
|
|
Fulton Bank |
|
|
16 |
|
|
|
15 |
|
|
|
17 |
|
|
|
0.2 |
% |
Virginia Beach |
|
VA |
|
|
436,000 |
|
|
Fulton Bank |
|
|
16 |
|
|
|
8 |
|
|
|
9 |
|
|
|
2.3 |
% |
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
6
operating in the financial services industry, limit or expand permissible activities or affect competition among
banks and other financial institutions.
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 |
Subsidiary |
|
Charter |
|
Regulator(s) |
Fulton Bank |
|
PA
|
|
PA/FDIC |
The Bank |
|
NJ
|
|
NJ/FDIC |
The Columbia Bank |
|
MD
|
|
MD/FDIC |
Lafayette Ambassador Bank |
|
PA
|
|
PA/FRB |
Skylands Community Bank |
|
NJ
|
|
NJ/FDIC |
Hagerstown Trust Company |
|
MD
|
|
MD/FDIC |
Delaware National Bank |
|
National
|
|
OCC (1) |
FNB Bank, N.A. |
|
National
|
|
OCC |
Swineford National Bank |
|
National
|
|
OCC |
The Peoples Bank of Elkton |
|
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. |
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, among
others. In general, these statutes and related interpretations establish the eligible business
activities of the Corporation, certain acquisition and merger restrictions, limitations on
intercompany transactions such as loans and dividends and capital adequacy requirements, among
other statutes and regulations.
The Corporation is subject to regulation and examination by the FRB, and is required to file
periodic reports and to provide additional information that the FRB may require. In addition, the
FRB must approve certain proposed changes in organizational structure or other business activities
before they occur. The BHCA imposes certain restrictions upon the Corporation regarding the
acquisition of substantially all of the assets of or direct or indirect ownership or control of any
bank for which it is not already the majority owner.
Capital Requirements There are a number of restrictions on financial and bank holding
companies and FDIC-insured depository subsidiaries that are designed to minimize potential loss to
depositors and the FDIC insurance funds. If an FDIC-insured depository subsidiary is
undercapitalized, the bank holding company is required to ensure (subject to certain limits) the
subsidiarys compliance with the terms of any capital restoration plan filed with its appropriate
banking agency. Also, a bank holding company is required to serve as a source of financial strength
to its depository institution subsidiaries and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. Under the BHCA, the FRB has the
authority to require a bank holding company to terminate any activity or to relinquish control of a
non-bank subsidiary upon the FRBs determination that such activity or control constitutes a
serious risk to the financial soundness and stability of a depository institution subsidiary of the
bank holding company.
Bank holding companies are required to comply with the FRBs risk-based capital guidelines that
require a minimum ratio of total capital to risk-weighted assets of 8%. At least half of the total
capital is required to be Tier 1 capital. In addition to the risk-based capital guidelines, the FRB
has adopted a minimum leverage capital ratio under which a bank holding company must maintain a
level of Tier 1 capital to average total consolidated assets of at least 3% in the case of a bank
holding company which has the highest regulatory examination rating and is not contemplating
significant growth or expansion. All other bank holding companies are expected to maintain a
leverage capital ratio of at least 1% to 2% above the stated minimum.
7
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 may exist on paying dividends in excess of net income for specified periods.
See Note J Regulatory Matters in the Notes to Consolidated Financial Statements for additional
information regarding regulatory capital and dividend and loan limitations.
Federal Deposit Insurance Substantially all of the deposits of the Corporations
subsidiary banks are insured up to the applicable limits by the Bank Insurance Fund (BIF) of the
FDIC, generally up to $100,000 per insured depositor and up to $250,000 for retirement accounts.
Effective October 3, 2008 with the enactment of the Emergency Economic Stabilization Act of 2008
(EESA), the $100,000 insurance limit was increased to $250,000 through December 31, 2009. See
additional discussion of the EESA under Regulatory Developments. 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. For
the period from 1997 through 2006, the Corporations subsidiary banks (based on the FDICs
classification system), did not pay any premiums as the BIF was sufficiently funded. 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. During 2007 and 2008, the Corporations subsidiary
banks were assessed insurance premiums, which were partially offset by each affiliates
one-time credit. It is likely that premiums will continue to be assessed in the near term and that
the Corporations expense will increase as deposits grow and one-time credits expire. Furthermore,
with the recent increase in bank failures, the BIF has become underfunded and the FDIC has proposed
changes in the assessment rates which will become effective in 2009. In addition, the FDIC has
adopted an interim rule imposing an emergency special assessment of 20 basis points on insured
deposits. If this interim rule is implemented, the Corporation could incur additional FDIC
insurance premiums of approximately $20 million in 2009.
USA Patriot Act Anti-terrorism legislation enacted under the USA Patriot Act of 2001
(Patriot Act) expanded the scope of anti-money laundering laws and regulations and imposed
significant new compliance obligations for financial institutions, including the Corporations
subsidiary banks. These regulations include obligations to maintain appropriate policies,
procedures and controls to detect, prevent and report money laundering and terrorist financing.
Failure to comply with the Patriot Acts requirements could have serious legal, financial and
reputational consequences. The Corporation has adopted appropriate policies, procedures and
controls to address compliance with the Patriot Act and will continue to revise and update its
policies, procedures and controls to reflect 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 requires management to issue a report on the effectiveness of its
internal controls over financial reporting. In addition, the Corporations independent registered
public accountants are required to issue an opinion on the effectiveness of the Corporations
internal control over financial reporting. These reports can be found in Item 8, Financial
Statements and Supplementary Data. Certifications of the Chief Executive Officer and the Chief
Financial Officer as required by Sarbanes-Oxley and the resulting SEC rules can be found in the
Signatures and Exhibits sections.
8
Regulatory Developments On October 3, 2008 the EESA, also known as the Troubled Asset
Relief Program (TARP), was enacted. In connection with the EESA, the U.S. Treasury Department (UST)
initiated a Capital Purchase Program (CPP), which allows for qualifying financial institutions to
issue preferred stock to the UST, subject to certain limitations and terms. The EESA was developed
to attract broad participation by strong financial institutions, to stabilize the financial system
and increase lending to benefit the national economy and citizens of the U.S.
On December 23, 2008, the Corporation entered into a Securities Purchase Agreement with the UST
pursuant to which the Corporation sold to the UST for an aggregate purchase price of $376.5
million, 376,500 shares of preferred stock and warrants to purchase up to 5.5 million shares of
common stock of the Corporation. The preferred stock ranks senior to the Corporations common
shares and pays a compounding cumulative dividend at a rate of 5% per year for the first five
years, and 9% per year thereafter. The preferred stock is non-voting, other than class voting
rights on matters that could adversely affect the preferred stock. The preferred stock is callable
at par after three years. Prior to the end of three years, the preferred stock may be redeemed with
the proceeds from one or more qualified equity offerings, as defined, of any Tier 1 perpetual
preferred or common stock of at least $94.1 million. The UST may also
transfer the preferred stock to a third-party at any time. The Corporations preferred stock is
included as a component of Tier 1 capital in accordance with regulatory capital requirements.
As a condition of its participation in the CPP, and as long as the preferred stock issued to the
UST is outstanding, without the consent of the UST, common stock repurchases are currently limited
to purchases in connection with the administration of any employee benefit plan, consistent with
past practices, including purchases to offset share dilution in connection with any such plans
until December 2011 or until the UST no longer owns any of the Corporations preferred shares
issued under the CPP. In addition, the Corporation is prohibited from paying any dividend with
respect to shares of common stock or repurchasing or redeeming any shares of the Corporations
common shares in any quarter unless all accrued and unpaid dividends are paid on the preferred
stock for all past dividend periods (including the latest completed dividend period), subject to
certain limited exceptions. In addition, without the consent of the UST, the Corporation is
prohibited from declaring or paying any cash dividends on common shares in excess of $0.15 per
share, which was the last quarterly cash dividend per share declared prior to October 14, 2008.
See also Note M, Stock-based Compensation Plans and Shareholders Equity in the Notes to
Consolidated Financial Statements for additional details related to the Corporations participation
in the CPP.
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 net income or loss.
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 76% of total revenues in 2008. The narrowing of interest rate spreads, the
difference between interest rates earned on loans and investments and interest rates paid on
deposits and borrowings, could adversely affect the Corporations net interest income and financial
condition. 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. 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.
The severity and duration of the current recession and the composition of the Corporations loan
portfolio could impact the level of loan charge-offs and the provision for loan losses and may
affect the Corporations net income or loss.
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 further weaken
9
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:
|
|
|
borrowers may not be able to repay their loans; |
|
|
|
|
the value of the collateral securing the Corporations loans to borrowers may decline;
and |
|
|
|
|
the quality of the Corporations loan portfolio may decline. |
Any of these scenarios could require the Corporation to charge-off a higher percentage of its loans
and/or increase its provision for loan losses, which would negatively impact its results of
operations.
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.
During 2008, the Corporations provision for loan losses was $119.6 million. While the Corporation
believes that its allowance for loan losses as of December 31, 2008 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 negatively impacting its results of operations. A
decrease in real estate values could cause higher loan losses and require higher loan loss
provisions for loans that are secured by real estate.
Price fluctuations in securities markets, as well as recent market events, such as a continuation
of the disruption in credit and other markets and the abnormal functioning of markets for
securities, could have an impact on the Corporations results of operations.
As of December 31,
2008, the Corporations equity investments consisted of Federal
Home Loan Bank (FHLB) and Federal Reserve Bank stock ($85.3 million), common stocks of publicly traded financial institutions ($43.4
million), and money market mutual funds and other equity investments ($10.0 million). The value of
the securities in the Corporations equity portfolio may be affected by a number of factors,
including factors that impact the performance of the U.S. securities market in general and, due to
the concentration in stocks of financial institutions in the Corporations equity portfolio,
specific risks associated with that sector. Historically, gains on sales of stocks of other
financial institutions have been a recurring component of the Corporations earnings. However,
general economic conditions and uncertainty surrounding the financial institution sector as a whole
has impacted the value of these securities over the past two years. Further declines in bank stock
values could result in additional other-than-temporary impairment charges. During 2008, $43.1
million of impairment charges were recorded for stocks of financial institutions.
As of December 31, 2008, the Corporation has $119.9 million of corporate debt securities issued by
financial institutions whose values declined significantly during 2008. As with stocks of financial
institutions, continued declines in the values of these securities, combined with adverse changes
in the expected cash flows from these investments, could result in additional other-than-temporary
impairment charges. During 2008, $20.7 million of impairment charges were recorded for debt
securities issued by financial institutions.
The Corporations investment management and trust services income could also be impacted by
fluctuations in the securities market. A portion of this revenue is based on the value of the
underlying investment portfolios. If the values of those investment portfolios decrease, whether
due to factors influencing U.S. securities markets in general, or otherwise, the Corporations
revenue could be negatively impacted. In addition, the Corporations ability to sell its brokerage
services is dependent, in part, upon consumers level of confidence in the outlook for rising
securities prices.
During 2008, developments in the market for student loan auction rate securities (also known as
auction rate certificates or ARCs) resulted in the Corporation recording charges of $19.8
million.
The Corporations investment management and trust subsidiary, Fulton Financial Advisors, N.A.
(FFA), holds ARCs for some of its customers accounts. ARCs are one of several types of securities
that were previously utilized by FFA as short-term investment vehicles for its customers. ARCs are
long-term securities structured to allow their sale in periodic auctions, resulting in the
treatment of ARCs as short-term instruments in normal market conditions. However, in mid-February,
2008, market auctions for ARCs began to fail due to an insufficient number of buyers; these market
failures were the first widespread and continuing failures in the over 20-year history of the
auction rate securities markets. As a result, although the credit quality of ARCs has not been
impacted, ARCs are currently not liquid investments for their holders, including FFAs customers.
It is unclear when liquidity will return to this market.
10
FFA has agreed to purchase ARCs from customer accounts upon notification from customers that they
have liquidity needs or otherwise desire to liquidate their holdings. Specifically, FFA will
generally purchase customer ARCs at par value with an interest adjustment, which would position
customers as if they had owned 90-day U.S. Treasury bills instead of ARCs.
Management believes that the financial guarantee liability recorded as of December 31, 2008 is
adequate. Future purchases of ARCs, changes in their estimated fair value or changes in the
likelihood of their purchase could require the Corporation to make adjustments to the amount of the
liability and have a material impact on the Corporations results of operations.
If the goodwill that the Corporation has recorded in connection with its acquisitions becomes
impaired, it could have a negative impact on the Corporations results of operations.
The Corporation has historically supplemented its internal growth with strategic acquisitions of
banks, branches and other financial services companies. 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. During 2008, the
Corporation recorded a $90.0 million goodwill impairment charge for one of its defined reporting
units. As of December 31, 2008, the Corporation had $534.4 million of goodwill on its consolidated
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 earnings in the period in which
the impairment occurs. Despite the current years impairment charge, there can be no assurance that
future evaluations of goodwill will not result in additional findings of impairment.
Difficult conditions in the capital markets and the economy generally may materially adversely
affect the Corporations business and results of operations. The Corporation does not expect these
conditions to improve in the near future.
The Corporations results of operations and financial condition are affected by conditions in the
capital markets and the economy generally. The capital and credit markets have been experiencing
extreme volatility and disruption for more than twelve months. The volatility and disruption in
these markets have produced downward pressure on stock prices of, and credit availability to,
certain companies without regard to those companies underlying financial strength.
In response to the financial crises affecting the banking system and financial markets and going
concern threats to investment banks and other financial institutions, on October 3, 2008, President
Bush signed the Emergency Economic Stabilization Act of 2008 (EESA) into law. Pursuant to the EESA,
the U.S. Treasury (UST) was authorized to, among other things, deploy up to $750 billion into the
financial system. On February 17, 2009, President Obama signed the American Recovery and
Reinvestment Act of 2009 (ARRA) into law. The Federal Government, the Federal Reserve and other
governmental and regulatory bodies have taken or are considering taking other actions to address
the financial crisis. There can be no assurance as to what impact such actions will have on the
financial markets, including the extreme levels of volatility currently being experienced. Such
actions, although intended to aid the financial markets, and continued volatility in the markets
could materially and adversely affect our business, financial condition and results of operations,
or the trading price of our common stock.
Recently, concerns over the availability and cost of credit and a declining U.S. real estate market
have contributed to increased volatility and diminished expectations for the economy and the
capital and credit markets going forward. These factors, combined with declining business and
consumer confidence, have precipitated an economic slowdown and induced fears of a prolonged
recession. These events and the continuing market upheavals may have a continued adverse effect on
the Corporation.
Included among the potential adverse effects of the current economic downturn on the Corporation
are the following:
|
|
|
A prolonged economic downturn, especially one affecting the Corporations geographic
market areas, could reduce the Corporations customer base level of deposits and demand
for financial products, such as loans. The Corporations success depends significantly
upon the growth in population, income levels, deposits and housing
starts in its
geographic markets. Unlike many larger institutions, the Corporation
is not able to spread the risks
of unfavorable local economic conditions across a large number of diversified economies
and geographic locations. If the communities in which the
Corporation operates do not grow, or if
prevailing economic conditions locally or nationally are unfavorable,
its business could
be adversely affected. |
|
|
|
|
Recent negative developments in the financial industry and the credit markets may
subject the Corporation to additional regulation. As discussed above, the Corporation and
its subsidiaries are subject to regulations and examinations by various regulatory
authorities. In addition, as a result of its participation in the USTs Capital Purchase
Program (CPP), the Corporation is subject to certain restrictions associated with
participation in the CPP. |
11
|
|
|
As a result of the recent global financial crisis, the potential exists for new Federal or
state laws and regulations regarding lending and funding practices and liquidity standards,
and bank regulatory agencies are expected to be active in responding to concerns and trends
identified in examinations, which may result in the issuance of formal enforcement orders.
Negative developments in the financial industry and the domestic and international credit
markets, and the impact of new legislation in response to those developments, may
negatively impact the Corporations operations, including its ability to originate or sell
loans, and adversely impact its financial performance. |
|
|
|
|
The Corporations future growth and liquidity needs may require the Corporation to
raise additional capital in the future, but that capital may not be available when it is
needed or may be available at an excessive cost. The Corporation is required by regulatory
authorities to maintain adequate levels of capital to support its operations. In October
2008, the UST announced plans to direct $250 billion of its authority under EESA into
preferred stock investments in banks under the CPP. In November 2008, the Corporation
voluntarily applied to the UST to participate in the CPP and the application was approved.
As a result, on December 23, 2008, the Corporation issued $376.5 million of preferred
stock, as well as warrants to purchase 5.5 million shares of the Corporations common
stock, to the UST. |
|
|
|
|
The Corporation anticipates that current capital levels will satisfy regulatory
requirements for the foreseeable future. The Corporation may at some point choose to raise
additional capital to support its continued growth or to redeem the preferred stock issued
under the CPP. The Corporations ability to raise additional capital will depend, in part,
on conditions in the capital markets at that time, which are outside of the Corporations
control. Accordingly, the Corporation may be unable to raise additional capital, if and
when needed, on terms acceptable to the Corporation, or at all. If the Corporation cannot
raise additional capital when needed, its ability to further expand operations through
internal growth and acquisitions could be materially impacted. In addition, if the
Corporation decides to raise additional equity capital, shareholders interests could be
diluted. |
|
|
|
|
In addition to primary sources of liquidity in the form of principal and interest payments
on outstanding loans and investments and deposits, the Corporation maintains secondary
sources that provide it with additional liquidity. These secondary sources include secured
and unsecured borrowings from sources such as the Federal Reserve
Bank and FHLB and
third-party commercial banks. The Corporations strong liquidity position was further
enhanced by its participation in the CPP and it believes that it is well positioned to
withstand current market conditions. However, market liquidity conditions have been
negatively impacted by the recent disruptions in the capital markets and could, in the
future, have a negative impact on secondary sources of liquidity. |
The competition the Corporation faces is significant and may reduce the Corporations customer base
and negatively impact the Corporations results of operations.
There is significant competition among commercial banks in the market areas served by the
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
12
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 intercompany 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 and regulations are generally designed to
minimize potential loss to depositors and the FDIC insurance funds, they do not eliminate risk, and
compliance with such statutes and regulations increases the Corporations expense, requires
managements attention and can be a disadvantage from a competitive standpoint with respect to
non-regulated competitors.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The following table summarizes the Corporations branch properties, by subsidiary bank, as of
December 31, 2008. Remote service facilities (mainly stand-alone automated teller machines) are
excluded.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
Subsidiary Bank |
|
Owned |
|
Leased |
|
Branches |
Fulton Bank |
|
|
37 |
|
|
|
65 |
|
|
|
102 |
|
The Bank |
|
|
32 |
|
|
|
19 |
|
|
|
51 |
|
The Columbia Bank |
|
|
5 |
|
|
|
21 |
|
|
|
26 |
|
Lafayette Ambassador Bank |
|
|
8 |
|
|
|
17 |
|
|
|
25 |
|
Skylands Community Bank |
|
|
7 |
|
|
|
20 |
|
|
|
27 |
|
Hagerstown Trust Company |
|
|
6 |
|
|
|
6 |
|
|
|
12 |
|
Delaware National Bank |
|
|
9 |
|
|
|
3 |
|
|
|
12 |
|
FNB Bank, N.A. |
|
|
8 |
|
|
|
2 |
|
|
|
10 |
|
Swineford National Bank |
|
|
5 |
|
|
|
2 |
|
|
|
7 |
|
The Peoples Bank of Elkton |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
118 |
|
|
|
156 |
|
|
|
274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Corporations other significant administrative properties.
Banking subsidiaries also maintain administrative offices at their respective main banking
branches. These properties are included within the preceding table.
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned/ |
Entity |
|
Property |
|
Location |
|
Leased |
Fulton Bank/Fulton Financial Corporation |
|
Corporate Headquarters |
|
Lancaster, PA |
|
(1) |
Fulton Financial Corporation |
|
Operations Center |
|
East Petersburg, PA |
|
Owned |
Fulton Bank |
|
Operations Center |
|
Mantua, NJ |
|
Owned |
Lafayette Ambassador Bank |
|
Operations Center |
|
Bethlehem, PA |
|
Owned |
|
|
|
(1) |
|
Includes approximately 100,000 square feet which is owned by an independent third-party
who financed the construction through a loan from Fulton Bank. The Corporation is leasing
this space from the third-party in an arrangement accounted for as a capital lease. The
lease term expires in 2027. The Corporation owns the remainder of the Corporate
Headquarters location. This property also includes a Fulton Bank branch, which is included
in the preceding table. |
13
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 2008.
14
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Common Stock
As of December 31, 2008, the Corporation had 175.0 million shares of $2.50 par value common stock
outstanding held by approximately 48,000 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 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Range |
|
Per-Share |
|
|
High |
|
Low |
|
Dividend |
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
13.69 |
|
|
$ |
9.83 |
|
|
$ |
0.1500 |
|
Second Quarter |
|
|
13.66 |
|
|
|
10.03 |
|
|
|
0.1500 |
|
Third Quarter |
|
|
17.00 |
|
|
|
7.35 |
|
|
|
0.1500 |
|
Fourth Quarter |
|
|
13.04 |
|
|
|
7.89 |
|
|
|
0.1500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
16.81 |
|
|
$ |
14.50 |
|
|
$ |
0.1475 |
|
Second Quarter |
|
|
15.32 |
|
|
|
14.21 |
|
|
|
0.1500 |
|
Third Quarter |
|
|
16.26 |
|
|
|
11.25 |
|
|
|
0.1500 |
|
Fourth Quarter |
|
|
15.02 |
|
|
|
9.91 |
|
|
|
0.1500 |
|
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, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
7,056,184 |
|
|
$ |
13.66 |
|
|
|
13,609,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans
not approved by security
holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
7,056,184 |
|
|
$ |
13.66 |
|
|
|
13,609,429 |
|
|
|
|
|
|
|
|
|
|
|
15
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, 2003, in each of the following: (i) Fulton
Financial Corporation common stock; (ii) the stock of all U. S.
companies traded on The NASDAQ Stock Market and (iii) common stock of the performance peer group
approved by the Board of Directors on September 21, 2004 consisting of bank and financial holding
companies located throughout the United States with assets between $6-20 billion which were not a
party to a merger agreement as of the end of the period and (B) all dividends were reinvested in
such securities over the past five years. The graph is not indicative of future price performance.
The graph below is furnished under this Part II Item 5 of this Form 10-K and shall not be deemed to
be soliciting material or to be filed with the Commission or subject to Regulation 14A or 14C,
or to the liabilities of Section 18 of the Exchange Act of 1934, as amended.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index |
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fulton Financial Corporation |
|
|
100.00 |
|
|
|
115.21 |
|
|
|
112.35 |
|
|
|
115.99 |
|
|
|
81.37 |
|
|
|
73.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NASDAQ Composite |
|
|
100.00 |
|
|
|
108.59 |
|
|
|
110.08 |
|
|
|
120.56 |
|
|
|
132.39 |
|
|
|
78.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fulton Financial 2008 Peer Group |
|
|
100.00 |
|
|
|
116.00 |
|
|
|
115.67 |
|
|
|
126.42 |
|
|
|
102.33 |
|
|
|
88.74 |
|
|
|
|
|
|
(1) |
|
A listing of the Fulton Financial Peer Group is located under the heading
Compensation Discussion and Analysis within the Corporations 2009 Proxy
Statement. |
Issuer Purchases of Equity Securities
Not Applicable.
16
Item 6. Selected Financial Data
5-YEAR CONSOLIDATED SUMMARY OF FINANCIAL RESULTS
(dollars in thousands, except per-share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
867,494 |
|
|
$ |
939,577 |
|
|
$ |
864,507 |
|
|
$ |
625,767 |
|
|
$ |
493,643 |
|
Interest expense |
|
|
343,346 |
|
|
|
450,833 |
|
|
|
378,944 |
|
|
|
213,219 |
|
|
|
135,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
524,148 |
|
|
|
488,744 |
|
|
|
485,563 |
|
|
|
412,548 |
|
|
|
357,649 |
|
Provision for loan losses |
|
|
119,626 |
|
|
|
15,063 |
|
|
|
3,498 |
|
|
|
3,120 |
|
|
|
4,717 |
|
Investment securities (losses) gains, net |
|
|
(58,241 |
) |
|
|
1,740 |
|
|
|
7,439 |
|
|
|
6,625 |
|
|
|
17,712 |
|
Other income |
|
|
155,387 |
|
|
|
146,284 |
|
|
|
142,436 |
|
|
|
137,673 |
|
|
|
121,152 |
|
Gain on sale of credit card portfolio |
|
|
13,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses |
|
|
406,625 |
|
|
|
405,455 |
|
|
|
365,991 |
|
|
|
316,291 |
|
|
|
277,515 |
|
Goodwill impairment |
|
|
90,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
18,953 |
|
|
|
216,250 |
|
|
|
265,949 |
|
|
|
237,435 |
|
|
|
214,281 |
|
Income taxes |
|
|
24,570 |
|
|
|
63,532 |
|
|
|
80,422 |
|
|
|
71,361 |
|
|
|
64,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(5,617 |
) |
|
|
152,718 |
|
|
|
185,527 |
|
|
|
166,074 |
|
|
|
149,608 |
|
Preferred stock dividends and discount accretion |
|
|
(463 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders |
|
$ |
(6,080 |
) |
|
$ |
152,718 |
|
|
$ |
185,527 |
|
|
$ |
166,074 |
|
|
$ |
149,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER COMMON SHARE (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (basic) |
|
$ |
(0.03 |
) |
|
$ |
0.88 |
|
|
$ |
1.07 |
|
|
$ |
1.01 |
|
|
$ |
0.95 |
|
Net income (loss) (diluted) |
|
|
(0.03 |
) |
|
|
0.88 |
|
|
|
1.06 |
|
|
|
1.00 |
|
|
|
0.94 |
|
Cash dividends |
|
|
0.600 |
|
|
|
0.598 |
|
|
|
0.581 |
|
|
|
0.540 |
|
|
|
0.493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
(0.04 |
%) |
|
|
1.01 |
% |
|
|
1.30 |
% |
|
|
1.41 |
% |
|
|
1.45 |
% |
Return on average equity |
|
|
(0.35 |
) |
|
|
9.98 |
|
|
|
12.84 |
|
|
|
13.24 |
|
|
|
13.98 |
|
Return on average tangible equity (2) |
|
|
9.29 |
|
|
|
18.16 |
|
|
|
23.87 |
|
|
|
20.28 |
|
|
|
18.58 |
|
Net interest margin |
|
|
3.70 |
|
|
|
3.66 |
|
|
|
3.82 |
|
|
|
3.93 |
|
|
|
3.83 |
|
Efficiency ratio |
|
|
56.31 |
|
|
|
61.20 |
|
|
|
56.00 |
|
|
|
55.50 |
|
|
|
55.90 |
|
Ending tangible common equity to tangible assets |
|
|
5.97 |
|
|
|
6.03 |
|
|
|
5.98 |
|
|
|
6.98 |
|
|
|
7.94 |
|
Dividend payout ratio |
|
|
N/M |
|
|
|
68.00 |
|
|
|
54.80 |
|
|
|
54.00 |
|
|
|
52.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PERIOD-END BALANCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
16,185,106 |
|
|
$ |
15,923,098 |
|
|
$ |
14,918,964 |
|
|
$ |
12,401,555 |
|
|
$ |
11,160,148 |
|
Investment securities |
|
|
2,724,841 |
|
|
|
3,153,552 |
|
|
|
2,878,238 |
|
|
|
2,562,145 |
|
|
|
2,449,859 |
|
Loans, net of unearned income |
|
|
12,042,620 |
|
|
|
11,204,424 |
|
|
|
10,374,323 |
|
|
|
8,424,728 |
|
|
|
7,533,915 |
|
Deposits |
|
|
10,551,916 |
|
|
|
10,105,445 |
|
|
|
10,232,469 |
|
|
|
8,804,839 |
|
|
|
7,895,524 |
|
Federal Home Loan Bank advances and long-term debt |
|
|
1,787,797 |
|
|
|
1,642,133 |
|
|
|
1,304,148 |
|
|
|
860,345 |
|
|
|
684,236 |
|
Shareholders equity |
|
|
1,859,647 |
|
|
|
1,574,920 |
|
|
|
1,516,310 |
|
|
|
1,282,971 |
|
|
|
1,244,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE BALANCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
15,976,871 |
|
|
$ |
15,090,458 |
|
|
$ |
14,297,681 |
|
|
$ |
11,781,485 |
|
|
$ |
10,348,268 |
|
Investment securities |
|
|
2,924,340 |
|
|
|
2,843,478 |
|
|
|
2,869,862 |
|
|
|
2,498,538 |
|
|
|
2,563,143 |
|
Loans, net of unearned income |
|
|
11,595,243 |
|
|
|
10,736,566 |
|
|
|
9,892,082 |
|
|
|
7,981,604 |
|
|
|
6,857,386 |
|
Deposits |
|
|
10,016,528 |
|
|
|
10,222,594 |
|
|
|
9,955,247 |
|
|
|
8,364,435 |
|
|
|
7,285,134 |
|
Federal Home Loan Bank advances and long-term debt |
|
|
1,822,115 |
|
|
|
1,579,527 |
|
|
|
1,069,868 |
|
|
|
839,694 |
|
|
|
641,154 |
|
Shareholders equity |
|
|
1,609,828 |
|
|
|
1,530,613 |
|
|
|
1,444,793 |
|
|
|
1,254,476 |
|
|
|
1,069,904 |
|
|
|
|
N/M |
|
Not meaningful. |
|
(1) |
|
Adjusted for stock dividends and stock splits. |
|
(2) |
|
Net income (loss), as adjusted for intangible amortization (net of tax) and goodwill
impairment charges, divided by average common shareholders equity, net of goodwill and
intangible assets. |
17
Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations (Managements
Discussion) concerns Fulton Financial Corporation (the Corporation), a financial holding company
registered under the Bank Holding Company Act and incorporated under the laws of the Commonwealth
of Pennsylvania in 1982, and its wholly owned subsidiaries. Managements Discussion should be read
in conjunction with the consolidated financial statements and other financial information presented
in this report.
FORWARD-LOOKING STATEMENTS
The Corporation has made, and may continue to make, certain forward-looking statements with respect
to its acquisition and growth strategies; market risk; changes or adverse developments in economic,
political, or regulatory conditions; a continuation or worsening of the current disruption in
credit and other markets, including the lack of or reduced access to, and the abnormal functioning
of, markets for mortgages and other asset-backed securities and for commercial paper and other
short-term borrowings; the effect of competition and interest rates on net interest margin and net
interest income; investment strategy and income growth; investment securities gains; declines in
the value of securities which may result in charges to earnings; changes in rates of deposit and
loan growth; asset quality and the impact on assets from adverse changes in the economy and in
credit or other markets and resulting effects on credit risk and asset values; balances of
risk-sensitive assets to risk-sensitive liabilities; salaries and employee benefits and other
expenses; amortization of intangible assets; goodwill impairment; capital and liquidity strategies
and other financial and business matters for future periods. The Corporation cautions that these
forward-looking statements are subject to various assumptions, risks and uncertainties. Because of
the possibility of changes in these assumptions, actual results could differ materially from
forward-looking statements. The Corporation undertakes no obligations to update or revise any
forward-looking statements.
OVERVIEW
During 2008, the Corporation faced significant challenges associated with the overall economic
downturn. Poor economic conditions, which were initially evident within the residential housing
market beginning in 2007, spread throughout most sectors of the economy in 2008. The values of
various assets, including loans, investment securities and intangible assets, declined
significantly in the current year, resulting in a number of significant charges to earnings.
Despite these setbacks and the expectation of a challenging economy at least in the short-term
the Corporation believes it is positioned to withstand the current conditions through its strong
capital and liquidity positions, conservative underwriting of loans and prudent management of
interest rate risk.
Summary Financial Results
The Corporation generates the majority of its revenue through net interest income, or the
difference between interest earned on loans and investments and interest paid on deposits and
borrowings. Growth in net interest income is dependent upon balance sheet growth and/or maintaining
or increasing the net interest margin, which is net interest income (fully taxable-equivalent) as a
percentage of average interest-earning assets. The Corporation also generates revenue through fees
earned on the various services and products offered to its customers and through 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.
18
The following table presents a summary of the Corporations earnings and selected performance
ratios:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Net income (loss) available to common shareholders (in thousands) |
|
$ |
(6,080 |
) |
|
$ |
152,718 |
|
Income before income taxes (in thousands) |
|
$ |
18,953 |
|
|
$ |
216,250 |
|
Diluted net income (loss) per common share (1) |
|
$ |
(0.03 |
) |
|
$ |
0.88 |
|
Return on average assets |
|
|
(0.04 |
%) |
|
|
1.01 |
% |
Return on average equity (2) |
|
|
(0.35 |
%) |
|
|
9.98 |
% |
Return on average tangible equity (3) |
|
|
9.29 |
% |
|
|
18.16 |
% |
Net interest margin (4) |
|
|
3.70 |
% |
|
|
3.66 |
% |
Non-performing assets to total assets |
|
|
1.35 |
% |
|
|
0.76 |
% |
|
|
|
(1) |
|
Calculated as net income (loss) available to common
shareholders divided by diluted weighted average common shares
outstanding. |
|
(2) |
|
Calculated as net income (loss), divided by average shareholders equity. |
|
(3) |
|
Calculated as net income (loss), adjusted for intangible
amortization (net of tax) and goodwill impairment charges, divided by
average shareholders equity, excluding goodwill and intangible assets. |
|
(4) |
|
Presented on a fully taxable-equivalent (FTE) basis, using a
35% Federal tax rate and statutory interest expense disallowances. See
also Net Interest Income section of Managements Discussion. |
The Corporations income before income taxes in 2008 decreased $197.3 million, or 91.2%, from 2007.
The decrease in income before income taxes in 2008 in comparison to 2007 was primarily due to the
following:
Decreases in income before income taxes:
|
|
An increase in the provision for loan losses of $104.6 million, or 694.2%, to $119.6
million in 2008. |
|
|
|
During 2008, deteriorating economic conditions negatively impacted the quality of the
Corporations loan portfolio. In general, significant declines in residential real estate
values led to a slowing of the housing markets. This, in turn, had a detrimental impact on
residential real estate developers and their ability to meet the contractual payments on their
loans. Ultimately, as the slowdown spread through other sectors of the economy and recessionary
conditions became evident, other types of credit began to deteriorate as the confidence of both
businesses and consumers declined. |
|
|
|
The Corporations non-performing assets increased significantly, from $120.9 million, or 0.76%
of total assets, as of December 31, 2007 to $219.0 million, or 1.35% of total assets, as of
December 31, 2008, with significant increases occurring in non-performing construction loans,
commercial mortgages and commercial loans. Net charge-offs for 2008 were 0.45% of average loans,
compared to 0.09% in 2007. As a result of these increases in non-performing assets and net
charge-offs, the Corporation increased the provision for loan losses as additional allocations
of the allowance for loan losses became necessary. |
|
|
|
A goodwill impairment charge of $90.0 million, recorded in 2008. |
|
|
|
As required by Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (Statement 142), the Corporation completes an annual goodwill impairment test
as of October 31st each year. In connection with its 2008 impairment test, the Corporation
determined that the goodwill associated with its Columbia Bank reporting unit was impaired;
resulting in a $90.0 million impairment charge. |
|
|
|
A $65.0 million increase in charges related to the other-than-temporary impairment of
securities. |
|
|
|
During 2008, the Corporation recorded pre-tax charges of $65.3 million for the
other-than-temporary impairment of investment securities, recorded within investment securities
(losses) gains on the consolidated statements of operations. During 2007, the Corporation
recorded $324,000 of other-than-temporary impairment charges. Other-than-temporary impairment
charges were recognized mainly for the Corporations investments in stocks of financial
institutions and debt securities issued by financial institutions. Uncertainty surrounding the
sector as a whole negatively impacted the value of securities issued by financial institutions. |
|
|
|
During 2008, the Corporations other-than-temporary impairment charges related to stocks of
financial institutions were $43.1 million, while its other-than-temporary impairment charges for
debt securities were $20.7 million, primarily for pooled trust preferred securities issued by
financial institutions. |
19
|
|
Contingent losses of $19.8 million associated with the Corporations guarantee to purchase
illiquid auction rate securities from customers. |
|
|
|
The Corporations investment management and trust subsidiary, Fulton Financial Advisors, N.A.
(FFA), held student loan auction rate securities, also known as auction rate certificates
(ARCs), for some of its customers accounts. ARCs were one of several types of securities that
were previously utilized by FFA as short-term investment vehicles for its customers. ARCs are
long-term securities structured to allow their sale in periodic auctions, giving the securities
some of the characteristics of short-term instruments in normal market conditions. However, in
2008, market auctions for ARCs began to fail due to an insufficient number of buyers. As a
result, although the credit quality of ARCs was not impacted, they were not liquid investments
for their holders, including FFAs customers. |
|
|
|
During 2008, FFA agreed to purchase ARCs from customer accounts upon notification from customers
that they have liquidity needs or otherwise desire to liquidate their holdings. The estimated
fair value of this guarantee resulted in a $19.8 million pre-tax charge to earnings in 2008,
included within operating risk loss on the consolidated statements of operations. |
Increases in income before income taxes:
|
|
A $35.4 million, or 7.2%, increase in net interest income. |
|
|
|
The 2008 improvement in net interest income in comparison to 2007 was largely due to an increase
in average interest-earning assets, and a four basis point increase in net interest margin.
Decreases in interest rates on short-term borrowings and deposit balances were the result of the
Federal Reserve Board (FRB) lowering the target Federal funds rate a total of 400-425 basis
points since December 31, 2007 (from 4.25% to 0-0.25%). |
|
|
|
During 2008, interest rates paid on short-term borrowings and many deposit balances declined
more quickly than interest rates earned on assets. The more pronounced decrease in interest
expense during 2008 in comparison to 2007 produced an increase in net interest income and net
interest margin. Further decreases in rates on interest-bearing liabilities are not expected in
the near future, due both to the current low-interest rate environment and the ongoing strong
competition for deposits. As a result, the Corporation expects net interest margin compression
in 2009. See the discussion under the heading, Net Interest Income below, for additional
details. |
|
|
|
A $22.8 million reduction in pre-tax contingent losses associated with the potential
repurchase of previously sold residential mortgage and home equity loans. |
|
|
|
During 2007, the Corporation recorded $25.1 million of pre-tax charges associated with the
potential repurchase of residential mortgage and home equity loans sold to secondary market
investors through its former Resource Mortgage affiliate. During 2008, the Corporation recorded
an additional $2.3 million of contingent losses related to such loans, all of which were
originated prior to 2008. See Note O, Commitments and Contingencies in the Notes to
Consolidated Financial Statements for additional details. |
|
|
|
A $13.9 million pre-tax gain on the sale of the Corporations credit card portfolio. |
|
|
|
In 2008, the Corporation sold its approximately $87 million credit card portfolio to U.S. Bank
National Association ND, d/b/a Elan Financial Services (Elan), and recorded a $13.9 million
pre-tax gain on the transaction. |
|
|
|
Under a separate agreement, the Corporation provides ongoing marketing services on behalf of
Elan and receives fee income for each new account originated and a percentage of the revenue
earned on both new accounts and accounts sold. During 2008, the Corporation recognized $3.6
million of credit card fee income, included within other income on the consolidated statements
of operations, in connection with this agreement. |
|
|
|
The sale of the credit card portfolio reduced the Corporations net interest income for 2008.
During the year ended December 31, 2007, interest income earned on the credit card portfolio was
$14.8 million, or 1.6% of total interest income, at an average yield of 19.2%. In 2008, prior to
the sale of the credit card portfolio, the Corporation recognized interest income on the credit
card portfolio of $5.1 million at an average yield of 20.1%. Assuming the funding for credit
cards was provided by Federal funds purchased, the net interest income contribution of the
credit card portfolio in 2008 and 2007 was approximately $4.3 million and |
20
|
|
$10.9 million,
respectively. Despite the negative impact to the Corporations net interest income, the sale of
the credit card portfolio has resulted in a reduction of consumer credit risk, while providing a
future revenue stream. |
Participation in United States Treasury Capital Purchase Program
In connection with the Emergency Economic Stabilization Act of 2008 (EESA), the U.S. Treasury
Department (UST) initiated a Capital Purchase Program (CPP) which allows for qualifying financial
institutions to issue preferred stock to the UST, subject to certain limitations and terms. The
EESA was developed to attract broad participation by strong financial institutions, to stabilize
the financial system and increase lending to benefit the national economy and citizens of the U.S.
In December 2008, the Corporation voluntarily applied to the UST to participate in the CPP and the
application was approved. As a result, the Corporation issued $376.5 million of preferred stock,
including warrants to purchase 5.5 million shares of the Corporations common stock, to the UST in
December 2008.
For additional details related to the terms of the preferred stock and common stock warrants issued
by the Corporation, see Note M, Stock-based Compensation Plans and Shareholders Equity in the
Notes to Consolidated Financial Statements and the Financial Condition section of Managements
Discussion.
21
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the most significant component of the Corporations net income. 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 2008 compared to 2007 and
2006. Interest income and yields are presented on a fully taxable-equivalent (FTE) basis, using a
35% Federal tax rate and statutory interest expense disallowances. The discussion following this
table is based on these tax-equivalent amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
|
Balance |
|
|
Interest (1) |
|
|
Rate |
|
|
Balance |
|
|
Interest (1) |
|
|
Rate |
|
|
Balance |
|
|
Interest (1) |
|
|
Rate |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income (2) |
|
$ |
11,595,243 |
|
|
$ |
732,533 |
|
|
|
6.32 |
% |
|
$ |
10,736,566 |
|
|
$ |
805,881 |
|
|
|
7.51 |
% |
|
$ |
9,892,082 |
|
|
$ |
731,057 |
|
|
|
7.39 |
% |
Taxable inv. securities (3) |
|
|
2,228,204 |
|
|
|
110,220 |
|
|
|
4.82 |
|
|
|
2,157,325 |
|
|
|
99,621 |
|
|
|
4.62 |
|
|
|
2,268,209 |
|
|
|
97,652 |
|
|
|
4.31 |
|
Tax-exempt inv. securities (3) |
|
|
512,920 |
|
|
|
27,904 |
|
|
|
5.44 |
|
|
|
496,820 |
|
|
|
25,856 |
|
|
|
5.20 |
|
|
|
447,000 |
|
|
|
21,770 |
|
|
|
4.87 |
|
Equity securities (3) |
|
|
183,216 |
|
|
|
6,520 |
|
|
|
3.56 |
|
|
|
189,333 |
|
|
|
9,073 |
|
|
|
4.79 |
|
|
|
154,653 |
|
|
|
7,341 |
|
|
|
4.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
2,924,340 |
|
|
|
144,644 |
|
|
|
4.95 |
|
|
|
2,843,478 |
|
|
|
134,550 |
|
|
|
4.73 |
|
|
|
2,869,862 |
|
|
|
126,763 |
|
|
|
4.42 |
|
Loans held for sale |
|
|
93,085 |
|
|
|
5,701 |
|
|
|
6.12 |
|
|
|
166,437 |
|
|
|
11,501 |
|
|
|
6.91 |
|
|
|
215,255 |
|
|
|
15,564 |
|
|
|
7.23 |
|
Other interest-earning assets |
|
|
21,503 |
|
|
|
586 |
|
|
|
2.71 |
|
|
|
33,015 |
|
|
|
1,630 |
|
|
|
4.90 |
|
|
|
53,211 |
|
|
|
2,530 |
|
|
|
4.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
14,634,171 |
|
|
|
883,464 |
|
|
|
6.04 |
|
|
|
13,779,496 |
|
|
|
953,562 |
|
|
|
6.93 |
|
|
|
13,030,410 |
|
|
|
875,914 |
|
|
|
6.73 |
|
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
318,524 |
|
|
|
|
|
|
|
|
|
|
|
329,814 |
|
|
|
|
|
|
|
|
|
|
|
335,935 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
197,967 |
|
|
|
|
|
|
|
|
|
|
|
190,910 |
|
|
|
|
|
|
|
|
|
|
|
185,084 |
|
|
|
|
|
|
|
|
|
Other assets (3) |
|
|
951,270 |
|
|
|
|
|
|
|
|
|
|
|
899,292 |
|
|
|
|
|
|
|
|
|
|
|
852,186 |
|
|
|
|
|
|
|
|
|
Less: Allowance for
loan losses |
|
|
(125,061 |
) |
|
|
|
|
|
|
|
|
|
|
(109,054 |
) |
|
|
|
|
|
|
|
|
|
|
(105,934 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
15,976,871 |
|
|
|
|
|
|
|
|
|
|
$ |
15,090,458 |
|
|
|
|
|
|
|
|
|
|
$ |
14,297,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
1,714,029 |
|
|
$ |
13,168 |
|
|
|
0.77 |
% |
|
$ |
1,696,624 |
|
|
$ |
28,331 |
|
|
|
1.67 |
% |
|
$ |
1,673,407 |
|
|
$ |
25,112 |
|
|
|
1.50 |
% |
Savings deposits |
|
|
2,152,158 |
|
|
|
28,520 |
|
|
|
1.32 |
|
|
|
2,258,113 |
|
|
|
53,312 |
|
|
|
2.36 |
|
|
|
2,340,402 |
|
|
|
51,394 |
|
|
|
2.19 |
|
Time deposits |
|
|
4,502,399 |
|
|
|
170,426 |
|
|
|
3.79 |
|
|
|
4,553,994 |
|
|
|
212,752 |
|
|
|
4.67 |
|
|
|
4,134,190 |
|
|
|
170,435 |
|
|
|
4.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
8,368,586 |
|
|
|
212,114 |
|
|
|
2.53 |
|
|
|
8,508,731 |
|
|
|
294,395 |
|
|
|
3.46 |
|
|
|
8,147,999 |
|
|
|
246,941 |
|
|
|
3.03 |
|
Short-term borrowings |
|
|
2,336,526 |
|
|
|
50,091 |
|
|
|
2.12 |
|
|
|
1,574,495 |
|
|
|
73,983 |
|
|
|
4.66 |
|
|
|
1,653,974 |
|
|
|
78,043 |
|
|
|
4.67 |
|
Long-term debt |
|
|
1,822,115 |
|
|
|
81,141 |
|
|
|
4.45 |
|
|
|
1,579,527 |
|
|
|
82,455 |
|
|
|
5.22 |
|
|
|
1,069,868 |
|
|
|
53,960 |
|
|
|
5.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
12,527,227 |
|
|
|
343,346 |
|
|
|
2.74 |
|
|
|
11,662,753 |
|
|
|
450,833 |
|
|
|
3.86 |
|
|
|
10,871,841 |
|
|
|
378,944 |
|
|
|
3.48 |
|
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
1,647,942 |
|
|
|
|
|
|
|
|
|
|
|
1,713,863 |
|
|
|
|
|
|
|
|
|
|
|
1,807,248 |
|
|
|
|
|
|
|
|
|
Other |
|
|
191,874 |
|
|
|
|
|
|
|
|
|
|
|
183,229 |
|
|
|
|
|
|
|
|
|
|
|
173,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
14,367,043 |
|
|
|
|
|
|
|
|
|
|
|
13,559,845 |
|
|
|
|
|
|
|
|
|
|
|
12,852,888 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
1,609,828 |
|
|
|
|
|
|
|
|
|
|
|
1,530,613 |
|
|
|
|
|
|
|
|
|
|
|
1,444,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabs. and Equity |
|
$ |
15,976,871 |
|
|
|
|
|
|
|
|
|
|
$ |
15,090,458 |
|
|
|
|
|
|
|
|
|
|
$ |
14,297,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net
interest margin (FTE) |
|
|
|
|
|
|
540,118 |
|
|
|
3.70 |
% |
|
|
|
|
|
|
502,729 |
|
|
|
3.66 |
% |
|
|
|
|
|
|
496,970 |
|
|
|
3.82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent adjustment |
|
|
|
|
|
|
(15,970 |
) |
|
|
|
|
|
|
|
|
|
|
(13,985 |
) |
|
|
|
|
|
|
|
|
|
|
(11,407 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
524,148 |
|
|
|
|
|
|
|
|
|
|
$ |
488,744 |
|
|
|
|
|
|
|
|
|
|
$ |
485,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes dividends earned on equity securities. |
|
(2) |
|
Includes non-performing loans. |
|
(3) |
|
Balances include amortized historical cost for available for sale securities. The related
unrealized holding gains (losses) are included in other assets. |
22
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007 |
|
|
2007 vs. 2006 |
|
|
|
Increase (decrease) due |
|
|
Increase (decrease) due |
|
|
|
to change in |
|
|
to change in |
|
|
|
Volume |
|
|
Rate |
|
|
Net |
|
|
Volume |
|
|
Rate |
|
|
Net |
|
|
|
(in thousands) |
|
Interest income on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income |
|
$ |
61,027 |
|
|
$ |
(134,375 |
) |
|
$ |
(73,348 |
) |
|
$ |
63,236 |
|
|
$ |
11,588 |
|
|
$ |
74,824 |
|
Taxable investment securities |
|
|
4,588 |
|
|
|
6,011 |
|
|
|
10,599 |
|
|
|
(4,913 |
) |
|
|
6,882 |
|
|
|
1,969 |
|
Tax-exempt investment securities |
|
|
854 |
|
|
|
1,194 |
|
|
|
2,048 |
|
|
|
2,529 |
|
|
|
1,557 |
|
|
|
4,086 |
|
Equity securities |
|
|
(285 |
) |
|
|
(2,268 |
) |
|
|
(2,553 |
) |
|
|
1,661 |
|
|
|
71 |
|
|
|
1,732 |
|
Loans held for sale |
|
|
(4,610 |
) |
|
|
(1,190 |
) |
|
|
(5,800 |
) |
|
|
(3,399 |
) |
|
|
(664 |
) |
|
|
(4,063 |
) |
Short-term investments |
|
|
(457 |
) |
|
|
(587 |
) |
|
|
(1,044 |
) |
|
|
(984 |
) |
|
|
84 |
|
|
|
(900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
$ |
61,117 |
|
|
$ |
(131,215 |
) |
|
$ |
(70,098 |
) |
|
$ |
58,130 |
|
|
$ |
19,518 |
|
|
$ |
77,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
288 |
|
|
$ |
(15,451 |
) |
|
$ |
(15,163 |
) |
|
$ |
352 |
|
|
$ |
2,867 |
|
|
$ |
3,219 |
|
Savings deposits |
|
|
(2,375 |
) |
|
|
(22,417 |
) |
|
|
(24,792 |
) |
|
|
(1,914 |
) |
|
|
3,832 |
|
|
|
1,918 |
|
Time deposits |
|
|
(2,384 |
) |
|
|
(39,942 |
) |
|
|
(42,326 |
) |
|
|
18,304 |
|
|
|
24,013 |
|
|
|
42,317 |
|
Short-term borrowings |
|
|
26,332 |
|
|
|
(50,224 |
) |
|
|
(23,892 |
) |
|
|
(3,892 |
) |
|
|
(168 |
) |
|
|
(4,060 |
) |
Long-term debt |
|
|
11,713 |
|
|
|
(13,027 |
) |
|
|
(1,314 |
) |
|
|
26,543 |
|
|
|
1,952 |
|
|
|
28,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
$ |
33,574 |
|
|
$ |
(141,061 |
) |
|
$ |
(107,487 |
) |
|
$ |
39,393 |
|
|
$ |
32,496 |
|
|
$ |
71,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: Changes which are partially attributable to rate and volume are allocated based on the proportion of the direct changes attributable to rate and volume.
2008 vs. 2007
Interest income decreased $70.1 million, or 7.4%, due to a $131.2 million decrease caused by an 89
basis point decline in average rates, offset by a $61.1 million increase in interest income
realized from an $854.7 million, or 6.2%, increase in average balances.
The increase in average interest-earning assets was almost entirely due to loan growth. Average
loans increased by $858.7 million, or 8.0%, to $11.6 billion in 2008. The following table presents
the growth in average loans, net of unearned income, by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) |
|
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
Real estate commercial mortgage |
|
$ |
3,746,914 |
|
|
$ |
3,322,421 |
|
|
$ |
424,493 |
|
|
|
12.8 |
% |
Commercial industrial, financial and agricultural |
|
|
3,536,125 |
|
|
|
3,213,357 |
|
|
|
322,768 |
|
|
|
10.0 |
|
Real estate home equity |
|
|
1,597,376 |
|
|
|
1,454,753 |
|
|
|
142,623 |
|
|
|
9.8 |
|
Real estate construction |
|
|
1,310,076 |
|
|
|
1,402,029 |
|
|
|
(91,953 |
) |
|
|
(6.6 |
) |
Real estate residential mortgage |
|
|
918,830 |
|
|
|
751,649 |
|
|
|
167,181 |
|
|
|
22.2 |
|
Consumer |
|
|
399,112 |
|
|
|
506,201 |
|
|
|
(107,089 |
) |
|
|
(21.2 |
) |
Leasing and other |
|
|
86,810 |
|
|
|
86,156 |
|
|
|
654 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,595,243 |
|
|
$ |
10,736,566 |
|
|
$ |
858,677 |
|
|
|
8.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The growth in average loans was primarily due to increases in commercial mortgage and commercial
loans. The $424.5 million, or 12.8%, increase in commercial mortgage loans was mostly in floating
and adjustable rate loan products. The $322.8 million, or 10.0%, increase in commercial loans was
primarily in floating and adjustable rate loans and partially in fixed rate loan products.
The $167.2 million, or 22.2%, increase in residential mortgage loans was primarily due to growth in
traditional adjustable rate mortgages. The $142.6 million, or 9.8%, increase in home equity loans
was due to an increase in home equity lines of credit, due in
23
part to the introduction of a new blended fixed/floating rate loan product in late 2007 and an
increase in line of credit usage for existing borrowings.
Offsetting the above increases were a $107.1 million, or 21.2%, decrease in consumer loans and a
$92.0 million, or 6.6%, decrease in construction loans. The decrease in consumer loans was due
primarily to the Corporations sale of its approximately $87 million credit card portfolio in April
2008 and a decrease in the indirect automobile loan portfolio. The decrease in construction loans
was primarily due to a decrease in floating rate commercial construction loans.
The average yield on loans during 2008 of 6.32% represented a 119 basis point, or 15.8%, decrease
in comparison to 2007. The decrease in the average yield on loans reflected a lower average rate
environment, as illustrated by a lower average prime rate in 2008 (5.12%) as compared to 2007
(8.03%). The decrease in the average yield was not as pronounced as the decrease in the average
prime rate as fixed rate loans do not reprice when short-term rates decline.
Average loans held for sale decreased $73.4 million, or 44.1%, as a result of a $466.4 million, or
32.9%, decrease in the volume of loans originated for sale. The decrease in volumes of loans
originated for sale was mainly due to the Corporations exit from the national wholesale mortgage
business in the second half of 2007.
Average investments increased $80.9 million, or 2.8%. In late 2007, the Corporation pre-purchased
investments, based on the expected cash flows to be generated from maturing securities over an
approximate six-month period. The result of this pre-purchase was a higher average investment
balance for 2008. Also contributing to the increase was the sale of approximately $250 million of
lower-yielding investment securities during the first quarter of 2007, which lowered the balance of
average investment securities for 2007.
The average yield on investment securities increased 22 basis points from 4.73% in 2007 to 4.95% in
2008. The increase in yield was due to the systematic reinvestment of normal portfolio cash flows,
primarily from shorter-duration, lower-yielding mortgage-backed securities, into a combination of
higher-yielding mortgage-backed pass-through securities, conservative U.S. government issued
collateralized mortgage obligations and longer-term municipal securities.
Interest expense decreased $107.5 million, or 23.8%, to $343.3 million in 2008 from $450.8 million
in 2007. Interest expense decreased $141.1 million due to a 112 basis point, or 29.0%, decrease in
the average cost of total interest-bearing liabilities. This decrease was partially offset by an
increase in interest expense of $33.6 million caused by an $864.5 million, or 7.4%, increase in
average interest-bearing liabilities.
The following table summarizes the change in average deposits, by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) |
|
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
Noninterest-bearing demand |
|
$ |
1,647,942 |
|
|
$ |
1,713,863 |
|
|
$ |
(65,921 |
) |
|
|
(3.8 |
%) |
Interest-bearing demand |
|
|
1,714,029 |
|
|
|
1,696,624 |
|
|
|
17,405 |
|
|
|
1.0 |
|
Savings/money market |
|
|
2,152,158 |
|
|
|
2,258,113 |
|
|
|
(105,955 |
) |
|
|
(4.7 |
) |
Time deposits |
|
|
4,502,399 |
|
|
|
4,553,994 |
|
|
|
(51,595 |
) |
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,016,528 |
|
|
$ |
10,222,594 |
|
|
$ |
(206,066 |
) |
|
|
(2.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation experienced a net decrease in noninterest-bearing and interest-bearing demand and
savings accounts of $154.5 million, or 2.7%, primarily due to personal accounts. The $51.6 million
decrease in time deposits was due to a $137.2 million decrease in brokered certificates of deposit,
offset by an $85.6 million increase in customer certificates of deposit.
24
The following table summarizes the changes in average borrowings, by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) |
|
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
Short-term borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased |
|
$ |
1,328,888 |
|
|
$ |
808,358 |
|
|
$ |
520,530 |
|
|
|
64.4 |
% |
Short-term promissory notes |
|
|
454,473 |
|
|
|
404,527 |
|
|
|
49,946 |
|
|
|
12.3 |
|
FHLB overnight repurchase agreements |
|
|
303,224 |
|
|
|
89,742 |
|
|
|
213,482 |
|
|
|
237.9 |
|
Customer repurchase agreements |
|
|
227,130 |
|
|
|
247,948 |
|
|
|
(20,818 |
) |
|
|
(8.4 |
) |
Other short-term borrowings |
|
|
22,811 |
|
|
|
23,920 |
|
|
|
(1,109 |
) |
|
|
(4.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings |
|
|
2,336,526 |
|
|
|
1,574,495 |
|
|
|
762,031 |
|
|
|
48.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB Advances |
|
|
1,439,197 |
|
|
|
1,212,085 |
|
|
|
227,112 |
|
|
|
18.7 |
|
Other long-term debt |
|
|
382,918 |
|
|
|
367,442 |
|
|
|
15,476 |
|
|
|
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
1,822,115 |
|
|
|
1,579,527 |
|
|
|
242,588 |
|
|
|
15.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
$ |
4,158,641 |
|
|
$ |
3,154,022 |
|
|
$ |
1,004,619 |
|
|
|
31.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The $762.0 million, or 48.4%, increase in short-term borrowings was mainly due to a $520.5 million
increase in Federal funds purchased and a $213.5 million increase in Federal Home Loan Bank (FHLB)
overnight repurchase agreements. The $242.6 million, or 15.4%, increase in long-term debt was
primarily due to increases in FHLB advances as longer-term rates were locked and durations were
extended to manage interest rate risk. The total increase in borrowings of $1.0 billion was
principally employed to support overall balance sheet growth.
2007 vs. 2006
In February 2006, the Corporation acquired Columbia Bancorp (Columbia Bank), of Columbia, Maryland,
a $1.3 billion bank holding company whose primary subsidiary was The Columbia Bank. Results for
2007 in comparison to 2006 were impacted by a full year contribution by Columbia Bank in 2007,
compared to an eleven-month contribution in 2006.
Net interest income increased $5.8 million, or 1.2%, from $497.0 million in 2006 to $502.7 million
in 2007, due to an increase in average interest-earning assets, offset by a decline in net interest
margin.
Average interest-earning assets grew 5.7%, from $13.0 billion in 2006 to $13.8 billion in 2007.
Interest income increased $77.6 million, or 8.9%, primarily as a result of an increase in average
interest-earning assets, which contributed $58.1 million to the increase, with the remaining growth
in interest income due to the 20 basis point, or 3.0%, increase in average rates on
interest-earning assets. Columbia Bank contributed approximately $99 million to the increase in
average interest-earning assets.
Loan growth was particularly strong in the commercial loan and commercial mortgage categories,
which together increased $662.8 million, or 11.3%, with Columbia Bank contributing approximately
$35 million to the increase. The remaining growth in commercial loans was across all commercial
loan types, and throughout most subsidiary banks and geographical regions. The remaining growth in
commercial mortgages was primarily in adjustable rate mortgages.
The increases in residential mortgage loans of $113.0 million, or 17.6%, was due to growth in
adjustable rate mortgage loans ($87.9 million, or a 20.6% increase) and the impact of $23.7 million
of residential mortgage loans repurchased in 2007 that were previously sold to secondary market
investors.
Additional increases in loans were due to increases in construction loans of $39.4 million, or
2.9%, and home equity loans of $37.5 million, or 2.6%. Columbia Bank contributed approximately $36
million and $16 million to the increases in construction loans and home equity loans, respectively.
The remaining increase in home equity loans was due to the repurchase of previously sold loans
during 2007 and due to the introduction of a blended fixed/floating rate product in late 2007.
25
Offsetting these increases was a $16.6 million, or 3.2%, decrease in average consumer loans. The
Corporations indirect automobile portfolio decreased $33.9 million, or 10.9%, while growth in
credit card outstandings of $17.0 million, or 28.2%, somewhat offset this decline.
The average yield on loans during 2007 of 7.51% represented a 12 basis point, or 1.6%, increase in
comparison to 2006. The increase in the average yield on loans reflected a higher average rate
environment, as illustrated by a higher average prime rate in 2007 (8.03%) as compared to 2006
(7.96%).
Average loans held for sale decreased $48.8 million, or 22.7%, as a result of lower volumes mainly
due to the Corporations exit from the national wholesale mortgage business.
Average investments decreased $26.4 million, or 0.9%, while the average yield on investment
securities increased 31 basis points from 4.42% in 2006 to 4.73% in 2007. The increase in yield was
primarily attributable to the Corporations systematic reinvestment of normal portfolio cash flows,
primarily from lower duration, significantly lower yielding balloon mortgage-backed securities,
into a combination of higher yielding mortgage-backed pass-through securities, conservative
collateralized mortgage obligations, as well as longer term municipal securities. Also contributing
to the increase in yield was a reduction in premium amortization, which is accounted for as an
offset to interest income, from $4.8 million in 2006 to $3.5 million in 2007. The decrease in
amortization reflects the cumulative impact of initiatives to reduce the premium levels of
mortgage-backed securities purchased during 2006 and 2007 and stable prepayment experience on
relatively short duration mortgage-backed securities purchased prior to that period.
The increase in interest income was offset by an increase in interest expense of $71.9 million, or
19.0%, to $450.8 million in 2007 from $378.9 million in 2006. Interest expense increased $39.4
million due to a $790.9 million, or 7.3%, increase in average interest-bearing liabilities and
$32.5 million due to a 38 basis point, or 10.9%, increase in the average cost of total
interest-bearing liabilities. The increase in the average cost of interest-bearing liabilities
primarily resulted from a change in deposit composition as non-interest bearing demand and lower
cost savings and money market deposits shifted toward higher cost certificates of deposit. Columbia
Bank contributed approximately $81 million to the increase in average interest-bearing liabilities.
The time deposit increase of $419.8 million was due to normal growth and existing customers
shifting funds from noninterest-bearing and interest-bearing demand and savings accounts to time
deposits to take advantage of higher rates. The net decrease in demand and savings accounts of
$152.5 million, or 2.6%, was net of an approximately $42 million increase related to the Columbia
Bank acquisition. Growing core deposits continued to be a challenge for the Corporation, and banks
in general, as more attractive investment opportunities existed for consumers over the past two
years, including equity markets and higher yielding time deposits.
During 2007, the Corporation obtained additional borrowings to fund loan growth. Average borrowings
increased $430.2 million, or 15.8%, during 2007, with Columbia Bank contributing approximately $21
million to the increase. The $79.5 million, or 4.8%, decrease in short-term borrowings was mainly
due to a decrease in Federal funds purchased, offset by a net increase of $136.8 million, or 26.5%,
in short-term promissory notes and customer repurchase agreements. Average long-term debt increased
$509.7 million, or 47.6%, to $1.6 billion. The increase in long-term debt was primarily due to
increases in FHLB advances as longer-term rates were locked and durations were extended to manage
interest rate risk, and partially due to the May 2007 issuance of $100.0 million of ten-year
subordinated notes. On an ending balance basis, however, short-term borrowings increased $703.1
million, or 41.8%, as continued growth in loans and investments during the latter part of 2007
required additional funding that could not be generated by deposit growth.
Provision and Allowance for Credit Losses
The Corporation accounts for the credit risk associated with lending activities through its
allowance for credit losses and provision for loan losses. The provision is the expense recognized
on the consolidated statements of operations to adjust the allowance to its proper balance, as
determined through the application of the Corporations allowance methodology procedures. These
procedures include the evaluation of the risk characteristics of the portfolio and documentation in
accordance with the Securities and Exchange Commissions (SEC) Staff Accounting Bulletin No. 102,
Selected Loan Loss Allowance Methodology and Documentation Issues (SAB 102). See the Critical
Accounting Policies section of Managements Discussion for a discussion of the Corporations
allowance for credit loss evaluation methodology.
26
A summary of the Corporations loan loss experience follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
Loans, net of unearned income outstanding
at end of year |
|
$ |
12,042,620 |
|
|
$ |
11,204,424 |
|
|
$ |
10,374,323 |
|
|
$ |
8,424,728 |
|
|
$ |
7,533,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily average balance of loans, net of
unearned income |
|
$ |
11,595,243 |
|
|
$ |
10,736,566 |
|
|
$ |
9,892,082 |
|
|
$ |
7,981,604 |
|
|
$ |
6,857,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of allowance for credit losses
at beginning of year |
|
$ |
112,209 |
|
|
$ |
106,884 |
|
|
$ |
92,847 |
|
|
$ |
89,627 |
|
|
$ |
77,700 |
|
Loans charged off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial financial and agricultural |
|
|
18,592 |
|
|
|
6,796 |
|
|
|
3,013 |
|
|
|
4,095 |
|
|
|
3,482 |
|
Real estate mortgage |
|
|
28,275 |
|
|
|
1,206 |
|
|
|
429 |
|
|
|
467 |
|
|
|
1,466 |
|
Consumer |
|
|
5,188 |
|
|
|
3,678 |
|
|
|
3,138 |
|
|
|
3,436 |
|
|
|
3,476 |
|
Leasing and other |
|
|
4,804 |
|
|
|
2,059 |
|
|
|
389 |
|
|
|
206 |
|
|
|
453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans charged off |
|
|
56,859 |
|
|
|
13,739 |
|
|
|
6,969 |
|
|
|
8,204 |
|
|
|
8,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries of loans previously charged off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial financial and agricultural |
|
|
1,795 |
|
|
|
1,664 |
|
|
|
2,863 |
|
|
|
2,705 |
|
|
|
2,042 |
|
Real estate mortgage |
|
|
446 |
|
|
|
178 |
|
|
|
268 |
|
|
|
1,245 |
|
|
|
906 |
|
Consumer |
|
|
1,487 |
|
|
|
1,246 |
|
|
|
1,289 |
|
|
|
1,169 |
|
|
|
1,496 |
|
Leasing and other |
|
|
1,433 |
|
|
|
913 |
|
|
|
97 |
|
|
|
77 |
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
5,161 |
|
|
|
4,001 |
|
|
|
4,517 |
|
|
|
5,196 |
|
|
|
4,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged off |
|
|
51,698 |
|
|
|
9,738 |
|
|
|
2,452 |
|
|
|
3,008 |
|
|
|
4,357 |
|
Provision for loan losses |
|
|
119,626 |
|
|
|
15,063 |
|
|
|
3,498 |
|
|
|
3,120 |
|
|
|
4,717 |
|
Allowance of purchased entities |
|
|
|
|
|
|
|
|
|
|
12,991 |
|
|
|
3,108 |
|
|
|
11,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
180,137 |
|
|
$ |
112,209 |
|
|
$ |
106,884 |
|
|
$ |
92,847 |
|
|
$ |
89,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Allowance for Credit Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
173,946 |
|
|
$ |
107,547 |
|
|
$ |
106,884 |
|
|
$ |
92,847 |
|
|
$ |
89,627 |
|
Reserve for unfunded lending commitments (1) |
|
|
6,191 |
|
|
|
4,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
$ |
180,137 |
|
|
$ |
112,209 |
|
|
$ |
106,884 |
|
|
$ |
92,847 |
|
|
$ |
89,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Asset Quality Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans, net of
unearned income |
|
|
0.45 |
% |
|
|
0.09 |
% |
|
|
0.02 |
% |
|
|
0.04 |
% |
|
|
0.06 |
% |
Allowance for loan losses to loans, net of unearned
income outstanding at end of year |
|
|
1.44 |
% |
|
|
0.96 |
% |
|
|
1.03 |
% |
|
|
1.10 |
% |
|
|
1.19 |
% |
Allowance for credit losses to loans, net of
unearned
income outstanding at end of year |
|
|
1.50 |
% |
|
|
1.00 |
% |
|
|
1.03 |
% |
|
|
1.10 |
% |
|
|
1.19 |
% |
Non-performing assets (2) to total assets |
|
|
1.35 |
% |
|
|
0.76 |
% |
|
|
0.39 |
% |
|
|
0.38 |
% |
|
|
0.30 |
% |
Non-accrual loans to total loans, net of
unearned income |
|
|
1.34 |
% |
|
|
0.68 |
% |
|
|
0.32 |
% |
|
|
0.43 |
% |
|
|
0.30 |
% |
|
|
|
(1) |
|
Reserve for unfunded lending commitments transferred to other liabilities as of December
31, 2007. Prior periods were not reclassified. |
|
(2) |
|
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 |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Non-accrual loans (1) (2) (3) |
|
$ |
161,962 |
|
|
$ |
76,150 |
|
|
$ |
33,113 |
|
|
$ |
36,560 |
|
|
$ |
22,574 |
|
Accruing loans past due 90 days or more |
|
|
35,177 |
|
|
|
29,782 |
|
|
|
20,632 |
|
|
|
9,012 |
|
|
|
8,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans |
|
|
197,139 |
|
|
|
105,932 |
|
|
|
53,745 |
|
|
|
45,572 |
|
|
|
30,892 |
|
Other real estate |
|
|
21,855 |
|
|
|
14,934 |
|
|
|
4,103 |
|
|
|
2,072 |
|
|
|
2,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets |
|
$ |
218,994 |
|
|
$ |
120,866 |
|
|
$ |
57,848 |
|
|
$ |
47,644 |
|
|
$ |
33,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In 2008, the total interest income that would have been recorded if
non-accrual loans had been current in accordance with their original terms
was approximately $14.0 million. The amount of interest income on non-accrual
loans that was included in 2008 income was approximately $987,000. |
|
(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, may
continue to accrue interest after reaching 90 days past due. |
|
(3) |
|
Excluded from the amounts presented as of December 31, 2008 were
$427.6 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 the Financial Accounting Standards Boards Statement of
Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan, but continue to pay according to their contractual
terms and are, therefore, not included in non-performing loans. Non-accrual
loans include $77.1 million of impaired loans. |
The following table summarizes the Corporations non-performing loans, by type, as of the indicated
dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Real estate construction |
|
$ |
80,083 |
|
|
$ |
30,927 |
|
|
$ |
13,385 |
|
|
$ |
374 |
|
|
$ |
92 |
|
Real estate commercial mortgage |
|
|
41,745 |
|
|
|
14,515 |
|
|
|
8,776 |
|
|
|
9,853 |
|
|
|
7,652 |
|
Commercial industrial, agricultural and financial |
|
|
40,294 |
|
|
|
27,715 |
|
|
|
21,706 |
|
|
|
25,585 |
|
|
|
10,583 |
|
Real estate residential mortgage and home equity |
|
|
26,304 |
|
|
|
25,774 |
|
|
|
7,085 |
|
|
|
7,384 |
|
|
|
9,720 |
|
Consumer |
|
|
8,374 |
|
|
|
4,741 |
|
|
|
2,793 |
|
|
|
2,287 |
|
|
|
2,657 |
|
Leasing |
|
|
339 |
|
|
|
2,260 |
|
|
|
|
|
|
|
89 |
|
|
|
188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans |
|
$ |
197,139 |
|
|
$ |
105,932 |
|
|
$ |
53,745 |
|
|
$ |
45,572 |
|
|
$ |
30,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
The following table summarizes the allocation of the allowance for loan losses by loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
Loans |
|
|
|
|
|
|
Loans |
|
|
|
|
|
|
Loans in |
|
|
|
|
|
|
Loans in |
|
|
|
|
|
|
Loans in |
|
|
|
|
|
|
In Each |
|
|
|
|
|
In Each |
|
|
|
|
|
Each |
|
|
|
|
|
Each |
|
|
|
|
|
Each |
|
|
|
Allowance |
|
|
Category |
|
|
Allowance |
|
|
Category |
|
|
Allowance |
|
|
Category |
|
|
Allowance |
|
|
Category |
|
|
Allowance |
|
|
Category |
|
Comml financial &
agricultural |
|
$ |
66,147 |
|
|
|
30.2 |
% |
|
$ |
53,194 |
|
|
|
30.6 |
% |
|
$ |
52,942 |
|
|
|
28.6 |
% |
|
$ |
52,379 |
|
|
|
28.2 |
% |
|
$ |
43,207 |
|
|
|
30.1 |
% |
Real estate
mortgage |
|
|
82,477 |
|
|
|
66.0 |
|
|
|
35,584 |
|
|
|
64.2 |
|
|
|
37,197 |
|
|
|
65.5 |
|
|
|
17,602 |
|
|
|
64.7 |
|
|
|
19,784 |
|
|
|
62.5 |
|
Consumer, leasing
& other |
|
|
8,167 |
|
|
|
3.8 |
|
|
|
8,142 |
|
|
|
5.2 |
|
|
|
6,475 |
|
|
|
5.9 |
|
|
|
7,935 |
|
|
|
7.1 |
|
|
|
16,289 |
|
|
|
7.4 |
|
Unallocated |
|
|
17,155 |
|
|
|
|
|
|
|
10,627 |
|
|
|
|
|
|
|
10,270 |
|
|
|
|
|
|
|
14,931 |
|
|
|
|
|
|
|
10,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
173,946 |
|
|
|
100.0 |
% |
|
$ |
107,547 |
|
|
|
100.0 |
% |
|
$ |
106,884 |
|
|
|
100.0 |
% |
|
$ |
92,847 |
|
|
|
100.0 |
% |
|
$ |
89,627 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets increased to $219.0 million, or 1.35% of total assets, as of December 31,
2008, from $120.9 million, or 0.76% of total assets, as of December 31, 2007.
Non-performing loans increased $91.2 million, or 86.1%, due to increases in non-performing
construction loans ($49.2 million, or 158.9%), commercial mortgages ($27.2 million, or 187.6%) and
commercial loans ($12.6 million, or 45.4%). The increase in construction loans was due to
residential real estate developers, specifically in the Corporations Maryland and Virginia
markets, who have been severely impacted by declining demand for residential housing. The increase
in non-performing commercial and commercial mortgage loans was due to worsening general economic
conditions, with increases across most industries and geographical areas.
The $21.9 million balance of other real estate owned as of December 31, 2008 was primarily due to
foreclosures on repurchased residential mortgage loans, which contributed $15.9 million to the
balance of other real estate owned.
The Corporations net charge-offs for 2008 increased at levels consistent with the increase in
non-performing assets. Geographically, these charge-offs were spread throughout the Corporations
footprint. In comparison to 2007, net charge-offs increased $42.0 million, or 430.9%. Net
charge-offs as a percentage of average loans were 0.45% in 2008, a 36 basis point increase from
0.09% in 2007. Of the $56.9 million of gross charge-offs in 2008, $25.6 million were the result of
individual charge-offs greater than $1.0 million, including $17.1 million related to residential
construction and land development loans, $5.7 million related to commercial loans and $2.8 related
to leases of commercial equipment.
As a result of the significant increases in non-performing loans and net charge-offs detailed
above, the provision for loan losses increased $104.6 million, or 694.2%, from $15.1 million in
2007 to $119.6 million in 2008.
The provision for loan losses is determined by the allowance allocation process, whereby an
estimated need is allocated to impaired loans as defined by the Financial Accounting Standards
Boards (FASB) Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan (Statement 114), or to pools of loans under Statement of Financial Accounting
Standards No. 5, Accounting for Contingencies (Statement 5). 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% as of December 31,
2008. 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 for loan losses balance of $173.9
million as of December 31, 2008 is sufficient to cover losses inherent in the loan portfolio on
that date and is appropriate based on applicable accounting standards.
29
Other Income and Expenses
2008 vs. 2007
Other Income
The following table presents the components of other income for the past two years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) |
|
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
61,640 |
|
|
$ |
46,500 |
|
|
$ |
15,140 |
|
|
|
32.6 |
% |
Other service charges and fees |
|
|
36,247 |
|
|
|
32,151 |
|
|
|
4,096 |
|
|
|
12.7 |
|
Investment management and trust services |
|
|
32,734 |
|
|
|
38,665 |
|
|
|
(5,931 |
) |
|
|
(15.3 |
) |
Gain on sale of credit card portfolio |
|
|
13,910 |
|
|
|
|
|
|
|
13,910 |
|
|
|
N/A |
|
Gains on sale of mortgage loans |
|
|
10,332 |
|
|
|
14,294 |
|
|
|
(3,962 |
) |
|
|
(27.7 |
) |
Credit card servicing income |
|
|
3,587 |
|
|
|
|
|
|
|
3,587 |
|
|
|
N/A |
|
Other |
|
|
10,847 |
|
|
|
14,674 |
|
|
|
(3,827 |
) |
|
|
(26.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, excluding investment securities
(losses) gains |
|
|
169,297 |
|
|
|
146,284 |
|
|
|
23,013 |
|
|
|
15.7 |
|
Investment securities (losses) gains |
|
|
(58,241 |
) |
|
|
1,740 |
|
|
|
(59,981 |
) |
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
111,056 |
|
|
$ |
148,024 |
|
|
$ |
(36,968 |
) |
|
|
(25.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A Not Applicable.
N/M Not Meaningful. |
The increase in service charges on deposit accounts was primarily due to an increase in overdraft
fees of $13.0 million, or 58.1%, and an increase in cash management fees of $1.7 million, or
15.1%. The increase in overdraft fees was mainly due to a new overdraft program that was introduced
in November 2007. The increase in cash management fees was due to increased sales during 2007,
resulting in a higher revenue stream in 2008.
The $4.1 million, or 12.7%, increase in other service charges and fees was due to a $2.7 million,
or 63.2%, increase in foreign currency processing revenue, due primarily to an increase in volume,
a $1.1 million, or 12.5%, increase in debit card fees, also due to increased volumes, and a
$658,000, or 12.5%, increase in letter of credit fees.
The decrease in investment management and trust services income was primarily due to a $4.9
million, or 38.2%, decrease in brokerage revenue. During 2008, the Corporation began transitioning
its brokerage business from a transaction-based model to a relationship model, which generates fees
based on the values of assets under management rather than transaction volume. This transition had
a negative impact on brokerage revenue due to expected business disruptions. The negative
performance of equity markets also contributed to the decrease in investment management and trust
services income.
The decreases in gains on sale of mortgage loans resulted from lower sales volumes. Total loans
sold were $648.1 million in 2008 and $1.3 billion in 2007, mainly due to the exit from the national
wholesale residential mortgage business in 2007.
The $3.6 million of credit card servicing income was related to income earned subsequent to the
Corporations April 2008 credit card portfolio sale. Under a separate agreement entered into with
the purchaser, the Corporation receives fee income for each new account originated and a percentage
of the revenue earned on both new accounts and accounts sold.
The $3.8 million decrease in other income was primarily due to a $2.1 million gain related to the
resolution of litigation and the sale of certain assets between the Corporation and an unaffiliated
bank and a $700,000 gain related to the redemption of a partnership interest, both recorded in
2007. In 2008, the Corporation recorded a $1.0 million mortgage servicing rights impairment charge
as a reduction to servicing income. For additional details related to this impairment, see Note G,
Mortgage Servicing Rights in the Notes to Consolidated Financial Statements.
Investment securities losses of $58.2 million for 2008 were primarily due to charges to recognize
other-than-temporary impairment of $43.1 million related to financial institution stocks, $20.7
million related to debt securities and $1.5 million for other equity securities.
30
In addition, the Corporation recorded a $2.7 million loss related to the write-off of a
collaterialized mortgage obligation that was delivered as collateral for interest rate swaps with a
failed financial institution. The recovery of this asset is contingent upon the outcome of
bankruptcy proceedings. These impairment charges were offset by $4.8 million in gains from the
redemption of Class B shares in connection with Visa, Inc.s (Visa) initial public offering and
gains on the sale of MasterCard, Incorporated shares, in addition to net gains of $2.9 million and
$2.1 million on the sale of equity securities and debt securities, respectively.
Other Expenses
The following table presents the components of other expenses for each of the past two years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) |
|
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
Salaries and employee benefits |
|
$ |
213,557 |
|
|
$ |
217,526 |
|
|
$ |
(3,969 |
) |
|
|
(1.8 |
%) |
Net occupancy expense |
|
|
42,239 |
|
|
|
39,965 |
|
|
|
2,274 |
|
|
|
5.7 |
|
Operating risk loss |
|
|
24,308 |
|
|
|
27,229 |
|
|
|
(2,921 |
) |
|
|
(10.7 |
) |
Equipment expense |
|
|
13,332 |
|
|
|
13,892 |
|
|
|
(560 |
) |
|
|
(4.0 |
) |
Marketing |
|
|
13,267 |
|
|
|
11,334 |
|
|
|
1,933 |
|
|
|
17.1 |
|
Data processing |
|
|
12,813 |
|
|
|
12,755 |
|
|
|
58 |
|
|
|
0.5 |
|
Telecommunications |
|
|
8,172 |
|
|
|
8,094 |
|
|
|
78 |
|
|
|
1.0 |
|
Professional fees |
|
|
7,618 |
|
|
|
7,277 |
|
|
|
341 |
|
|
|
4.7 |
|
Intangible amortization |
|
|
7,162 |
|
|
|
8,334 |
|
|
|
(1,172 |
) |
|
|
(14.1 |
) |
Supplies |
|
|
5,773 |
|
|
|
5,825 |
|
|
|
(52 |
) |
|
|
(0.9 |
) |
Postage |
|
|
5,474 |
|
|
|
5,312 |
|
|
|
162 |
|
|
|
3.0 |
|
FDIC insurance premiums |
|
|
4,562 |
|
|
|
1,808 |
|
|
|
2,754 |
|
|
|
152.3 |
|
Goodwill impairment |
|
|
90,000 |
|
|
|
|
|
|
|
90,000 |
|
|
|
N/A |
|
Other |
|
|
48,348 |
|
|
|
46,104 |
|
|
|
2,244 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
496,625 |
|
|
$ |
405,455 |
|
|
$ |
91,170 |
|
|
|
22.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits decreased $4.0 million, or 1.8%, with salaries decreasing $1.1
million, or 0.6%, and benefits decreasing $2.9 million, or 7.1%.
The decrease in salaries was due to staff reductions that were made as part of a corporate-wide
workforce management and centralization initiative that began in 2007 and a decrease in stock-based
compensation, offset by normal merit increases. Average full-time equivalent employees decreased
from 3,840 in 2007 to 3,660 in 2008.
Employee
benefits decreased $2.9 million, or 7.1%, due to a $2.0 million reduction associated with
the curtailment of the Corporations defined benefit pension plan and a net decrease in expenses
for the Corporations retirement plans as a result of changes in contribution formulas in 2008.
Also contributing to the decrease was a reduction in severance expenses.
Net occupancy expense increased $2.3 million, or 5.7%. The increase was due to additional expenses
related to rental, maintenance, utility and depreciation of real property as a result of growth in
the branch network during 2008 in comparison to 2007. The Corporation added 5 full service branches
to its network in both 2008 and 2007.
Included within operating risk loss were charges recorded for losses on the actual and potential
repurchase of residential mortgage and home equity loans that had been originated and sold in the
secondary market and losses related to the Corporations decision to purchase illiquid ARCs from
customer accounts. The $2.9 million, or 10.7%, decrease in operating risk loss was due to a $22.8
million decrease in losses on the actual and potential repurchase of residential mortgage and home
equity loans, offset by $19.8 million of charges, recorded in 2008, related to the Corporations
guarantee to purchase ARCs from customer accounts. See Note O, Commitments and Contingencies in
the Notes to Consolidated Financial Statements for additional information.
The $560,000 decrease in equipment expense and the $1.2 million decrease in intangible amortization
were due to both equipment and intangible assets becoming fully depreciated and amortized during
2008. The $1.9 million increase in marketing expenses was due to deposit promotional campaigns, new
branch promotions and customer service initiatives undertaken during 2008.
31
The $2.8 million increase in Federal Deposit Insurance Corporation (FDIC) insurance premiums was
due to the expiration of one-time credits and an increase in insured deposits. In 2008, gross FDIC
insurance premiums were $7.0 million, reduced by $2.4 million of one-time credits. In 2007, gross
FDIC insurance premiums were $6.7 million, reduced by $4.9 million of one-time credits. The FDIC
adjusted its insurance assessment rates for 2009. Based on the estimated level of insured deposits
and the current 2009 assessment rates, the Corporation expects to incur approximately $14 million
of FDIC insurance premiums in 2009, net of one-time credits. In addition, the FDIC has adopted an
interim rule imposing an emergency special assessment of 20 basis points on insured deposits. If
this interim rule is implemented, the Corporation could incur additional FDIC insurance premiums of
approximately $20 million in 2009.
The $2.2 million, or 4.9%, increase in other expenses was due to a $5.2 million increase in costs
associated with the maintenance and disposition of foreclosed real estate and a $2.9 million
increase in consulting fees, primarily associated with new information technology initiatives.
Offsetting these increases was a $2.9 million decrease in other expenses due to the reversal of
litigation reserves associated with the Corporations share of indemnification liabilities with
Visa, which were no longer necessary as a result of Visas initial public offering in 2008, and a
$2.7 million decrease in state taxes due to the consolidation of certain subsidiary banks in 2007
and 2008.
2007 vs. 2006
Other Income
Service charges on deposit accounts increased $2.7 million, or 6.2%. The increase in service
charges on deposit accounts was due to increases of $1.5 million and $1.8 million in cash
management fees and overdraft fees, respectively, offset by a $591,000 decrease in other service
charges earned on both business and personal deposit accounts. The increase in overdraft fees was
partially due to a new overdraft program which began in November 2007. Investment management and
trust services increased $1.2 million, or 3.3%. The increase in investment management and trust
services was primarily due to trust revenue ($1.4 million, or 5.9%), offset by a decrease in
brokerage revenue of $206,000, or 1.6%. The increase in trust revenue was due to improvements in
equity markets increasing the values of assets under management.
Other service charges and fees grew $5.4 million, or 20.0%, led by an increase of $3.0 million in
foreign currency processing revenue as a result of the acquisition of a foreign currency processing
company at the end of 2006, a $1.2 million, or 15.9%, increase in debit card fees and an increase
in merchant fees of $664,000, or 9.7%. Both debit card fees and merchant fees increased as a result
of growth in transaction volume.
Gains on sale of mortgage loans decreased $6.8 million, or 32.2%, due to lower sales volumes,
offset by an increase on the spread on sales of 3 basis points, or 2.9%. Total loans sold were $1.3
billion in 2007 and $2.0 billion in 2006. Of the $679.4 million, or 34.9%, decrease, $636.4 million
occurred mainly due to the Corporations exit from the national wholesale residential mortgage
business.
Other income increased $1.3 million, or 10.0%. The increase in other income was primarily due to a
$2.1 million gain related to the resolution of litigation and the sale of certain assets between
the Corporation and an unaffiliated bank, offset by lower gains on sales of bank facilities in
2007.
Investment securities gains decreased $5.7 million, or 76.6%, in 2007. Investment securities gains,
net of realized losses, included realized gains on the sale of equity securities of $1.6 million in
2007, compared to $7.0 million in 2006, and net gains of $96,000 on the sales of available for sale
debt securities in 2007, compared to $474,000 in 2006.
Other Expenses
Salaries and employee benefits increased $3.6 million, or 1.7%, with salaries increasing $1.6
million, or 0.9%, and benefits increasing $2.0 million, or 5.3%.
The slight increase in salaries was due to lower salary deferrals as residential mortgage
origination volumes declined, offset by reductions in bonus expense. Full-time and part-time
salaries decreased by $619,000, or 0.4%, due to normal salary increases being offset by decreases
from the Corporations Resource Bank subsidiary and other staff reductions made as part of a
corporate-wide workforce management and centralization initiative. Average full-time equivalent
employees decreased from 4,020 in 2006 to 3,840 in 2007. As of December 31, 2007, full-time
equivalent employees were approximately 3,680.
32
Employee benefits increased $2.0 million, or 5.3%, primarily due to $2.0 million of severance
expense related to staff reductions and a $578,000 increase in healthcare costs, offset by reduced
retirement expense as a result of the curtailment of the defined benefit pension plan during 2007.
Net occupancy expense increased $3.5 million, or 9.5%. The increase in net occupancy expense was
due to additional expenses related to rental, maintenance, utility and depreciation of real
property as a result of growth in the branch network during 2007 in comparison to 2006, as well as
the impact of the Columbia Bank acquisition. During 2007 and 2006, the Corporation added 5 and 11
full service branches to its network, respectively.
Operating risk loss increased $22.4 million, or 465.2%. The increase in operating risk loss was due
to $25.1 million of charges recorded during 2007 for losses on the actual and potential repurchase
of residential mortgage and home equity loans that had been originated and sold in the secondary
market. Professional fees increased $2.2 million, or 43.9%, due to fees incurred for an independent
review related to repurchases of previously sold loans, greater reductions in legal fees during
2006 related to recoveries of non-accrual loans, and an increase in other unrelated legal fees.
The $6.6 million, or 16.0%, increase in other expenses included the following: $1.5 million of
charges for the Corporations subsidiary banks share, as members of Visa USA, of settled and
pending litigation incurred by Visa in various lawsuits, a $1.1 million charge for the write-off of
trade name intangible assets resulting from the consolidation of certain bank subsidiaries, a $1.1
million increase in the provision for customer reward points earned on credit cards, a $1.3 million
increase in costs associated with the disposition and maintenance of foreclosed real estate,
$570,000 in costs associated with the closure of national wholesale residential mortgage offices
and a $504,000 unfavorable net impact of the change in fair values of derivative financial
instruments. These increases were offset by a $1.6 million expense related to the settlement of a
lawsuit during 2006.
Income Taxes
Income taxes decreased $39.0 million, or 61.3%, in 2008 and decreased $16.9 million, or 21.0%, in
2007. The Corporations effective tax rate (income taxes divided by income before income taxes) was
129.6%, 29.4% and 30.2% in 2008, 2007 and 2006, respectively.
The effective tax rate for 2008 was significantly impacted by the $90.0 million goodwill impairment
charge, which is not deductible for income tax purposes. Excluding the impact of the goodwill
charge, the Corporations effective tax rate for 2008 was 22.6%. This adjusted effective rate for
2008 is lower than the prior years effective tax rates due to non-taxable income and tax credits
having a larger impact on the effective rate due to the decrease in income before taxes.
The Corporations effective tax rates are generally lower than the 35% Federal statutory rate due
to 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, $3.7 million and $3.9 million in 2008, 2007 and 2006, respectively.
For additional information regarding income taxes, see Note K, Income Taxes, in the Notes to
Consolidated Financial Statements.
33
FINANCIAL CONDITION
The table below presents condensed consolidated ending balance sheets for the Corporation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
Increase (decrease) |
|
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
331,164 |
|
|
$ |
381,283 |
|
|
$ |
(50,119 |
) |
|
|
(13.1 |
%) |
Other earning assets |
|
|
117,550 |
|
|
|
125,137 |
|
|
|
(7,587 |
) |
|
|
(6.1 |
) |
Investment securities |
|
|
2,724,841 |
|
|
|
3,153,552 |
|
|
|
(428,711 |
) |
|
|
(13.6 |
) |
Loans, net of allowance |
|
|
11,868,674 |
|
|
|
11,096,877 |
|
|
|
771,797 |
|
|
|
7.0 |
|
Premises and equipment |
|
|
202,657 |
|
|
|
193,296 |
|
|
|
9,361 |
|
|
|
4.8 |
|
Goodwill and intangible assets |
|
|
557,833 |
|
|
|
654,908 |
|
|
|
(97,075 |
) |
|
|
(14.8 |
) |
Other assets |
|
|
382,387 |
|
|
|
318,045 |
|
|
|
64,342 |
|
|
|
20.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
16,185,106 |
|
|
$ |
15,923,098 |
|
|
$ |
262,008 |
|
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
10,551,916 |
|
|
$ |
10,105,445 |
|
|
$ |
446,471 |
|
|
|
4.4 |
% |
Short-term borrowings |
|
|
1,762,770 |
|
|
|
2,383,944 |
|
|
|
(621,174 |
) |
|
|
(26.1 |
) |
Long-term debt |
|
|
1,787,797 |
|
|
|
1,642,133 |
|
|
|
145,664 |
|
|
|
8.9 |
|
Other liabilities |
|
|
222,976 |
|
|
|
216,656 |
|
|
|
6,320 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
14,325,459 |
|
|
|
14,348,178 |
|
|
|
(22,719 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
1,859,647 |
|
|
|
1,574,920 |
|
|
|
284,727 |
|
|
|
18.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders
Equity |
|
$ |
16,185,106 |
|
|
$ |
15,923,098 |
|
|
$ |
262,008 |
|
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets increased $262.0 million, or 1.6%, to $16.2 billion as of December 31, 2008, from
$15.9 billion as of December 31, 2007. Total loans, net of the allowance for loan losses, increased
$771.8 million, or 7.0%, while investment securities decreased $428.7 million, or 13.6%. Total
liabilities decreased $22.7 million, or 0.2%, due to a net decrease in short and long-term
borrowings of $475.5 million, or 11.8%, offset by a $446.5 million, or 4.4% increase in deposits.
Shareholders equity increased $284.7 million, or 18.1%, mainly as a result of the issuance of
preferred stock to the UST.
34
Loans
The following table presents loans outstanding, by type, as of the dates shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Real-estate commercial mortgage |
|
$ |
4,017,075 |
|
|
$ |
3,480,958 |
|
|
$ |
3,202,706 |
|
|
$ |
2,831,405 |
|
|
$ |
2,461,016 |
|
Commercial industrial, financial
and agricultural |
|
|
3,635,544 |
|
|
|
3,427,085 |
|
|
|
2,965,186 |
|
|
|
2,375,669 |
|
|
|
2,273,138 |
|
Real-estate home equity |
|
|
1,695,671 |
|
|
|
1,501,231 |
|
|
|
1,455,439 |
|
|
|
1,205,523 |
|
|
|
1,107,067 |
|
Real-estate construction |
|
|
1,268,955 |
|
|
|
1,366,923 |
|
|
|
1,440,180 |
|
|
|
851,555 |
|
|
|
595,567 |
|
Real-estate residential mortgage |
|
|
972,797 |
|
|
|
848,901 |
|
|
|
696,568 |
|
|
|
567,629 |
|
|
|
543,072 |
|
Consumer |
|
|
365,419 |
|
|
|
500,708 |
|
|
|
523,066 |
|
|
|
520,098 |
|
|
|
488,059 |
|
Leasing and other |
|
|
97,687 |
|
|
|
89,383 |
|
|
|
100,711 |
|
|
|
79,738 |
|
|
|
72,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans |
|
|
12,053,148 |
|
|
|
11,215,189 |
|
|
|
10,383,856 |
|
|
|
8,431,617 |
|
|
|
7,540,714 |
|
Unearned income |
|
|
(10,528 |
) |
|
|
(10,765 |
) |
|
|
(9,533 |
) |
|
|
(6,889 |
) |
|
|
(6,799 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income |
|
$ |
12,042,620 |
|
|
$ |
11,204,424 |
|
|
$ |
10,374,323 |
|
|
$ |
8,424,728 |
|
|
$ |
7,533,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of unearned income, increased $838.2 million, or 7.5%, in 2008 primarily due to an
increase in commercial mortgage loans of $536.1 million, or 15.4%, and an increase in commercial
loans of $208.5 million, or 6.1%. The increase in commercial mortgage loans was in floating and
adjustable rate loan products, while the increase in commercial loans was in fixed, floating and
adjustable rate loans. Also contributing to the increase in loans were increases in home equity
loans of $194.4 million, or 13.0%, and residential mortgages of $123.9 million, or 14.6%. The
increase in home equity loans was due to both new lines of credit and increases in borrowings
outstanding on existing lines of credit. The increase in residential mortgages was primarily in
traditional adjustable rate loans. These increases were offset by a decrease in construction loans
of $98.0 million, or 7.2%, and a decrease in consumer loans of $135.3 million, or 27.0%. The
decrease in construction loans was related to the slowdown in residential housing construction and
the decrease in consumer loans was due primarily to the Corporations sale of its credit card
portfolio.
Approximately $5.3 billion, or 43.9%, of the Corporations loan portfolio was in commercial
mortgage and construction loans as of December 31, 2008. While the Corporation does not have a
concentration of credit risk with any single borrower, industry or geographical location, the
performance of real estate markets and general economic conditions have adversely impacted the
performance of these loans.
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 |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
HTM |
|
|
AFS |
|
|
Total |
|
|
HTM |
|
|
AFS |
|
|
Total |
|
|
HTM |
|
|
AFS |
|
|
Total |
|
|
|
(in thousands) |
|
U.S. Government securities |
|
$ |
|
|
|
$ |
14,628 |
|
|
$ |
14,628 |
|
|
$ |
|
|
|
$ |
14,536 |
|
|
$ |
14,536 |
|
|
$ |
|
|
|
$ |
17,066 |
|
|
$ |
17,066 |
|
U.S. Government sponsored
agency securities |
|
|
6,782 |
|
|
|
77,002 |
|
|
|
83,784 |
|
|
|
6,478 |
|
|
|
202,523 |
|
|
|
209,001 |
|
|
|
7,648 |
|
|
|
288,465 |
|
|
|
296,113 |
|
State and municipal |
|
|
825 |
|
|
|
523,536 |
|
|
|
524,361 |
|
|
|
1,120 |
|
|
|
521,538 |
|
|
|
522,658 |
|
|
|
1,262 |
|
|
|
488,279 |
|
|
|
489,541 |
|
Corporate debt securities |
|
|
25 |
|
|
|
119,894 |
|
|
|
119,919 |
|
|
|
25 |
|
|
|
165,982 |
|
|
|
166,007 |
|
|
|
75 |
|
|
|
70,637 |
|
|
|
70,712 |
|
Collateralized mortgage
obligations |
|
|
|
|
|
|
504,193 |
|
|
|
504,193 |
|
|
|
|
|
|
|
594,775 |
|
|
|
594,775 |
|
|
|
|
|
|
|
492,524 |
|
|
|
492,524 |
|
Mortgage-backed securities |
|
|
2,004 |
|
|
|
1,141,351 |
|
|
|
1,143,355 |
|
|
|
2,662 |
|
|
|
1,452,188 |
|
|
|
1,454,850 |
|
|
|
3,539 |
|
|
|
1,343,107 |
|
|
|
1,346,646 |
|
Auction rate securities (1) |
|
|
|
|
|
|
195,900 |
|
|
|
195,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
9,636 |
|
|
|
2,576,504 |
|
|
|
2,586,140 |
|
|
|
10,285 |
|
|
|
2,951,542 |
|
|
|
2,961,827 |
|
|
|
12,524 |
|
|
|
2,700,078 |
|
|
|
2,712,602 |
|
Equity securities |
|
|
|
|
|
|
138,701 |
|
|
|
138,701 |
|
|
|
|
|
|
|
191,725 |
|
|
|
191,725 |
|
|
|
|
|
|
|
165,636 |
|
|
|
165,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,636 |
|
|
$ |
2,715,205 |
|
|
$ |
2,724,841 |
|
|
$ |
10,285 |
|
|
$ |
3,143,267 |
|
|
$ |
3,153,552 |
|
|
$ |
12,524 |
|
|
$ |
2,865,714 |
|
|
$ |
2,878,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note O, Commitments and Contingencies in the Notes to Consolidated Financial Statements for additional details related to auction rate
securities. |
35
Total investment securities decreased $428.7 million, or 13.6%, to $2.7 billion as of December 31,
2008. During 2008, proceeds from maturities and sales were not fully reinvested in the portfolio
based on balance sheet management considerations, such as the Corporations overall funding
position and the current and expected interest rate environment. In addition, the Corporation
pre-purchased investments in late 2007 based on the expected cash flows to be generated from
maturing securities over an approximate six-month period. Finally, the Corporation sold
approximately $180 million of securities at the end of the second quarter of 2008 in order to fund
balance sheet growth and to manage interest rate risk. The impact of the above factors was
partially offset by $224.0 million of ARCs that were purchased from customers during 2008. See Note
O, Commitments and Contingencies in the Notes to the Consolidated Financial Statements for
additional details.
The Corporation classified 99.6% of its investment portfolio as available for sale as of December
31, 2008 and, as such, these investments were recorded at their estimated fair values. The net
unrealized loss on available for sale investment securities decreased from $29.9 million as of
December 31, 2007 to $3.9 million as of December 31, 2008, generally due to $65.3 million of
other-than-temporary impairment charges recorded by the Corporation during 2008, offset by the
overall increase in portfolio values due to interest rate changes on collaterialized mortgage
obligations and mortgage-backed securities.
Other Assets
Cash and due from banks decreased $50.1 million, or 13.1%. 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 for the month of December, cash and due from banks decreased
$13.6 million, or 4.3%, from $319.7 million in 2007 to $306.1 million in 2008.
Other earning assets decreased $7.6 million, or 6.1%, primarily due to an $8.1 million, or 7.8%,
decrease in loans held for sale. Premises and equipment increased $9.4 million, or 4.8%, to $202.7
million. The increase reflects additions primarily for the construction of new branch facilities
and information technology hardware and software additions, offset by the sales of branch and
office facilities during 2008. The Corporation incurred approximately $12.3 million of capital
expenditures related to hardware and software for strategic information technology initiatives in
2008. The Corporation expects to incur an additional $1.0 million of capital expenditures related
to these initiatives in 2009.
Goodwill and intangible assets decreased $97.1 million, or 14.8%. The decrease was due primarily to
the $90.0 million goodwill impairment charge for the Columbia Bank reporting unit and $7.2 million
of intangible amortization expense. See also Note F, Goodwill and Intangible Assets, in the Notes
to Consolidated Financial Statements for additional information.
Other assets increased $64.3 million, or 20.2%, to $382.4 million. The increase was primarily due
to a $45.9 million increase in deferred tax assets as other-than-temporary impairment losses on
investment securities and increased loan loss provisions resulted in higher temporary differences,
a $10.3 million increase in LIH investments and a $6.9 million increase in other real estate owned.
These increases in other assets were offset by a decrease associated with a change in the funded
status of Corporations defined benefit pension plan. As of December 31, 2007, the defined benefit
pension plan was overfunded by $6.8 million, recorded as a component of other assets. As of
December 31, 2008, the defined benefit pension plans underfunded status was $12.2 million as a
result of a significant decrease in the fair value of plan assets, recorded as a component of other
liabilities. See Note L, Employee Benefit Plans, in the Notes to Consolidated Financial
Statements for additional information related to the Corporations defined benefit pension plan.
Deposits and Borrowings
Deposits increased $446.5 million, or 4.4%, to $10.6 billion as of December 31, 2008. During 2008,
total demand deposits increased $5.7 million, or 0.2%, savings deposits decreased $120.8 million,
or 5.7%, and time deposits increased $561.6 million, or 12.4%. The increase in time deposits
resulted from a $502.1 million increase in customer certificates of deposit and a $59.5 million
increase in brokered certificates of deposit. The majority of this increase occurred during the fourth quarter of 2008 as time deposit
rates became more competitive to reduce the reliance on wholesale funding.
Short-term borrowings decreased $621.2 million, or 26.1%, primarily due to a $650.0 million
decrease in FHLB overnight repurchase agreements and an $86.2 million decrease in short-term
promissory notes, offset by a $90.3 million increase in Federal funds purchased. The decrease
resulted from the aforementioned increase in time deposits as well as the December 2008 preferred
stock issuance. Long-term debt increased $145.7 million, or 8.9%, primarily due to an increase in
FHLB advances to fund loan growth.
36
Other Liabilities
Other liabilities increased $6.3 million, or 2.9%. The increase was primarily attributable to a
$12.2 million increase associated with the underfunded status of the Corporations defined benefit
pension plan as of December 31, 2008, an $8.7 million increase associated with the Corporations
guarantee to purchase illiquid ARCs from customer accounts, a $3.7 million increase associated with
deferred revenue related to a change in third-party administrators for the Corporations brokerage
business in 2008, a $3.2 million increase for amounts payable on LIH investments and a $1.5 million
increase in the reserve for unfunded lending commitments. These increases to other liabilities were
offset by a $15.6 million decrease in accrued interest payable, related to a decrease in average
interest rates in 2008, and a $6.7 million decrease in the reserve for potential repurchases of
previously sold residential mortgage and home equity loans.
Shareholders Equity
Total shareholders equity increased $284.7 million, or 18.1%, to $1.9 billion, or 11.5% of total
assets as of December 31, 2008. Increases resulted from the issuance of $376.5 million of preferred
stock and common stock warrants, to the UST under the CPP in December 2008 and $13.2 million of
common stock issuances. These increases were offset by $104.6 million of dividends paid to
shareholders. Changes in shareholders equity are summarized in the consolidated statements of
shareholders equity and comprehensive income (loss).
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, 2008, the Corporation and each of
its bank subsidiaries met the minimum capital requirements. In addition, all of the Corporations
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.
On December 23, 2008, the Corporation entered into a Securities Purchase Agreement with the UST
pursuant to which the Corporation sold to the UST for an aggregate purchase price of $376.5
million, 376,500 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (preferred
stock), par value $1,000 per share, and warrants to purchase up to 5.5 million shares of common
stock, par value $2.50 per share. As a condition under the CPP, without the consent of the UST, the
Corporations share repurchases are limited to purchases in connection with the administration of
any employee benefit plan, including purchases to offset share dilution in connection with any such
plans. This restriction is effective until December 2011 or until the UST no longer owns any of the
Corporations preferred shares issued under the CPP. The Corporations preferred stock is included
as a component of Tier 1 capital in accordance with regulatory capital requirements.
The preferred stock ranks senior to the Corporations common shares and pays a compounding
cumulative dividend at a rate of 5% per year for the first five years, and 9% per year thereafter.
Dividends are payable quarterly on February 15th, May 15th, August 15th and November 15th. The
Corporation is prohibited from paying any dividend with respect to shares of common stock or repurchasing or redeeming any
shares of the Corporations common shares in any quarter unless all accrued and unpaid dividends
are paid on the preferred stock for all past dividend periods (including the latest completed
dividend period), subject to certain limited exceptions. In addition, without the consent of the
UST, the Corporation is prohibited from declaring or paying any cash dividends on common shares in
excess of $0.15 per share, which was the last quarterly cash dividend per share declared prior to
October 14, 2008. The preferred stock is non-voting, other than class voting rights on matters that
could adversely affect the preferred stock. The preferred stock is callable at par after three
years. Prior to the end of three years, the preferred stock may be redeemed with the proceeds from
one or more qualified equity offerings of any Tier 1 perpetual preferred or common stock of at
least $94.1 million (a Qualified Equity Offering). The UST may also transfer the preferred stock to
a third-party at any time.
The 5.5 million of common stock warrants issued to the UST have a term of 10 years and are
exercisable at any time, in whole or in part, at an exercise price of $10.25 per share (subject to
certain anti-dilution adjustments). The UST may not exercise the warrants for, or transfer the
warrants with respect to, more than half of the initial shares of common stock underlying the
warrants prior to the earlier of (i) the date on which the Corporation receives aggregate gross
proceeds of not less than $376.5 million from one or more Qualified Equity Offerings and
(ii) December 31, 2009. The number of shares to be delivered upon settlement of the warrants will
be reduced by 50% if the Company receives aggregate gross proceeds of at least 100% of the
aggregate liquidation preference of the preferred stock from one or more Qualified Equity Offerings
prior to December 31, 2009.
37
The $376.5 million of proceeds was allocated to the preferred stock and the warrants based on their
relative fair values at issuance ($368.9 million was allocated to the preferred stock and $7.6
million to the warrants). The difference between the initial value allocated to the preferred stock
of approximately $368.9 million and the liquidation value of $376.5 million (the preferred stock
discount) will be charged to retained earnings over the first five years of the contract as an
adjustment to the dividend yield using the effective yield method.
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 as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
$ |
5,453,799 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,453,799 |
|
Time deposits (2) |
|
|
3,827,384 |
|
|
|
1,012,469 |
|
|
|
210,623 |
|
|
|
47,641 |
|
|
|
5,098,117 |
|
Short-term borrowings (3) |
|
|
1,762,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,762,770 |
|
Long-term debt (3) |
|
|
246,490 |
|
|
|
563,211 |
|
|
|
107,186 |
|
|
|
870,910 |
|
|
|
1,787,797 |
|
Operating leases (4) |
|
|
13,602 |
|
|
|
22,948 |
|
|
|
17,454 |
|
|
|
46,796 |
|
|
|
100,800 |
|
Purchase obligations (5) |
|
|
19,585 |
|
|
|
19,735 |
|
|
|
905 |
|
|
|
|
|
|
|
40,225 |
|
Uncertain tax positions (6) |
|
|
5,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,526 |
|
|
|
|
(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. |
|
(6) |
|
Includes accrued interest. See additional information related to
uncertain tax positions in Note K, Income Taxes in the Notes to Consolidated
Financial Statements. |
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 on 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, 2008 (in thousands):
|
|
|
|
|
Commercial mortgage, construction and land development |
|
$ |
459,121 |
|
Home equity |
|
|
886,693 |
|
Credit card |
|
|
140 |
|
Commercial and other |
|
|
2,014,545 |
|
|
|
|
|
Total commitments to extend credit |
|
$ |
3,360,499 |
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
$ |
789,804 |
|
Commercial letters of credit |
|
|
37,620 |
|
|
|
|
|
Total letters of credit |
|
$ |
827,424 |
|
|
|
|
|
38
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 for Credit Losses The Corporation accounts for the credit risk associated with
its lending activities through the allowance for credit losses. The allowance for credit losses
consists of the allowance for loan losses and the reserve for unfunded lending commitments. The
allowance for loan losses represents managements estimate of losses inherent in the existing loan
portfolio. The reserve for unfunded lending commitments represents managements estimate of losses
inherent in its unfunded loan commitments, the balance of which is included in other liabilities.
The provision for loan losses is the periodic charge to earnings, which is necessary to adjust the
allowance for credit losses to its proper balance. 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. |
|
|
- |
|
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 5. In general, these loans include residential mortgages,
consumer loans, installment loans, commercial loans and commercial mortgages rated
satisfactory or better, 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
credit 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, amounts included in the Corporations consolidated balance sheets and
consolidated statements of operations are based on preliminary estimates of value.
39
All acquisitions consummated with an effective date of January 1, 2009 or later will be accounted
for under the requirements of Statement of Financial Accounting Standards No. 141 (revised 2007),
Business Combinations (Statement 141R). The statement establishes principles and requirements for
how an acquirer: recognizes and measures in its financial statement the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and
measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
determines what information to disclose to enable users of the financial statements to evaluate the
nature and financial effects of the business combination.
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 on the consolidated statements of operations.
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. In 2008, the
Corporation recorded a $90.0 million goodwill impairment charge due to one of its defined reporting
units failing the annual impairment test and based on the additional valuation procedures
performed. The Corporation determined that no impairment write-offs were necessary during 2007 and
2006. For additional details related to the Corporations 2008 goodwill impairment, see Note F,
Goodwill and Intangible Assets in the Notes to the Consolidated Financial Statements.
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.
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 $7.5 million as of
December 31, 2008 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 consolidated financial statements.
The Corporation accounts for uncertain tax positions as required by FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 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.
See also Note K, Income Taxes, in the Notes to Consolidated Financial Statements.
40
Fair Value Measurements On January 1, 2008, the Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 157, Fair Value Measurement (Statement 157) for
all assets and liabilities required to be measured at fair value on a recurring basis and all
financial assets and liabilities measured at fair value on a nonrecurring basis. Statement 157
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value into the following three categories (from highest to lowest priority):
|
|
|
Level 1 Inputs that represent quoted prices for identical instruments in active
markets. |
|
|
|
|
Level 2 Inputs that represent quoted prices for similar instruments in active
markets, or quoted prices for identical instruments in non-active markets. Also includes
valuation techniques whose inputs are derived principally from observable market data
other than quoted prices, such as interest rates or other market-corroborated means. |
|
|
|
|
Level 3 Inputs that are largely unobservable, as little or no market data exists for
the instrument being valued. |
As required by Statement 157, the Corporation has categorized all financial assets and liabilities
and all nonfinancial assets and liabilities required to be measured at fair value on a recurring
basis into the above three levels. In addition, the Corporation has categorized all financial
assets and liabilities measured at fair value on a nonrecurring basis into the above three levels.
See Note P, Fair Value Measurements in the Notes to Consolidated Financial Statements for the
disclosures required by Statement 157.
In October 2008, the FASB issued Staff Position No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3 clarifies the
application of Statement 157 in a market that is not active and provides an example to illustrate
key considerations in determining the fair value of a financial asset when the market for that
financial asset is not active. FSP 157-3 was effective upon issuance for the Corporation. The
Corporation applied the provisions of FSP 157-3 to certain debt security investments for which
there was no active market.
The determination of fair value for assets and liabilities categorized as Level 3 assets requires a
great deal of subjectivity due to the use of unobservable inputs. In addition, determining when a
market is no longer active and placing little or no reliance on distressed market prices requires
the use of managements judgment. The need for greater management judgment in determining fair
values for Level 3 assets and liabilities has further been heightened by the current challenging
economic conditions, which have resulted in a great deal of volatility in the fair values of
investment securities.
The Corporation engages third-party valuation experts to assist in valuing most of the assets and
liabilities measured at fair value on a recurring basis which are classified as Level 2 or Level 3
items, including: available-for-sale investment securities, guarantee liabilities associated with
the Corporations commitment to purchase ARCs from customer accounts and hedged certificates of
deposits and their related interest rate swaps.
Recent Accounting Pronouncements
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures
about Derivative Instruments and Hedging Activities (Statement 161). Statement 161 establishes the
disclosure requirements for derivative instruments and hedging activities, including disclosure of
information that should enable users of financial information to understand how and why a company
uses derivative instruments, how derivative instruments and related hedged items are accounted for,
and how derivative instruments and related hedged items affect a companys financial position,
financial performance, and cash flows. The standard is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, or the Corporations March
31, 2009 quarterly report on Form 10-Q. The adoption of Statement 161 is not expected to have a
material impact on the Corporations consolidated financial statements.
In September 2008, the FASB issued FASB Staff Position No. 133-1 and 45-4, Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB
Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. This
staff position requires companies who sell credit derivatives or issue financial guarantees to
disclose information about these instruments to enable users of the financial statements to assess
the potential effect of the instruments on the reporting entitys financial position, financial
performance and cash flows. The disclosure requirements of this staff position were effective for
the Corporation on December 31, 2008, and impacted the
Corporations disclosures related to
guarantees subject to FASB Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an
interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34
(FIN 45), which include: standby and commercial letters of credit and ARC purchase guarantees. See
Note O, Commitments and Contingencies in the Notes to Consolidated Financial Statements for
disclosures related to this staff position.
In June 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (EITF
03-6-1). EITF 03-6-1 requires companies to include
41
participating share-based payment transactions, prior to vesting, in the earnings allocation in computing earnings per share. EITF 03-6-1 defines
participating share-based payment awards as those that contain nonforfeitable rights to dividends,
even if granted prior to when an award vests. EITF 03-6-1 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, or the Corporations March 31, 2009
quarterly report on Form 10-Q. The adoption of EITF 03-6-1 is not expected to impact the
Corporations earning per share computations.
In December 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN 46(R)-8, Disclosures
by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities. This staff position requires companies to disclose additional information about
transfers of financial assets and interests in variable interest entities, including the following:
a transferors continuing involvement in financial assets that it has transferred in a
securitization or asset-backed financing arrangement, the nature of any restrictions and the
carrying amounts of any assets held by an entity that relate to a transferred asset and how
servicing assets and liabilities are reported under Statement 140. This staff position is effective
for the first reporting period ending after December 15, 2008, or December 31, 2008 for the
Corporation. See Note G, Mortgage Servicing Rights and Note I, Short-term Borrowings and
Long-term Debt in the Notes to Consolidated Financial Statements for disclosures related to this
staff position.
In December 2008, the FASB issued FASB Staff Position No. FAS 132(R)-1, Employers Disclosures
about Postretirement Benefit Plan Assets. This staff position amends FASB Statement No. 132
(revised 2003), Employers Disclosures about Pensions and Postretirement Benefits, to provide guidance on
an employers disclosures about plan assets of a defined benefit pension or other postretirement
plans. This staff position is effective for disclosures about plan assets provided for fiscal years
ending after December 15, 2009, or December 31, 2009 for the Corporation. The adoption of this
staff position will impact future disclosures related to the Corporations defined benefit pension
plan.
In January 2009, the FASB issued FASB Staff Position EITF 99-20-1, Amendments to the Impairment
Guidance in EITF Issue No. 99-20 (FSP EITF 99-20-1). This staff position amends the impairment
guidance in EITF No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial
Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, to achieve
more consistent determination of whether an other-than-temporary impairment has occurred for
certain debt securities. Specifically, this staff position provides that when determining whether
an impairment of a securitized financial asset is other-than-temporary the holder of that
instrument must assess whether there has been a probable adverse change in expected cash flows and
is not required to use market participant assumptions in that determination. FSP EITF 99-20-1 is
effective for reporting periods ending after December 15, 2008, or December 31, 2008 for the
Corporation. The application of this staff position did not impact the Corporations consolidated
financial statements.
42
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, debt security market price risk, foreign
currency risk and commodity price risk. Due to the nature of its operations, only equity and debt
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. As of
December 31, 2008, the Corporations equity investments
consisted of FHLB and Federal Reserve Bank stock ($85.3 million), common stocks of publicly traded financial institutions ($43.4 million), and
money market mutual funds and other equity investments ($10.0 million). The equity investments most
susceptible to equity market price risk are the financial institutions stocks, which had an
adjusted cost basis of $42.8 million and a fair value of $43.4 million as of December 31, 2008. Gross unrealized gains and losses in this portfolio
were approximately $2.1 million and $1.5 million as of December 31, 2008, respectively.
Although the carrying value of financial institution stocks accounted for less than 0.3% of the
Corporations total assets as of December 31, 2008, the Corporation has a history of realizing
gains from this portfolio. However, significant declines in the values of financial institution
stocks held in this portfolio have not only impacted the Corporations ability to realize gains on
their sale in 2008 and 2007, but have also resulted in significant other-than-temporary impairment
charges.
The Corporation has evaluated 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 $43.1
million in 2008, $292,000 in 2007, and $122,000 in 2006 for specific equity securities which were
deemed to exhibit other-than-temporary impairment in value. In addition, the Corporation recorded
other-than-temporary impairment charges of $1.2 million and $357,000 for a mutual fund investment
and other government agency-sponsored stocks, respectively, in 2008. 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.
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.
Another source of equity market price risk is the Corporations investment in FHLB stock. The
Corporation is required to own FHLB stock in order to borrow funds from the FHLB. FHLBs obtain
funding primarily through issuance of consolidated obligations of the Federal Home Loan Bank
system. The U.S. government does not guarantee these obligations, and each of the FHLB banks is
generally jointly and severally liable for repayment of each others debt. Recently, the FHLB
system has experienced financial stress, and some of the regional banks within the FHLB system have
suspended or reduced their dividends, or eliminated the ability of members to redeem capital stock.
The ultimate impact of these developments on the FHLB system or its programs for advances to
members is uncertain. The Corporations FHLB stock and its ability to obtain FHLB funds could be
adversely impacted if the financial health of the FHLB system worsens.
In addition to its equity portfolio, the Corporations investment management and trust services
revenue is impacted by fluctuations in the securities markets. A portion of the Corporations trust
and brokerage 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 would 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.
Debt Security Price Risk
Debt security market price risk is the risk that changes in the values of debt security investments
could have a material impact on the financial position or results of operations of the Corporation.
The Corporations debt security investments consist primarily of mortgage-backed securities and
collateralized mortgage obligations whose principal payments are guaranteed by U.S. government
sponsored agencies, state and municipal securities, U.S. government sponsored and U.S. government
debt securities, auction rate
43
certificates and corporate debt securities. Only the auction rate
certificates and corporate debt securities have significant debt security price risk.
Auction rate certificates (ARCs)
Beginning in the second quarter of 2008, the Corporations debt securities included ARCs purchased
from customers. Due to the current market environment, these ARCs are susceptible to significant
market price risk. As of December 31, 2008, ARCs had a cost basis of $208.3 million and fair value of $195.9
million, or 1.2% of total assets.
ARCs are long-term securities structured to allow their sale in periodic auctions, resulting in
both the treatment of ARCs as short-term instruments in normal market conditions and fair values
that could be derived based on periodic auction prices. However, beginning in mid-February 2008,
market auctions for these securities began to fail due to an insufficient number of buyers,
resulting in an illiquid market. This illiquidity has resulted in recent market prices that
represent forced liquidations or distressed sales and do not provide an accurate basis for fair
value. Therefore, as of December 31, 2008, the fair value of the ARC securities held by the
Corporation were derived using significant unobservable inputs based on an expected cash flow model
which produced fair values which were materially different from those that would be expected from
settlement of these investments in the illiquid market that presently exists. The expected cash
flow model produced fair values which assumed a return to market liquidity sometime within the next
three to five years. If liquidity does not return within a time frame that is materially consistent
with the Corporations assumptions, the fair value of ARCs could significantly change.
The credit quality of the underlying debt associated with the ARCs is also a factor in the
determination of their estimated fair value. As of December 31, 2008, the total combined estimated
fair value of ARCs held by the Corporation and ARCs held within customers accounts was
approximately $292 million, with $195.9 million held by the Corporation, as stated above.
Approximately 98% of the approximately $292 million of ARCs are backed by student loans, while the
remaining ARCs are backed by state and municipal securities. Approximately 80% of the student loan
ARCs have credit ratings of AAA, with a majority of the remaining 20% AA-rated. The current
illiquid market did not impact the credit risk associated with the assets underlying the ARCs, both
those held by the Corporation and those that remain in customer accounts. Therefore, as of December
31, 2008, the risk of changes in the estimated fair values of ARCs due to deterioration in the
credit quality of their underlying debt instruments is not significant.
Corporate Debt Securities
The Corporation holds corporate debt securities in the form of pooled trust preferred securities,
single-issuer trust preferred securities and subordinated debt issued by financial institutions, as
presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Amortized cost |
|
|
Estimated fair value |
|
|
|
(in thousands) |
|
Single-issuer trust preferred securities (1) |
|
$ |
97,887 |
|
|
$ |
69,819 |
|
Subordinated debt |
|
|
34,788 |
|
|
|
31,745 |
|
Pooled trust preferred securities |
|
|
19,351 |
|
|
|
15,381 |
|
|
|
|
|
|
|
|
Total corporate debt securities issued by financial institutions |
|
$ |
152,026 |
|
|
$ |
116,945 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Single-issuer trust preferred securities with
estimated fair values totaling $7.5 million as of December 31,
2008 are classified as Level 3 assets. See Note P, Fair Value
Measurements in the Notes to Consolidated Financial Statements for additional details. |
Historically, the Corporation determined the fair value of these securities based on prices
received from third-party brokers and pricing agencies who determined fair values using both quoted
prices for similar assets, when available, and model-based valuation techniques that derived fair
value based on market-corroborated data, such as instruments with similar prepayment speeds and
default interest rates.
The Corporation has determined that the market for pooled trust preferred securities and certain
single-issuer trust preferred securities held by the Corporation was not active. Consistent with
Staff Position No. 157-3, the Corporation determined, through the use of a third-party valuation
specialist, the fair value of its investments in pooled trust preferred securities using a
discounted cash flows
44
model, which applied a credit and liquidity adjusted discount rate to
expected cash flows. For certain single-issuer trust preferred securities, the Corporation
determined fair values based on quotes provided by third-party brokers who determined fair values
based predominantly on internal valuation models and were not indicative prices or binding offers.
In 2008, the Corporation recorded $15.8 million of other-than-temporary impairment charges related
to investments in pooled trust preferred securities. In addition, the Corporation recorded a $4.9
million other-than-temporary impairment charge related to subordinated debt issued by a failed
financial institution. The current illiquid market for debt securities issued by financial
institutions may continue to impact the fair values of these securities. Additional impairment
charges may be necessary in the future depending upon the performance of the individual investments
held by the Corporation.
See Note P, Fair Value Measurements, in the Notes to Consolidated Financial Statements for
further discussion related to the fair values of debt securities.
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 cash needs of its customers, who, as depositors, may want to withdraw funds or who, as
borrowers, need credit availability. Liquidity is provided on a continuous basis through scheduled
and unscheduled principal and interest payments on outstanding loans and investments and through
the availability of deposits and borrowings. The Corporation also maintains secondary sources that
provide liquidity on a secured and unsecured basis to meet short-term needs.
The consolidated statements of cash flows provide details related to the Corporations sources and
uses of cash. The Corporation generated $194.7 million in cash from operating activities during
2008, mainly due to net loss, as adjusted for non-cash charges such as the provision for loan
losses, goodwill impairment and investment securities losses. Investing activities resulted in a
net cash outflow of $501.5 million in 2008 due to the purchase of investment securities and the net
increase in loans exceeding the proceeds from sales and maturities of investments. Financing
activities resulted in net cash proceeds of $256.7 million in 2008, compared to net cash proceeds
of $800.2 million in 2007 as net funds provided by the issuance of preferred stock, additions of
long-tern debt and increases in time deposits exceeded net repayments of short-term borrowings and
decreases in demand and savings accounts, 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.
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.
As of December 31, 2008, 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 $3.1 billion, or
19.4% of total assets, as compared to $3.6 billion, or 22.9% of total assets, as of December 31,
2007.
45
The following tables present the expected maturities of investment securities as of December 31,
2008 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 |
|
$ |
|
|
|
|
|
|
|
$ |
6,782 |
|
|
|
2.10 |
% |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
State and municipal (1) |
|
|
322 |
|
|
|
6.32 |
|
|
|
503 |
|
|
|
5.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
347 |
|
|
|
5.86 |
% |
|
$ |
7,285 |
|
|
|
2.32 |
% |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
(2) |
|
$ |
2,004 |
|
|
|
6.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
14,628 |
|
|
|
2.02 |
% |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
U.S. Government sponsored
agency securities (3) |
|
|
18,266 |
|
|
|
4.72 |
|
|
|
42,224 |
|
|
|
5.23 |
|
|
|
16,147 |
|
|
|
4.94 |
|
|
|
365 |
|
|
|
3.93 |
|
State and municipal (1) |
|
|
93,472 |
|
|
|
4.43 |
|
|
|
233,410 |
|
|
|
5.05 |
|
|
|
29,610 |
|
|
|
5.71 |
|
|
|
167,044 |
|
|
|
6.69 |
|
Auction rate securities (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,473 |
|
|
|
4.31 |
|
|
|
193,427 |
|
|
|
2.19 |
|
Corporate debt securities |
|
|
229 |
|
|
|
4.13 |
|
|
|
2,734 |
|
|
|
6.92 |
|
|
|
31,745 |
|
|
|
5.42 |
|
|
|
85,186 |
|
|
|
7.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
126,595 |
|
|
|
4.19 |
% |
|
$ |
278,368 |
|
|
|
5.10 |
% |
|
$ |
79,975 |
|
|
|
5.40 |
% |
|
$ |
446,022 |
|
|
|
4.99 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage
obligations
(2) |
|
$ |
504,193 |
|
|
|
5.29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
(2) |
|
$ |
1,141,351 |
|
|
|
5.02 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Weighted average yields on tax-exempt securities have been computed on a fully
taxable-equivalent basis assuming a tax rate of 35% and statutory interest expense
disallowances. |
|
(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. |
|
(4) |
|
Maturities of auction rate securities are based on contractual maturities. See Note O,
Commitments and Contingencies in the Notes to Consolidated Financial Statements for
additional disclosures related to auction rate securities. |
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 subject to changes in interest rates as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One |
|
|
|
|
|
|
|
|
|
One Year |
|
|
Through |
|
|
More Than |
|
|
|
|
|
|
or Less |
|
|
Five Years |
|
|
Five Years |
|
|
Total |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Commercial, financial and agricultural: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable and floating rate |
|
$ |
721,809 |
|
|
$ |
1,623,480 |
|
|
$ |
281,003 |
|
|
$ |
2,626,292 |
|
Fixed rate |
|
|
398,137 |
|
|
|
505,098 |
|
|
|
106,017 |
|
|
|
1,009,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,119,946 |
|
|
$ |
2,128,578 |
|
|
$ |
387,020 |
|
|
$ |
3,635,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real-estate mortgage (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable and floating rate |
|
$ |
1,087,956 |
|
|
$ |
2,408,846 |
|
|
$ |
1,382,040 |
|
|
$ |
4,878,842 |
|
Fixed rate |
|
|
563,338 |
|
|
|
874,191 |
|
|
|
442,077 |
|
|
|
1,879,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,651,294 |
|
|
$ |
3,283,037 |
|
|
$ |
1,824,117 |
|
|
$ |
6,758,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real-estate construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable and floating rate |
|
$ |
643,806 |
|
|
$ |
283,493 |
|
|
$ |
38,689 |
|
|
$ |
965,988 |
|
Fixed rate |
|
|
75,838 |
|
|
|
68,766 |
|
|
|
85,458 |
|
|
|
230,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
719,644 |
|
|
$ |
352,259 |
|
|
$ |
124,147 |
|
|
$ |
1,196,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes commercial mortgages, residential mortgages and home equity loans. |
Contractual maturities of time deposits of $100,000 or more outstanding as of December 31, 2008 are
as follows (in thousands):
|
|
|
|
|
Three months or less |
|
$ |
324,075 |
|
Over three through six months |
|
|
381,865 |
|
Over six through twelve months |
|
|
637,895 |
|
Over twelve months |
|
|
370,450 |
|
|
|
|
|
Total |
|
$ |
1,714,285 |
|
|
|
|
|
Each of the Corporations subsidiary banks is a member of the FHLB and has access to FHLB overnight
and term credit facilities. As of December 31, 2008, the Corporation had $1.4 billion in overnight
and term advances outstanding from the FHLB with an additional $1.2 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.
The Corporation maintains liquidity sources in the form of core demand and savings deposits, time
deposits in various denominations, including jumbo and brokered time deposits, repurchase
agreements and short-term promissory notes. During the fourth quarter of 2008, a combination of
commercial real estate loans, commercial loans and securities were pledged to the Federal Reserve Bank of
Philadelphia to provide access to overnight Federal Reserve Bank borrowings under the discount window and term
borrowings under the Federal Reserve Banks term auction facility. As of December 31, 2008, the Corporation had $1.7
billion of collateralized borrowing availability at the discount window and term auction facility
and no outstanding borrowings.
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 |
|
|
|
|
|
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
Beyond |
|
Total |
|
Fair Value |
|
|
|
|
Fixed rate loans (1) |
|
$ |
1,174,691 |
|
|
$ |
621,482 |
|
|
$ |
457,152 |
|
|
$ |
340,733 |
|
|
$ |
307,692 |
|
|
$ |
643,464 |
|
|
$ |
3,545,214 |
|
|
$ |
3,545,828 |
|
|
|
|
|
Average rate |
|
|
5.27 |
% |
|
|
6.60 |
% |
|
|
6.62 |
% |
|
|
6.60 |
% |
|
|
6.76 |
% |
|
|
6.46 |
% |
|
|
6.15 |
% |
|
|
|
|
|
|
|
|
Floating rate loans (1) (7) |
|
|
2,456,683 |
|
|
|
1,076,624 |
|
|
|
825,502 |
|
|
|
667,909 |
|
|
|
1,756,089 |
|
|
|
1,701,744 |
|
|
|
8,484,551 |
|
|
|
8,208,920 |
|
|
|
|
|
Average rate |
|
|
4.89 |
% |
|
|
5.33 |
% |
|
|
5.35 |
% |
|
|
5.38 |
% |
|
|
4.32 |
% |
|
|
6.11 |
% |
|
|
5.16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate investments (2) |
|
|
630,221 |
|
|
|
457,989 |
|
|
|
408,593 |
|
|
|
273,470 |
|
|
|
96,231 |
|
|
|
426,969 |
|
|
|
2,293,473 |
|
|
|
2,324,178 |
|
|
|
|
|
Average rate |
|
|
4.75 |
% |
|
|
4.86 |
% |
|
|
4.75 |
% |
|
|
4.79 |
% |
|
|
5.04 |
% |
|
|
4.64 |
% |
|
|
4.77 |
% |
|
|
|
|
|
|
|
|
Floating rate investments (2) |
|
|
32 |
|
|
|
500 |
|
|
|
208,281 |
|
|
|
|
|
|
|
141 |
|
|
|
89,182 |
|
|
|
298,136 |
|
|
|
262,890 |
|
|
|
|
|
Average rate |
|
|
5.42 |
% |
|
|
5.63 |
% |
|
|
3.28 |
% |
|
|
|
|
|
|
1.91 |
% |
|
|
4.63 |
% |
|
|
3.69 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest-earning assets |
|
|
117,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,550 |
|
|
|
117,550 |
|
|
|
|
|
Average rate |
|
|
5.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,379,177 |
|
|
$ |
2,156,595 |
|
|
$ |
1,899,528 |
|
|
$ |
1,282,112 |
|
|
$ |
2,160,503 |
|
|
$ |
2,861,359 |
|
|
$ |
14,738,924 |
|
|
$ |
14,459,366 |
|
|
|
|
|
Average rate |
|
|
4.98 |
% |
|
|
5.60 |
% |
|
|
5.30 |
% |
|
|
5.58 |
% |
|
|
4.70 |
% |
|
|
5.92 |
% |
|
|
5.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate deposits (3) |
|
$ |
3,827,542 |
|
|
$ |
736,148 |
|
|
$ |
276,233 |
|
|
$ |
154,590 |
|
|
$ |
56,134 |
|
|
$ |
47,470 |
|
|
$ |
5,098,117 |
|
|
$ |
5,137,200 |
|
|
|
|
|
Average rate |
|
|
3.23 |
% |
|
|
3.86 |
% |
|
|
3.60 |
% |
|
|
4.48 |
% |
|
|
4.05 |
% |
|
|
1.91 |
% |
|
|
3.38 |
% |
|
|
|
|
|
|
|
|
Floating rate deposits (4) |
|
|
1,498,076 |
|
|
|
169,870 |
|
|
|
169,870 |
|
|
|
156,174 |
|
|
|
148,899 |
|
|
|
1,657,469 |
|
|
|
3,800,358 |
|
|
|
3,800,359 |
|
|
|
|
|
Average rate |
|
|
1.15 |
% |
|
|
0.77 |
% |
|
|
0.77 |
% |
|
|
0.70 |
% |
|
|
0.66 |
% |
|
|
0.59 |
% |
|
|
0.83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate borrowings (5) |
|
|
249,961 |
|
|
|
469,756 |
|
|
|
94,794 |
|
|
|
102,760 |
|
|
|
5,799 |
|
|
|
508,404 |
|
|
|
1,431,474 |
|
|
|
1,399,552 |
|
|
|
|
|
Average rate |
|
|
4.33 |
% |
|
|
4.84 |
% |
|
|
3.60 |
% |
|
|
4.01 |
% |
|
|
2.88 |
% |
|
|
5.50 |
% |
|
|
4.84 |
% |
|
|
|
|
|
|
|
|
Floating rate borrowings (6) |
|
|
1,763,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
356,000 |
|
|
|
2,119,093 |
|
|
|
2,128,880 |
|
|
|
|
|
Average rate |
|
|
0.64 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.96 |
% |
|
|
1.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,338,672 |
|
|
$ |
1,375,774 |
|
|
$ |
540,897 |
|
|
$ |
413,524 |
|
|
$ |
210,832 |
|
|
$ |
2,569,343 |
|
|
$ |
12,449,042 |
|
|
$ |
12,465,991 |
|
|
|
|
|
Average rate |
|
|
2.22 |
% |
|
|
3.81 |
% |
|
|
2.71 |
% |
|
|
2.94 |
% |
|
|
1.62 |
% |
|
|
1.91 |
% |
|
|
2.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts are based on contractual payments and maturities, adjusted for expected prepayments. |
|
(2) |
|
Amounts are based on contractual maturities; adjusted for expected prepayments on
mortgage-backed securities, collateralized mortgage obligations and expected calls 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.
Amounts also include junior subordinated deferrable interest debentures. |
|
(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) |
|
Line of credit amounts are based on historical cash flow assumptions, 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.
Included within the $8.5 billion of floating rate loans above are $3.4 billion of loans, or 40% of
the total, that float with the prime interest rate, $1.1 billion, or 13%, of loans which float with
other interest rates, primarily LIBOR, and $4.0 billion, or 47%, of adjustable rate loans. The $4.0
billion of adjustable rate loans include loans that are fixed rate instruments for a certain period
of time, and then convert to floating rates.
48
The following table
presents the percentage of adjustable rate loans, stratified by their remaining
fixed term at December 31, 2008:
|
|
|
|
|
|
|
Percent of Total |
|
|
Adjustable Rate |
Fixed Rate Term |
|
Loans |
One year |
|
|
19.7 |
% |
Two years |
|
|
0.8 |
|
Three years |
|
|
2.4 |
|
Four years |
|
|
1.3 |
|
Five years |
|
|
60.7 |
|
Greater than five years |
|
|
15.7 |
|
The Corporation uses three complementary methods to measure and manage interest rate risk. They are
static gap analysis, simulation of earnings, and estimates of economic value of equity. Using these
measurements in tandem provides a reasonably comprehensive summary of the magnitude of interest
rate risk in the Corporation, level of risk as time evolves, and exposure to changes in interest
rate relationships.
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 no 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 prepayments, based upon industry projections for prepayment speeds. The
Corporations policy limits the cumulative six-month ratio of rate sensitive assets to rate
sensitive liabilities (RSA/RSL) to a range of 0.85 to 1.15. As of December 31, 2008, the cumulative
six-month ratio of RSA/RSL was 1.14. While the RSA/RSL is within policy limits at December 31,
2008, the Corporation is taking measures to reduce its static gap position, which is at its current
level due primarily to the receipt of $376.5 million in CPP funds on December 23, 2008, which
reduced the Corporations overnight borrowings.
Simulation of net interest income and net 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 a 100
basis point shock in interest rates, 15% for a 200 basis point shock and 20% for a 300 basis point
shock. A shock is an immediate upward or downward movement of interest rates across the yield
curve based upon changes in the prime rate. The shocks do not take into account changes in customer
behavior that could result in changes to mix and/or volumes in the balance sheet nor do they
account for competitive pricing over the forward 12-month period. The following table summarizes
the expected impact of interest rate shocks on net interest income (due to the current level of
interest rates, the 200 and 300 basis point downward shock scenarios are not shown):
|
|
|
|
|
|
|
Annual change |
|
|
|
|
in net interest |
|
|
Rate Shock |
|
income |
|
% Change |
+300 bp
|
|
+ $45.1 million
|
|
+ 9.0% |
+200 bp
|
|
+ $30.3 million
|
|
+ 6.0% |
+100 bp
|
|
+ $13.7 million
|
|
+ 2.7% |
-100 bp
|
|
- $18.9 million
|
|
- 3.8% |
Economic value of equity estimates the discounted present value of asset 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 movement in interest
rates. As of December 31, 2008, the Corporation was within economic value of equity policy limits.
49
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per-share data)
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
2008 |
|
|
2007 |
|
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
331,164 |
|
|
$ |
381,283 |
|
Interest-bearing deposits with other banks |
|
|
16,791 |
|
|
|
11,330 |
|
Federal funds sold |
|
|
4,919 |
|
|
|
9,823 |
|
Loans held for sale |
|
|
95,840 |
|
|
|
103,984 |
|
Investment securities: |
|
|
|
|
|
|
|
|
Held to maturity (estimated fair value of $9,765 in 2008 and $10,399 in 2007) |
|
|
9,636 |
|
|
|
10,285 |
|
Available for sale |
|
|
2,715,205 |
|
|
|
3,143,267 |
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income |
|
|
12,042,620 |
|
|
|
11,204,424 |
|
Less: Allowance for loan losses |
|
|
(173,946 |
) |
|
|
(107,547 |
) |
|
|
|
|
|
|
|
Net Loans |
|
|
11,868,674 |
|
|
|
11,096,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
202,657 |
|
|
|
193,296 |
|
Accrued interest receivable |
|
|
58,566 |
|
|
|
73,435 |
|
Goodwill |
|
|
534,385 |
|
|
|
624,072 |
|
Intangible assets |
|
|
23,448 |
|
|
|
30,836 |
|
Other assets |
|
|
323,821 |
|
|
|
244,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
16,185,106 |
|
|
$ |
15,923,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
$ |
1,653,440 |
|
|
$ |
1,722,211 |
|
Interest-bearing |
|
|
8,898,476 |
|
|
|
8,383,234 |
|
|
|
|
|
|
|
|
Total Deposits |
|
|
10,551,916 |
|
|
|
10,105,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings: |
|
|
|
|
|
|
|
|
Federal funds purchased |
|
|
1,147,673 |
|
|
|
1,057,335 |
|
Other short-term borrowings |
|
|
615,097 |
|
|
|
1,326,609 |
|
|
|
|
|
|
|
|
Total Short-Term Borrowings |
|
|
1,762,770 |
|
|
|
2,383,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest payable |
|
|
53,678 |
|
|
|
69,238 |
|
Other liabilities |
|
|
169,298 |
|
|
|
147,418 |
|
Federal Home Loan Bank advances and long-term debt |
|
|
1,787,797 |
|
|
|
1,642,133 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
14,325,459 |
|
|
|
14,348,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
|
|
|
|
|
|
Preferred stock, $1,000 par value, 376,500 shares authorized and outstanding |
|
|
368,944 |
|
|
|
|
|
Common stock, $2.50 par value, 600 million shares authorized, 192.4 million shares issued
in 2008 and 191.8 million shares issued in 2007 |
|
|
480,978 |
|
|
|
479,559 |
|
Additional paid-in capital |
|
|
1,260,947 |
|
|
|
1,254,369 |
|
Retained earnings |
|
|
31,075 |
|
|
|
141,993 |
|
Accumulated other comprehensive loss |
|
|
(17,907 |
) |
|
|
(21,773 |
) |
Treasury stock (17.3 million shares in 2008 and 18.3 million shares in 2007), at cost |
|
|
(264,390 |
) |
|
|
(279,228 |
) |
|
|
|
|
|
|
|
Total Shareholders Equity |
|
|
1,859,647 |
|
|
|
1,574,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
16,185,106 |
|
|
$ |
15,923,098 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
50
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per-share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
Interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees |
|
$ |
727,124 |
|
|
$ |
801,175 |
|
|
$ |
727,297 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
110,220 |
|
|
|
99,621 |
|
|
|
97,652 |
|
Tax-exempt |
|
|
18,137 |
|
|
|
17,423 |
|
|
|
14,896 |
|
Dividends |
|
|
5,726 |
|
|
|
8,227 |
|
|
|
6,568 |
|
Loans held for sale |
|
|
5,701 |
|
|
|
11,501 |
|
|
|
15,564 |
|
Other interest income |
|
|
586 |
|
|
|
1,630 |
|
|
|
2,530 |
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income |
|
|
867,494 |
|
|
|
939,577 |
|
|
|
864,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
212,114 |
|
|
|
294,395 |
|
|
|
246,941 |
|
Short-term borrowings |
|
|
50,091 |
|
|
|
73,983 |
|
|
|
78,043 |
|
Long-term debt |
|
|
81,141 |
|
|
|
82,455 |
|
|
|
53,960 |
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense |
|
|
343,346 |
|
|
|
450,833 |
|
|
|
378,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
|
524,148 |
|
|
|
488,744 |
|
|
|
485,563 |
|
Provision for Loan Losses |
|
|
119,626 |
|
|
|
15,063 |
|
|
|
3,498 |
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income After Provision for Loan Losses |
|
|
404,522 |
|
|
|
473,681 |
|
|
|
482,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income |
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
61,640 |
|
|
|
46,500 |
|
|
|
43,773 |
|
Other service charges and fees |
|
|
36,247 |
|
|
|
32,151 |
|
|
|
26,792 |
|
Investment management and trust services |
|
|
32,734 |
|
|
|
38,665 |
|
|
|
37,441 |
|
Gain on sale of credit card portfolio |
|
|
13,910 |
|
|
|
|
|
|
|
|
|
Gains on sale of mortgage loans |
|
|
10,332 |
|
|
|
14,294 |
|
|
|
21,086 |
|
Investment securities (losses) gains, net |
|
|
(58,241 |
) |
|
|
1,740 |
|
|
|
7,439 |
|
Other |
|
|
14,434 |
|
|
|
14,674 |
|
|
|
13,344 |
|
|
|
|
|
|
|
|
|
|
|
Total Other Income |
|
|
111,056 |
|
|
|
148,024 |
|
|
|
149,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
213,557 |
|
|
|
217,526 |
|
|
|
213,913 |
|
Net occupancy expense |
|
|
42,239 |
|
|
|
39,965 |
|
|
|
36,493 |
|
Operating risk loss |
|
|
24,308 |
|
|
|
27,229 |
|
|
|
4,818 |
|
Equipment expense |
|
|
13,332 |
|
|
|
13,892 |
|
|
|
14,251 |
|
Marketing |
|
|
13,267 |
|
|
|
11,334 |
|
|
|
10,638 |
|
Data processing |
|
|
12,813 |
|
|
|
12,755 |
|
|
|
12,228 |
|
Intangible amortization |
|
|
7,162 |
|
|
|
8,334 |
|
|
|
7,907 |
|
Goodwill impairment |
|
|
90,000 |
|
|
|
|
|
|
|
|
|
Other |
|
|
79,947 |
|
|
|
74,420 |
|
|
|
65,743 |
|
|
|
|
|
|
|
|
|
|
|
Total Other Expenses |
|
|
496,625 |
|
|
|
405,455 |
|
|
|
365,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes |
|
|
18,953 |
|
|
|
216,250 |
|
|
|
265,949 |
|
Income taxes |
|
|
24,570 |
|
|
|
63,532 |
|
|
|
80,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
|
(5,617 |
) |
|
|
152,718 |
|
|
|
185,527 |
|
Preferred stock dividends and discount accretion |
|
|
(463 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Available to Common Shareholders |
|
$ |
(6,080 |
) |
|
$ |
152,718 |
|
|
$ |
185,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) (Basic) |
|
$ |
(0.03 |
) |
|
$ |
0.88 |
|
|
$ |
1.07 |
|
Net Income (Loss) (Diluted) |
|
|
(0.03 |
) |
|
|
0.88 |
|
|
|
1.06 |
|
Cash Dividends |
|
|
0.600 |
|
|
|
0.598 |
|
|
|
0.581 |
|
See Notes to Consolidated Financial Statements
51
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Preferred |
|
|
Shares |
|
|
|
|
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
|
|
|
|
Stock |
|
|
Outstanding |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Stock |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2006 |
|
$ |
|
|
|
|
164,868 |
|
|
$ |
430,827 |
|
|
$ |
996,708 |
|
|
$ |
138,529 |
|
|
$ |
(42,285 |
) |
|
$ |
(240,808 |
) |
|
$ |
1,282,971 |
|
Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
185,527 |
|
|
|
|
|
|
|
|
|
|
|
185,527 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,993 |
|
|
|
|
|
|
|
11,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply Statement 158
(net of $4.7 million tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,799 |
) |
|
|
|
|
|
|
(8,799 |
) |
Stock dividend - 5% |
|
|
|
|
|
|
|
|
|
|
22,648 |
|
|
|
107,952 |
|
|
|
(130,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued, including related tax benefits |
|
|
|
|
|
|
1,222 |
|
|
|
2,989 |
|
|
|
6,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,857 |
|
Stock-based compensation awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,687 |
|
Stock issued for acquisition of Columbia Bancorp |
|
|
|
|
|
|
8,619 |
|
|
|
20,523 |
|
|
|
133,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154,131 |
|
Acquisition of treasury stock |
|
|
|
|
|
|
(1,061 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 |
|
|
$ |
476,987 |
|
|
$ |
1,246,823 |
|
|
$ |
92,592 |
|
|
$ |
(39,091 |
) |
|
$ |
(261,001 |
) |
|
$ |
1,516,310 |
|
Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,718 |
|
|
|
|
|
|
|
|
|
|
|
152,718 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,318 |
|
|
|
|
|
|
|
17,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued, including related tax benefits |
|
|
|
|
|
|
1,029 |
|
|
|
2,572 |
|
|
|
4,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,479 |
|
Stock-based compensation awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,639 |
|
Cumulative effect of FIN 48 adoption |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
220 |
|
Acquisition of treasury stock |
|
|
|
|
|
|
(1,174 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,227 |
) |
|
|
(18,227 |
) |
Cash dividends $0.598 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103,537 |
) |
|
|
|
|
|
|
|
|
|
|
(103,537 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
|
|
|
|
173,503 |
|
|
$ |
479,559 |
|
|
$ |
1,254,369 |
|
|
$ |
141,993 |
|
|
$ |
(21,773 |
) |
|
$ |
(279,228 |
) |
|
$ |
1,574,920 |
|
Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,617 |
) |
|
|
|
|
|
|
|
|
|
|
(5,617 |
) |
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,866 |
|
|
|
|
|
|
|
3,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,751 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock and common stock warrants issued |
|
|
368,900 |
|
|
|
|
|
|
|
|
|
|
|
7,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
376,500 |
|
Stock issued, including related tax benefits |
|
|
|
|
|
|
1,541 |
|
|
|
1,419 |
|
|
|
(3,080 |
) |
|
|
|
|
|
|
|
|
|
|
14,838 |
|
|
|
13,177 |
|
Stock-based compensation awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,058 |
|
Impact of pension plan measurement date change
(net of $23,000 tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
43 |
|
Cumulative effect of EITF 06-4 adoption |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(677 |
) |
|
|
|
|
|
|
|
|
|
|
(677 |
) |
Preferred stock discount accretion |
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends $0.600 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(104,623 |
) |
|
|
|
|
|
|
|
|
|
|
(104,623 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
368,944 |
|
|
|
175,044 |
|
|
$ |
480,978 |
|
|
$ |
1,260,947 |
|
|
$ |
31,075 |
|
|
$ |
(17,907 |
) |
|
$ |
(264,390 |
) |
|
$ |
1,859,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
52
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
(5,617 |
) |
|
$ |
152,718 |
|
|
$ |
185,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
119,626 |
|
|
|
15,063 |
|
|
|
3,498 |
|
Depreciation and amortization of premises and equipment |
|
|
19,693 |
|
|
|
19,711 |
|
|
|
19,270 |
|
Net amortization of investment security premiums |
|
|
290 |
|
|
|
2,111 |
|
|
|
3,608 |
|
Goodwill impairment |
|
|
90,000 |
|
|
|
|
|
|
|
|
|
Deferred income tax benefit |
|
|
(52,483 |
) |
|
|
(13,646 |
) |
|
|
(5,779 |
) |
Gain on sale of credit card portfolio |
|
|
(13,910 |
) |
|
|
|
|
|
|
|
|
Investment securities losses (gains) |
|
|
58,241 |
|
|
|
(1,740 |
) |
|
|
(7,439 |
) |
Gains on sale of mortgage loans |
|
|
(10,332 |
) |
|
|
(14,294 |
) |
|
|
(21,086 |
) |
Proceeds from sales of mortgage loans held for sale |
|
|
658,437 |
|
|
|
1,283,176 |
|
|
|
1,969,362 |
|
Originations of mortgage loans held for sale |
|
|
(655,459 |
) |
|
|
(1,164,101 |
) |
|
|
(1,943,940 |
) |
Amortization of intangible assets |
|
|
7,162 |
|
|
|
8,334 |
|
|
|
7,907 |
|
Intangible assets impairment |
|
|
|
|
|
|
1,069 |
|
|
|
|
|
Stock-based compensation |
|
|
2,058 |
|
|
|
2,639 |
|
|
|
1,687 |
|
Excess tax benefits from stock based compensation |
|
|
(20 |
) |
|
|
(111 |
) |
|
|
(783 |
) |
Decrease (increase) in accrued interest receivable |
|
|
14,869 |
|
|
|
(1,610 |
) |
|
|
(11,908 |
) |
(Increase) decrease in other assets |
|
|
(3,825 |
) |
|
|
16,315 |
|
|
|
(12,613 |
) |
(Decrease) increase in accrued interest payable |
|
|
(15,560 |
) |
|
|
7,846 |
|
|
|
21,741 |
|
Decrease in other liabilities |
|
|
(18,424 |
) |
|
|
(8,789 |
) |
|
|
(7,384 |
) |
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
200,363 |
|
|
|
151,973 |
|
|
|
16,141 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
194,746 |
|
|
|
304,691 |
|
|
|
201,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of securities available for sale |
|
|
740,353 |
|
|
|
365,559 |
|
|
|
147,194 |
|
Proceeds from maturities of securities held to maturity |
|
|
6,644 |
|
|
|
3,191 |
|
|
|
5,923 |
|
Proceeds from maturities of securities available for sale |
|
|
631,324 |
|
|
|
490,252 |
|
|
|
598,111 |
|
Proceeds from sale of credit card portfolio |
|
|
100,516 |
|
|
|
|
|
|
|
|
|
Purchase of securities held to maturity |
|
|
(6,038 |
) |
|
|
(2,287 |
) |
|
|
(698 |
) |
Purchase of securities available for sale |
|
|
(983,713 |
) |
|
|
(1,111,203 |
) |
|
|
(868,876 |
) |
(Increase) decrease in short-term investments |
|
|
(557 |
) |
|
|
7,035 |
|
|
|
20,598 |
|
Net increase in loans |
|
|
(961,002 |
) |
|
|
(809,562 |
) |
|
|
(886,372 |
) |
Net cash paid for acquisitions |
|
|
|
|
|
|
|
|
|
|
(109,729 |
) |
Net purchase of premises and equipment |
|
|
(29,054 |
) |
|
|
(21,606 |
) |
|
|
(32,642 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(501,527 |
) |
|
|
(1,078,621 |
) |
|
|
(1,126,491 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in demand and savings deposits |
|
|
(115,100 |
) |
|
|
(233,523 |
) |
|
|
(137,546 |
) |
Net increase in time deposits |
|
|
561,571 |
|
|
|
106,499 |
|
|
|
596,240 |
|
Additions to long-term debt |
|
|
344,690 |
|
|
|
1,463,633 |
|
|
|
550,166 |
|
Repayments of long-term debt |
|
|
(199,026 |
) |
|
|
(1,125,648 |
) |
|
|
(186,499 |
) |
(Decrease) increase in short-term borrowings |
|
|
(621,174 |
) |
|
|
703,104 |
|
|
|
197,795 |
|
Dividends paid |
|
|
(103,976 |
) |
|
|
(103,122 |
) |
|
|
(98,022 |
) |
Net proceeds from issuance of preferred stock and common
stock warrants |
|
|
376,500 |
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock |
|
|
13,157 |
|
|
|
7,368 |
|
|
|
9,074 |
|
Excess tax benefits from stock based compensation |
|
|
20 |
|
|
|
111 |
|
|
|
783 |
|
Acquisition of treasury stock |
|
|
|
|
|
|
(18,227 |
) |
|
|
(20,193 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
256,662 |
|
|
|
800,195 |
|
|
|
911,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in Cash and Due From Banks |
|
|
(50,119 |
) |
|
|
26,265 |
|
|
|
(13,025 |
) |
Cash and Due From Banks at Beginning of Year |
|
|
381,283 |
|
|
|
355,018 |
|
|
|
368,043 |
|
|
|
|
|
|
|
|
|
|
|
Cash and Due From Banks at End of Year |
|
$ |
331,164 |
|
|
$ |
381,283 |
|
|
$ |
355,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
358,906 |
|
|
$ |
442,987 |
|
|
$ |
357,203 |
|
Income taxes |
|
|
80,327 |
|
|
|
65,053 |
|
|
|
77,327 |
|
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 ten wholly owned banking subsidiaries: Fulton Bank, Swineford National Bank, Lafayette
Ambassador Bank, FNB Bank N.A., Hagerstown Trust Company, Delaware National Bank, The Bank, The
Peoples Bank of Elkton, Skylands Community 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.
During 2008 and 2007, the Corporation completed the consolidation of certain wholly owned banking
subsidiaries. In February 2007, the former First Washington State Bank subsidiary consolidated with
The Bank. In May 2007, the former Somerset Valley Bank subsidiary consolidated with Skylands
Community Bank. In July 2007, the former Lebanon Valley Farmers Bank subsidiary consolidated with
Fulton Bank. In March 2008, the former Resource Bank subsidiary consolidated with Fulton Bank. In
addition, during 2008, the Corporation announced the consolidation of its Maryland banking
subsidiaries. The consolidation, which is expected to take place in 2009, will merge the
Corporations Hagerstown Trust Company and Peoples Bank of Elkton subsidiaries into The Columbia
Bank.
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, Delaware, Maryland, 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 and the reported amounts of revenues and
expenses during the period. Actual results could differ from those estimates.
Fair Value Measurements: On January 1, 2008, the Corporation adopted the provisions of the
Financial Accounting Standards Boards (FASB) Statement of Financial Accounting Standards No. 157,
Fair Value Measurement (Statement 157) for assets and liabilities required to be measured at fair
value on a recurring basis and all financial assets and liabilities measured at fair value on a
nonrecurring basis.
Statement 157 establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into the following three categories (from highest to lowest
priority):
|
|
|
Level 1 Inputs that represent quoted prices for identical instruments in active
markets. |
|
|
|
|
Level 2 Inputs that represent quoted prices for similar instruments in active
markets, or quoted prices for identical instruments in non-active markets. Also includes
valuation techniques whose inputs are derived principally from observable market data
other than quoted prices, such as interest rates or other market-corroborated means. |
|
|
|
|
Level 3 Inputs that are largely unobservable, as little or no market data exists for
the instrument being valued.
|
54
As required by Statement 157, the Corporation has categorized all assets and liabilities required
to be measured at fair value on a recurring basis into the above three levels. In addition, the
Corporation has categorized all financial assets and liabilities measured at fair value on a
nonrecurring basis into the same three levels.
In February 2008, the FASB issued Staff Position No. 157-2, Effective Date of FASB Statement No.
157 (FSP 157-2). FSP 157-2 delayed the effective date of Statement 157 for nonfinancial assets and
liabilities measured at fair value on a nonrecurring basis, until fiscal years beginning after
November 15, 2008, or January 1, 2009 for the Corporation. In accordance with FSP 157-2, the
Corporation did not apply the provisions of Statement 157 for the following nonfinancial assets and
liabilities, which are not measured at fair value on a recurring basis: loans, deposits and
borrowings acquired in prior years business combinations, other intangible assets initially
measured at fair value upon acquisition and reporting units tested annually for goodwill impairment
under Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
The application of FSP 157-2 for these nonfinancial assets and liabilities is not expected to have
a material impact on their reported values.
In October 2008, the FASB issued Staff Position No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3 clarifies the
application of Statement 157 in a market that is not active and provides an example to illustrate
key considerations in determining the fair value of a financial asset when the market for that
financial asset is not active. FSP 157-3 was effective upon issuance for the Corporation. The
Corporation applied the provisions of FSP 157-3 to certain debt security investments for which
there was no active market.
See Note P, Fair Value Measurements for additional details.
Fair Value Option: In February 2007, the FASB issued Statement of Financial Accounting Standards
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. Statement 159 became effective for the Corporation on January 1, 2008.
Upon adoption of Statement 159, the Corporation elected to account for its hedged certificates of
deposit, as detailed under the heading Derivative Financial Instruments below, at fair value
according to the provisions of Statement 159. Prior to the adoption of Statement 159, the
Corporation accounted for these certificates of deposit at fair value under Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
(Statement 133), after performing required tests to determine the hedges were highly effective. The
adoption of Statement 159 for these instruments did not result in a change in the reported values
of the certificates of deposit on the Corporations consolidated balance sheets and, as such, no
cumulative-effect impact upon adoption of Statement 159 for these instruments was necessary.
However, adoption of Statement 159 for these instruments eliminated the requirement to perform
periodic tests of hedge effectiveness.
Mortgage loans held for sale originated prior to October 1, 2008 were measured at the lower of
aggregate cost or market. The Corporation elected to adopt Statement 159 for mortgage loans held
for sale originated after this date to more accurately reflect the financial performance of its
entire mortgage banking activities in its consolidated financial statements. Derivative financial
instruments related to these activities are also recorded at fair value under Statement 133, as
detailed under the heading Derivative Financial Instruments below. During 2008, the Corporation
originated mortgage loans for sale primarily to the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC)
and the Federal Home Loan Bank (FHLB). These loans conformed to standards published by these
agencies. Fair value is the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of
the date fair value is measured. The Corporation classifies interest income earned on mortgage
loans held for sale within interest income on the consolidated statements of operations, which is
separate from the fair value adjustments on loans held for sale, which are recorded as components
of gains on sale of mortgage loans.
55
The following table presents a summary of the Corporations fair value elections under Statement
159 and their impact on the Corporations consolidated financial statements as of and for the year
ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
|
Cost |
|
|
Fair Value |
|
|
|
|
Adjustment |
|
|
Statement of |
|
|
Asset |
|
|
Asset |
|
|
Balance Sheet |
|
Gain |
|
|
Operations |
|
|
(Liability) |
|
|
(Liability) |
|
|
Classification |
|
(Loss) |
|
|
Classification |
|
|
(in thousands) |
Mortgage loans held for sale (1) |
|
$ |
64,787 |
|
|
$ |
66,567 |
|
|
Loans held for sale |
|
$ |
1,780 |
|
|
Gains on sale of mortgage loans |
Hedged certificates of deposit |
|
|
(7,458 |
) |
|
|
(7,517 |
) |
|
Interest-bearing deposits |
|
|
(59 |
) |
|
Other expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
57,329 |
|
|
$ |
59,050 |
|
|
|
|
$ |
1,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cost basis of mortgage loans held for sale represents the unpaid principal balance. |
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
securities 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 declines in value
are other-than-temporary. Declines in value that are determined to be other-than-temporary are
recorded as losses on the consolidated statements of operations.
Loans and Revenue Recognition: Loan and lease financing receivables are stated at their principal
amount outstanding, except for mortgage loans held for sale, which the Corporation has elected to
carry at fair value, and floating rate residential mortgage construction loans held for sale, which
are carried at the lower of aggregate cost or fair value. Loans transferred from held for sale to
portfolio are reclassified at fair value, with write-downs recorded as other expense. 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 adjustments 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 previously 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.
Allowance for Credit Losses: The allowance for credit losses consists of the allowance for loan
losses and the reserve for unfunded lending commitments. The allowance for loan losses represents
managements estimate of losses inherent in the loan portfolio as of the balance sheet date and is
recorded as a reduction to loans. The reserve for unfunded lending commitments represents
managements estimate of losses inherent in its unfunded loan commitments and is recorded in other
liabilities on the consolidated balance sheet. The allowance for credit losses is increased by
charges to expense, through the provision for loan losses, and decreased by charge-offs, net of
recoveries. Managements periodic evaluation of the adequacy of the allowance for credit 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
underlying collateral and current economic conditions, among other considerations. Management
believes that the allowance for loan losses and the reserve for unfunded lending commitments are
adequate, however, future changes to the allowance or reserve 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 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).
56
Commercial loans, commercial mortgages and construction loans are reviewed for impairment under
Statement 114 if they are both greater than $100,000 and 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. 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 estimated fair value.
All loans not reviewed for impairment under Statement 114 are evaluated under Statement 5. 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. Closed end consumer loans are generally charged off when they become
120 days past due (180 days for open-end consumer loans) 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 increases 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 when impairment occurs.
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 on the consolidated balance sheets,
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 expense or other income, as appropriate.
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.
MSRs are evaluated quarterly for impairment, by comparing the carrying amount to estimated fair
value. Fair value is determined at the end of each quarter through a discounted cash flows
valuation. Significant inputs to the valuation include expected servicing income, net of expense,
the discount rate and the expected life of the underlying loans. To the extent the amortized cost
of the MSRs exceed their estimated fair values; a valuation allowance is established for such
impairment, through a charge against servicing income on the consolidated statements of operations.
If the Corporation determines, based on subsequent quarterly valuations, that an impairment no
longer exists, then the valuation allowance is reduced through a credit to earnings.
Derivative Financial Instruments: In connection with its mortgage banking activities, the
Corporation enters into commitments to originate certain fixed-rate residential mortgage loans for
customers, also referred to as interest rate locks. In addition, the Corporation enters into
forward commitments for the future sale or purchase of mortgage-backed securities to or from
third-party investors to hedge the effect of changes in interest rates on the value of the interest
rate locks. Forward sales commitments may also be in the form of commitments to sell individual
mortgage loans at a fixed price at a future date. Both the interest rate locks and the forward
commitments are accounted for as derivatives and carried at fair value, determined as the amount
that would be necessary to settle each derivative financial instrument at the end of the period.
Gross derivative assets and liabilities are recorded within other assets and
57
other liabilities on
the consolidated balance sheets, with changes in fair value during the period recorded within gains
on sale of mortgage loans on the consolidated statements of operations.
As of December 31, 2008, interest rate swaps with a notional amount of $10.0 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 and the
certificates of deposits are recorded at fair value, with changes in the fair values during the
period recorded to other expense. See additional discussion under the heading Fair Value Option
above.
The following table presents a summary of the notional amounts and fair values of derivative
financial instruments as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
Notional |
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
|
|
(in thousands) |
|
Interest rate locks with customers (1) |
|
$ |
141,145 |
|
|
$ |
425 |
|
|
$ |
35,204 |
|
|
$ |
(81 |
) |
Forward commitments (1) |
|
|
490,448 |
|
|
|
(1,445 |
) |
|
|
70,053 |
|
|
|
236 |
|
Interest rate swaps (2) |
|
|
10,000 |
|
|
|
18 |
|
|
|
248,000 |
|
|
|
(1,142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,002 |
) |
|
|
|
|
|
$ |
(987 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2008, the Corporation recorded gross mortgage
banking derivative assets of $1.5 million and gross mortgage banking
derivative liabilities of $2.5 million. As of December 31, 2007, gross
mortgage banking derivative assets were $486,000 and gross mortgage banking
derivative liabilities were $331,000. |
|
(2) |
|
Interest rate swaps recorded as a component of other liabilities on
the consolidated balance sheets. |
In prior years, the Corporation entered into forward-starting interest rate swaps in anticipation
of the issuance of fixed-rate debt. In October 2005, the Corporation entered into a
forward-starting interest rate swap with a notional amount of $150.0 million in anticipation of the
issuance of trust preferred securities in January 2006. In February 2007, the Corporation entered
into a forward-starting interest swap with a notional amount of $100.0 million in anticipation of
the issuance of subordinated debt in May 2007. These swaps were accounted for as cash flow hedges
because they hedged the variability of interest payments attributable to changes in interest rates
on the forecasted issuance of fixed-rate debt. The total amount recorded as a reduction to
accumulated other comprehensive income upon settlement of these derivatives is being amortized to
interest expense over the life of the related securities using the effective interest method. The
amount of net losses in accumulated other comprehensive income that will be reclassified into
earnings in 2009 is expected to be approximately $120,000.
Income Taxes: The provision for income taxes is based upon income before income taxes, adjusted
primarily for the effect of tax-exempt income, non-deductible expenses and net credits received
from investments in low and moderate income housing partnerships (LIH investments) and similar
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. The deferred income tax provision or
benefit is based on the changes in the deferred tax asset or liability from period to period.
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 statements of operations. Compensation expense is equal to
the fair value of the stock-based compensation awards, net of estimated forfeitures, and is
recognized over the vesting period of such awards.
Net Income (Loss) Per Common Share: The Corporations basic net income (loss) per common share is
calculated as net income (loss) available to common shareholders divided by the weighted average
number of common shares outstanding. Net income (loss) available to common shareholders is
calculated as net income (loss) less accrued dividends and discount accretion related to preferred
stock. See Note M, Stock-based Compensation Plans and Shareholders Equity for additional details
related to the Corporations issuance of preferred stock and common stock warrants.
58
For diluted net income (loss) per common share, net income (loss) available to common shareholders
is divided by the weighted average number of common 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,
restricted stock and common stock warrants.
A reconciliation of net income (loss) available to common shareholders and weighted average common
shares outstanding used to calculate basic net income (loss) per common share and diluted net
income (loss) per common share follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Net income (loss) |
|
$ |
(5,617 |
) |
|
$ |
152,718 |
|
|
$ |
185,527 |
|
Preferred stock dividends |
|
|
(419 |
) |
|
|
|
|
|
|
|
|
Preferred stock discount accretion |
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders |
|
$ |
(6,080 |
) |
|
$ |
152,718 |
|
|
$ |
185,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (basic) |
|
|
174,236 |
|
|
|
173,295 |
|
|
|
172,830 |
|
Impact of common stock equivalents |
|
|
|
|
|
|
1,091 |
|
|
|
2,042 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (diluted) |
|
|
174,236 |
|
|
|
174,386 |
|
|
|
174,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2007
and 2006, 4.4 million and 2.2 million stock options,
respectively, were excluded from the diluted earnings per share
computation as their effect would have been anti-dilutive. In 2008,
all common stock equivalents were excluded because their effect would
have been anti-dilutive due to the net loss for the year.
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 ten 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. In
2008, the Corporation issued guarantees to purchase auction rate securities held in customer
accounts. See Note O, Commitments and Contingencies for additional details.
In September 2008, the FASB issued FASB Staff Position No. 133-1 and 45-4, Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB
Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. This
staff position requires companies who sell credit derivatives or issue financial guarantees to
disclose information about these instruments to enable users of the financial statements to assess
the potential effect of the instruments on the reporting entitys financial position, financial
performance and cash flows. The disclosure requirements of this staff position were effective for
the Corporation on December 31, 2008, and impacted the Corporations disclosures related to
guarantees subject to FASB Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an
interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34
(FIN 45), which include: standby and commercial letters of credit and ARC purchase guarantees. See
Note O, Commitments and Contingencies for additional information.
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
59
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. If certain events
occur which might indicate goodwill has been impaired between annual tests, goodwill must be tested
when such events occur.
In 2008, the Corporation recorded a $90.0 million goodwill impairment charge for its Columbia Bank
reporting unit. See Note F, Goodwill and Intangible Assets for additional details. Based on the
results of goodwill impairment tests performed in 2007 and 2006, the Corporation concluded that
there was no impairment.
Variable Interest Entities: FASB Interpretation No. 46R, Consolidation of Variable Interest
Entities (revised December 2003) An Interpretation of ARB No. 51 (FIN 46R), 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 46R, 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.
The provisions of FIN 46R 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 on 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 for additional information.
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. As of December
31, 2008 and 2007, the Corporations LIH Investments, included in other assets on the consolidated
balance sheets, totaled $47.5 million and $37.2 million, respectively. The net income tax benefit
associated with these investments was $3.9 million, $3.7 million and $3.9 million in 2008, 2007 and
2006, respectively. None of the Corporations LIH investments met the consolidation criteria of FIN
46R, or its related interpretations, as of December 31, 2008 or 2007.
New Accounting Standards: In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (Statement
161). Statement 161 establishes the disclosure requirements for derivative instruments and for
hedging activities, including disclosure of information that should enable users of financial
information to understand how and why a company uses derivative instruments, how derivative
instruments and related hedged items are accounted for, and how derivative instruments and related
hedged items affect a companys financial position, financial performance, and cash flows. The
standard is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, or the Corporations March 31, 2009 quarterly report on Form
10-Q. The adoption of Statement 161 is not expected to have a material impact on the Corporations
consolidated financial statements.
In June 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (EITF
03-6-1). EITF 03-6-1 requires companies to include participating share-based payment transactions,
prior to vesting, in the earnings allocation in computing earnings per share. EITF 03-6-1 defines
participating share-based payment awards as those that contain nonforfeitable rights to dividends,
even if granted prior to when an award vests. EITF 03-6-1 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, or the Corporations March 31, 2009
quarterly report on Form 10-Q. The adoption of EITF 03-6-1 is not expected to impact the
Corporations earning per share computations.
In December 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN 46(R)-8, Disclosures
by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities. This staff position requires companies to
disclose additional information about transfers of financial assets and interests in variable
interest entities, including the following: a transferors continuing involvement in financial
assets that it has transferred in a securitization or asset-backed financing arrangement, the
nature of any restrictions and the carrying amounts of any assets held by an entity that relate to
a transferred asset and how servicing assets and liabilities are reported under Statement 140. This
staff position is effective for the
first reporting period ending after December 15, 2008, or December 31, 2008 for the Corporation.
See Note G, Mortgage Servicing Rights and Note I, Short-term Borrowings and Long-term Debt for
additional disclosures related to the Corporations MSRs and Trust Preferred Securities.
60
In December 2008, the FASB issued FASB Staff Position No. FAS 132(R)-1, Employers Disclosures
about Postretirement Benefit Plan Assets. This staff position amends FASB Statement No. 132
(revised 2003), Employers Disclosures about Pensions and Postretirement Benefits, to provide
guidance on an employers disclosures about plan assets of a defined benefit pension or other
postretirement plans. This staff position is effective for disclosures about plan assets provided
for fiscal years ending after December 15, 2009, or December 31, 2009 for the Corporation. The
adoption of this staff position will impact future disclosures related to the Corporations defined
benefit pension plan.
In January 2009, the FASB issued FASB Staff Position EITF 99-20-1, Amendments to the Impairment
Guidance in EITF Issue No. 99-20 (FSP EITF 99-20-1). This staff position amends the impairment
guidance in EITF No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial
Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, to achieve
more consistent determination of whether an other-than-temporary impairment has occurred for
certain debt securities. Specifically, this staff position provides that when determining whether
an impairment of a securitized financial asset is other-than-temporary the holder of that
instrument must assess whether there has been a probable adverse change in expected cash flows and
is not required to use market participant assumptions in that determination. FSP EITF 99-20-1 is
effective for reporting periods ending after December 15, 2008, or December 31, 2008 for the
Corporation. The application of this staff position did not impact the Corporations consolidated
financial statements.
Reclassifications: Certain amounts in the 2007 and 2006 consolidated financial statements and notes
have been reclassified to conform to the 2008 presentation.
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, 2008 and 2007 was $70.9 million and $80.3 million, respectively.
61
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) |
|
2008 Held to Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored
agency securities |
|
$ |
6,782 |
|
|
$ |
60 |
|
|
$ |
|
|
|
$ |
6,842 |
|
State and municipal securities |
|
|
825 |
|
|
|
5 |
|
|
|
|
|
|
|
830 |
|
Corporate debt securities |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
25 |
|
Mortgage-backed securities |
|
|
2,004 |
|
|
|
66 |
|
|
|
(2 |
) |
|
|
2,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,636 |
|
|
$ |
131 |
|
|
$ |
(2 |
) |
|
$ |
9,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Available for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
138,071 |
|
|
$ |
2,133 |
|
|
$ |
(1,503 |
) |
|
$ |
138,701 |
|
U.S. Government securities |
|
|
14,545 |
|
|
|
83 |
|
|
|
|
|
|
|
14,628 |
|
U.S. Government sponsored
agency securities |
|
|
74,616 |
|
|
|
2,406 |
|
|
|
(20 |
) |
|
|
77,002 |
|
State and municipal securities |
|
|
520,429 |
|
|
|
5,317 |
|
|
|
(2,210 |
) |
|
|
523,536 |
|
Corporate debt securities |
|
|
154,976 |
|
|
|
1,085 |
|
|
|
(36,167 |
) |
|
|
119,894 |
|
Collateralized mortgage obligations |
|
|
489,686 |
|
|
|
14,713 |
|
|
|
(206 |
) |
|
|
504,193 |
|
Mortgage-backed securities |
|
|
1,118,508 |
|
|
|
24,160 |
|
|
|
(1,317 |
) |
|
|
1,141,351 |
|
Auction rate securities (1) |
|
|
208,281 |
|
|
|
|
|
|
|
(12,381 |
) |
|
|
195,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,719,112 |
|
|
$ |
49,897 |
|
|
$ |
(53,804 |
) |
|
$ |
2,715,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) See Note O, Commitments and Contingencies for additional details related to auction rate
securities. |
|
2007 Held to Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored
agency securities |
|
$ |
6,478 |
|
|
$ |
33 |
|
|
$ |
|
|
|
$ |
6,511 |
|
State and municipal securities |
|
|
1,120 |
|
|
|
7 |
|
|
|
|
|
|
|
1,127 |
|
Corporate debt securities |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
25 |
|
Mortgage-backed securities |
|
|
2,662 |
|
|
|
74 |
|
|
|
|
|
|
|
2,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,285 |
|
|
$ |
114 |
|
|
$ |
|
|
|
$ |
10,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Available for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
215,177 |
|
|
$ |
282 |
|
|
$ |
(23,734 |
) |
|
$ |
191,725 |
|
U.S. Government securities |
|
|
14,489 |
|
|
|
47 |
|
|
|
|
|
|
|
14,536 |
|
U.S. Government sponsored
agency securities |
|
|
200,899 |
|
|
|
1,658 |
|
|
|
(34 |
) |
|
|
202,523 |
|
State and municipal securities |
|
|
520,670 |
|
|
|
2,488 |
|
|
|
(1,620 |
) |
|
|
521,538 |
|
Corporate debt securities |
|
|
172,907 |
|
|
|
1,259 |
|
|
|
(8,184 |
) |
|
|
165,982 |
|
Collateralized mortgage obligations |
|
|
588,848 |
|
|
|
6,604 |
|
|
|
(677 |
) |
|
|
594,775 |
|
Mortgage-backed securities |
|
|
1,460,219 |
|
|
|
6,167 |
|
|
|
(14,198 |
) |
|
|
1,452,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,173,209 |
|
|
$ |
18,505 |
|
|
$ |
(48,447 |
) |
|
$ |
3,143,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities carried at $2.0 billion and $1.5 billion as of December 31, 2008 and 2007, 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 FHLB and the Federal Reserve Bank totaling $85.3 million and $109.3
million as of December 31, 2008 and 2007, respectively.
62
The amortized cost and estimated fair value of debt securities as of December 31, 2008, 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 |
|
$ |
347 |
|
|
$ |
352 |
|
|
$ |
125,787 |
|
|
$ |
126,595 |
|
Due from one year to five years |
|
|
7,285 |
|
|
|
7,345 |
|
|
|
274,010 |
|
|
|
278,368 |
|
Due from five years to ten years |
|
|
|
|
|
|
|
|
|
|
81,921 |
|
|
|
79,975 |
|
Due after ten years |
|
|
|
|
|
|
|
|
|
|
491,129 |
|
|
|
446,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,632 |
|
|
|
7,697 |
|
|
|
972,847 |
|
|
|
930,960 |
|
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
489,686 |
|
|
|
504,193 |
|
Mortgage-backed securities |
|
|
2,004 |
|
|
|
2,068 |
|
|
|
1,118,508 |
|
|
|
1,141,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,636 |
|
|
$ |
9,765 |
|
|
$ |
2,581,041 |
|
|
$ |
2,576,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents information related to the Corporations gains and losses on the sales
of equity and debt securities, and losses recognized for other-than-temporary impairment of
investments. Gross realized losses on equity and debt securities are net of other-than-temporary
impairment charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than- |
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
temporary |
|
|
|
|
|
|
Realized |
|
|
Realized |
|
|
Impairment |
|
|
Net (Losses) |
|
|
|
Gains |
|
|
Losses |
|
|
Losses |
|
|
Gains |
|
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
7,626 |
|
|
$ |
|
|
|
$ |
(44,649 |
) |
|
$ |
(37,023 |
) |
Debt securities |
|
|
3,887 |
|
|
|
(4,418 |
) |
|
|
(20,687 |
) |
|
|
(21,218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,513 |
|
|
$ |
(4,418 |
) |
|
$ |
(65,336 |
) |
|
$ |
(58,241 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
1,987 |
|
|
$ |
(51 |
) |
|
$ |
(292 |
) |
|
$ |
1,644 |
|
Debt securities |
|
|
2,158 |
|
|
|
(2,030 |
) |
|
|
(32 |
) |
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,145 |
|
|
$ |
(2,081 |
) |
|
$ |
(324 |
) |
|
$ |
1,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
7,128 |
|
|
$ |
(40 |
) |
|
$ |
(123 |
) |
|
$ |
6,965 |
|
Debt securities |
|
|
555 |
|
|
|
(81 |
) |
|
|
|
|
|
|
474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,683 |
|
|
$ |
(121 |
) |
|
$ |
(123 |
) |
|
$ |
7,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
The following table presents a summary of other-than-temporary impairment charges recorded by the
Corporation, by investment security type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Financial institution stocks |
|
$ |
43,131 |
|
|
$ |
117 |
|
|
$ |
123 |
|
U.S. government sponsored agency stock |
|
|
356 |
|
|
|
175 |
|
|
|
|
|
Mutual funds |
|
|
1,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities charges |
|
|
44,649 |
|
|
|
292 |
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaterialized mortgage obligations |
|
|
|
|
|
|
32 |
|
|
|
|
|
Bank-issued subordinated debt |
|
|
4,855 |
|
|
|
|
|
|
|
|
|
Pooled trust preferred securities |
|
|
15,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities charges |
|
|
20,687 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment charges |
|
$ |
65,336 |
|
|
$ |
324 |
|
|
$ |
123 |
|
|
|
|
|
|
|
|
|
|
|
In 2008, the values of financial institution stocks, including those held by the Corporation,
declined significantly. The $43.1 million other-than-temporary impairment charge in 2008 was due to
the increasing severity and duration of the decline in fair values of such holdings. These factors, in
conjunction with managements evaluation of the near-term prospects of each specific issuer,
resulted in the charges recognized during 2008. As of December 31, 2008, after other-than-temporary
impairment charges, the financial institution stock portfolio had a cost basis of $42.8 million and
a fair value of $43.4 million.
In addition to financial institution stocks, the Corporation recorded other-than-temporary
impairment charges on other equity securities of $1.5 million in 2008. The charges included a
write-down of the Corporations entire investment in the stock of U.S. government sponsored
agencies.
The estimated fair value of debt securities issued by financial institutions also declined
significantly during 2008. The $4.9 million other-than-temporary impairment charge for bank-issued
subordinated debt was related to an investment in a financial institution which failed during the
third quarter of 2008. The $15.8 million other-than-temporary impairment charge for pooled trust
preferred securities was due to adverse changes in the expected cash flows from certain of these
investments.
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, as of December 31, 2008. The unrealized losses included within
the table below are subsequent to the other-than-temporary impairment charges detailed above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 months |
|
|
12 Months or Longer |
|
|
Total |
|
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
(in thousands) |
|
U.S. Government sponsored agency
securities |
|
$ |
357 |
|
|
$ |
(3 |
) |
|
$ |
1,834 |
|
|
$ |
(17 |
) |
|
$ |
2,191 |
|
|
$ |
(20 |
) |
State and municipal securities |
|
|
98,846 |
|
|
|
(2,209 |
) |
|
|
1,039 |
|
|
|
(1 |
) |
|
|
99,885 |
|
|
|
(2,210 |
) |
Corporate debt securities |
|
|
36,832 |
|
|
|
(6,310 |
) |
|
|
53,198 |
|
|
|
(29,857 |
) |
|
|
90,030 |
|
|
|
(36,167 |
) |
Collateralized mortgage obligations |
|
|
4,560 |
|
|
|
(206 |
) |
|
|
|
|
|
|
|
|
|
|
4,560 |
|
|
|
(206 |
) |
Mortgage-backed securities |
|
|
123,065 |
|
|
|
(563 |
) |
|
|
90,804 |
|
|
|
(756 |
) |
|
|
213,869 |
|
|
|
(1,319 |
) |
Auction rate securities (1) |
|
|
195,900 |
|
|
|
(12,381 |
) |
|
|
|
|
|
|
|
|
|
|
195,900 |
|
|
|
(12,381 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
459,560 |
|
|
|
(21,672 |
) |
|
|
146,875 |
|
|
|
(30,631 |
) |
|
|
606,435 |
|
|
|
(52,303 |
) |
Equity securities |
|
|
10,377 |
|
|
|
(1,414 |
) |
|
|
327 |
|
|
|
(89 |
) |
|
|
10,704 |
|
|
|
(1,503 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
469,937 |
|
|
$ |
(23,086 |
) |
|
$ |
147,202 |
|
|
$ |
(30,720 |
) |
|
$ |
617,139 |
|
|
$ |
(53,806 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note O, Commitments and Contingencies for additional details related to auction rate
securities. |
64
As noted above, for its investments in equity securities, most notably its investments in stocks of
financial institutions, management evaluates the near-term prospects of the issuers in relation to
the severity and duration of the impairment. Based on that evaluation and
the Corporations ability and intent to hold those investments for a reasonable period of time
sufficient for a recovery of fair value, the Corporation does not consider those investments with
unrealized holding losses as of December 31, 2008 to be other-than-temporarily impaired.
In relation to the Corporations investments in mortgage-backed securities and collateralized
mortgage obligations, the contractual terms of those investments generally do not permit the issuer
to settle the securities at a price less than the amortized cost of the investment. Because the
decline in market value for mortgage-backed securities and collateralized mortgage obligations held
by the Corporation is attributable to changes in interest rates and not credit quality, and because
the Corporation has the ability and intent to hold those investments until a recovery of fair
value, which may be maturity, the Corporation does not consider those investments to be
other-than-temporarily impaired as of December 31, 2008.
A significant majority of the Corporations available for sale corporate debt securities are issued
by financial institutions. The following table presents the amortized cost and estimated fair
values of corporate debt securities as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
Amortized |
|
|
Estimated fair |
|
|
Amortized |
|
|
Estimated fair |
|
|
|
cost |
|
|
value |
|
|
cost |
|
|
value |
|
|
|
(in thousands) |
|
Single-issuer trust preferred securities (1) |
|
$ |
97,887 |
|
|
$ |
69,819 |
|
|
$ |
96,781 |
|
|
$ |
92,515 |
|
Subordinated debt |
|
|
34,788 |
|
|
|
31,745 |
|
|
|
37,886 |
|
|
|
36,760 |
|
Pooled trust preferred securities |
|
|
19,351 |
|
|
|
15,381 |
|
|
|
35,271 |
|
|
|
33,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities issued by
financial institutions |
|
|
152,026 |
|
|
|
116,945 |
|
|
|
169,938 |
|
|
|
163,018 |
|
Other corporate debt securities |
|
|
2,950 |
|
|
|
2,949 |
|
|
|
2,969 |
|
|
|
2,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale corporate debt securities |
|
$ |
154,976 |
|
|
$ |
119,894 |
|
|
$ |
172,907 |
|
|
$ |
165,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Single-issuer trust preferred securities with estimated fair values totaling
$7.5 million as of December 31, 2008 are classified as Level 3 assets under Statement
157. See Note P, Fair Value Measurements for additional details. |
Based on managements other-than-temporary impairment evaluations and the Corporations ability and
intent to hold these investments for a reasonable period of time sufficient for a recovery of fair
value, the Corporation does not consider these investments to be other-than-temporarily impaired as
of December 31, 2008.
NOTE D LOANS AND ALLOWANCE FOR CREDIT LOSSES
Gross loans are summarized as follows as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Real-estate commercial mortgage |
|
$ |
4,017,075 |
|
|
$ |
3,480,958 |
|
Commercial industrial, financial and agricultural |
|
|
3,635,544 |
|
|
|
3,427,085 |
|
Real-estate home equity |
|
|
1,695,671 |
|
|
|
1,501,231 |
|
Real-estate construction |
|
|
1,268,955 |
|
|
|
1,366,923 |
|
Real-estate residential mortgage |
|
|
972,797 |
|
|
|
848,901 |
|
Consumer |
|
|
365,419 |
|
|
|
500,708 |
|
Leasing and other |
|
|
84,832 |
|
|
|
79,175 |
|
Overdrafts |
|
|
12,855 |
|
|
|
10,208 |
|
|
|
|
|
|
|
|
|
|
|
12,053,148 |
|
|
|
11,215,189 |
|
Unearned income |
|
|
(10,528 |
) |
|
|
(10,765 |
) |
|
|
|
|
|
|
|
|
|
$ |
12,042,620 |
|
|
$ |
11,204,424 |
|
|
|
|
|
|
|
|
65
The Corporation has extended credit to the officers and directors of the Corporation and to their
associates. These 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 $290.9 million and $303.0 million as of December
31, 2008 and 2007, respectively. During 2008, additions totaled $49.3 million and repayments
totaled $61.4 million.
The total portfolio of mortgage loans serviced by the Corporation for unrelated third parties was
$1.2 billion and $952.1 million as of December 31, 2008 and 2007, respectively.
Changes in the allowance for credit losses were as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Balance at beginning of year |
|
$ |
112,209 |
|
|
$ |
106,884 |
|
|
$ |
92,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off |
|
|
(56,859 |
) |
|
|
(13,739 |
) |
|
|
(6,969 |
) |
Recoveries of loans previously charged off |
|
|
5,161 |
|
|
|
4,001 |
|
|
|
4,517 |
|
|
|
|
|
|
|
|
|
|
|
Net loans charged off |
|
|
(51,698 |
) |
|
|
(9,738 |
) |
|
|
(2,452 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
119,626 |
|
|
|
15,063 |
|
|
|
3,498 |
|
Allowance of purchased entity |
|
|
|
|
|
|
|
|
|
|
12,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
180,137 |
|
|
$ |
112,209 |
|
|
$ |
106,884 |
|
|
|
|
|
|
|
|
|
|
|
The following table presents the components of the allowance for credit losses for the years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Allowance for loan losses |
|
$ |
173,946 |
|
|
$ |
107,547 |
|
|
$ |
106,884 |
|
Reserve for unfunded lending commitments (1) |
|
|
6,191 |
|
|
|
4,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
$ |
180,137 |
|
|
$ |
112,209 |
|
|
$ |
106,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reserve for unfunded commitments transferred to other liabilities as of December 31,
2007. Prior periods were not reclassified. |
The following table presents non-performing assets as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Non-accrual loans |
|
$ |
161,962 |
|
|
$ |
76,150 |
|
Accruing loans greater than 90 days past due |
|
|
35,177 |
|
|
|
29,782 |
|
Other real estate owned |
|
|
21,855 |
|
|
|
14,934 |
|
|
|
|
|
|
|
|
|
|
$ |
218,994 |
|
|
$ |
120,866 |
|
|
|
|
|
|
|
|
66
The recorded investment in loans that were considered to be impaired, as defined by Statement 114,
and the related allowance for loan losses as of December 31 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Related |
|
|
|
|
|
|
Related |
|
|
|
Recorded |
|
|
Allowance for |
|
|
Recorded |
|
|
Allowance for |
|
|
|
Investment |
|
|
Loan Loss (1) |
|
|
Investment |
|
|
Loan Loss (1) |
|
|
|
(in thousands) |
|
Performing loans |
|
$ |
350,502 |
|
|
$ |
(66,730 |
) |
|
$ |
240,255 |
|
|
$ |
(60,102 |
) |
Non-accrual loans |
|
|
77,053 |
|
|
|
(27,452 |
) |
|
|
24,500 |
|
|
|
(9,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans (as defined by Statement 114) |
|
$ |
427,555 |
|
|
$ |
(94,182 |
) |
|
$ |
264,755 |
|
|
$ |
(69,702 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2008 and 2007, there were no impaired loans that did not have a
related allowance for loan loss. |
The average recorded investment in impaired performing loans during 2008, 2007 and 2006 was
approximately $273.6 million, $216.8 million and $200.7 million, respectively. The average recorded
investment in impaired non-accrual loans during 2008, 2007 and 2006 was approximately $54.7
million, $19.3 million and $13.7 million, respectively.
The Corporation generally 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 $16.8
million, $16.3 million and $15.7 million on impaired loans in 2008, 2007 and 2006, respectively.
NOTE E PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Land |
|
$ |
33,577 |
|
|
$ |
31,902 |
|
Buildings and improvements |
|
|
222,586 |
|
|
|
210,915 |
|
Furniture and equipment |
|
|
148,945 |
|
|
|
139,174 |
|
Construction in progress |
|
|
12,622 |
|
|
|
11,639 |
|
|
|
|
|
|
|
|
|
|
|
417,730 |
|
|
|
393,630 |
|
Less: Accumulated depreciation and amortization |
|
|
(215,073 |
) |
|
|
(200,334 |
) |
|
|
|
|
|
|
|
|
|
$ |
202,657 |
|
|
$ |
193,296 |
|
|
|
|
|
|
|
|
NOTE F GOODWILL AND INTANGIBLE ASSETS
The following table summarizes the changes in goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Balance at beginning of year |
|
$ |
624,072 |
|
|
$ |
626,042 |
|
|
$ |
418,735 |
|
Goodwill impairment |
|
|
(90,000 |
) |
|
|
|
|
|
|
|
|
Other goodwill additions (reductions) |
|
|
313 |
|
|
|
(1,970 |
) |
|
|
207,307 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
534,385 |
|
|
$ |
624,072 |
|
|
$ |
626,042 |
|
|
|
|
|
|
|
|
|
|
|
The Corporation did not complete any acquisitions during the years ended December 31, 2008 and
2007. The other goodwill additions (reductions) in 2008 and 2007 were primarily due to additional
purchase price incurred for prior acquisitions as a result of contingencies being met, offset by
tax benefits realized on the exercise of stock options assumed in acquisitions.
67
The goodwill addition in 2006 was due to the Corporations acquisition of Columbia Bancorp of
Columbia, Maryland for a total purchase price of $306.0 million. Columbia Bancorp was a $1.3
billion bank holding company whose primary subsidiary was The Columbia Bank.
Based on its 2008 annual goodwill impairment test performed as required by Statement 142, the
Corporation determined that the goodwill allocated to its Columbia Bank reporting unit (Columbia)
was impaired, resulting in a $90.0 million goodwill impairment charge. The Columbia reporting unit
consisted of the following wholly owned banking subsidiaries: The Columbia Bank (which the
Corporation acquired in 2006), Hagerstown Trust Company and The Peoples Bank of Elkton.
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 based on three evenly weighted metrics: (1) a primary market approach, which
measures fair value based on trading multiples of independent publicly traded financial
institutions of comparable sizes to the reporting units, (2) a secondary market approach, which
measures fair value based on acquisition multiples of publicly traded financial institutions which
were acquired in the year of the current goodwill impairment test, and (3) an income approach,
which estimates fair value based on discounted cash flows. If the fair values of the reporting
units exceed their book values, no write-downs of goodwill are necessary. If the fair values are
less than the book values, an additional valuation procedure is required to assess the proper
carrying value of the goodwill.
Columbias goodwill impairment resulted from a number of external and internal factors. Among the
external factors that contributed to Columbias impairment was the current years decreases in the
values of financial institution stocks and in the acquisition multiples paid for banks of
comparable size and character to Columbia, which produced a lower fair value for Columbia under the
primary and secondary market approaches. The Corporation acquired Columbia Bancorp in 2006, paying
a price that was commensurate with the market at that time, when bank values were higher than they
were as of the date of the 2008 impairment test. Among the internal factors which contributed to
the current years impairment charge was a decrease in expected cash flows for Columbia due to the
current interest rate environment, which negatively affected Columbias net interest income, and a
deterioration in the credit quality of Columbias commercial real estate portfolio.
As required by Statement 142, the Corporation recorded all fair value adjustments net of deferred
taxes. The resulting $90.0 million goodwill impairment charge recorded for Columbia was
non-deductible for Federal income tax purposes. In addition, since goodwill is excluded from
regulatory capital, the impairment charge did not impact the Corporations regulatory capital
ratios. For additional details related to the income tax effect of the goodwill impairment charge,
see Note K, Income Taxes. For details related to the Corporations regulatory capital, see Note
J, Regulatory Matters.
The following table summarizes intangible assets as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Impairment |
|
|
|
|
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
Gross |
|
|
Amortization |
|
|
Write-off |
|
|
Net |
|
|
|
(in thousands) |
|
Amortizing: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit |
|
$ |
50,279 |
|
|
$ |
(30,976 |
) |
|
$ |
19,303 |
|
|
$ |
50,279 |
|
|
$ |
(24,754 |
) |
|
$ |
|
|
|
$ |
25,525 |
|
Trade name |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
797 |
|
|
|
(212 |
) |
|
|
(585 |
) |
|
|
|
|
Unidentifiable and
other |
|
|
11,878 |
|
|
|
(8,996 |
) |
|
|
2,882 |
|
|
|
11,878 |
|
|
|
(7,830 |
) |
|
|
|
|
|
|
4,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizing |
|
|
62,157 |
|
|
|
(39,972 |
) |
|
|
22,185 |
|
|
|
62,954 |
|
|
|
(32,796 |
) |
|
|
(585 |
) |
|
|
29,573 |
|
Non-amortizing |
|
|
1,263 |
|
|
|
|
|
|
|
1,263 |
|
|
|
1,747 |
|
|
|
|
|
|
|
(484 |
) |
|
|
1,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
63,420 |
|
|
$ |
(39,972 |
) |
|
$ |
23,448 |
|
|
$ |
64,701 |
|
|
$ |
(32,796 |
) |
|
$ |
(1,069 |
) |
|
$ |
30,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangible assets are amortized using an accelerated method over the estimated
remaining life of the acquired core deposits. As of December 31, 2008, these assets had a weighted
average remaining life of approximately six years. Unidentifiable intangible assets, consisting of
premiums paid on branch acquisitions that did not qualify for business combinations accounting
under Statement 141, had a weighted average remaining life of five years. All other amortizing
intangible assets had a weighted average remaining life of approximately seven years. Amortization
expense related to intangible assets totaled $7.2 million, $8.3 million and $7.9 million in 2008,
2007 and 2006, respectively.
68
In 2007, the Corporation recorded $1.1 million of charges to other expense representing the balance
of impaired trade name intangibles for three subsidiary banks that consolidated with other
subsidiary banks. See Note A, Summary of Significant Accounting Policies for additional
information related to these transactions.
Amortization expense for the next five years is expected to be as follows (in thousands):
|
|
|
|
|
Year |
|
|
|
|
2009 |
|
$ |
5,741 |
|
2010 |
|
|
5,235 |
|
2011 |
|
|
4,239 |
|
2012 |
|
|
3,036 |
|
2013 |
|
|
2,240 |
|
NOTE G MORTGAGE SERVICING RIGHTS
The following table summarizes the changes in MSRs, which are included in other assets on the
consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Amortized cost: |
|
|
|
|
|
|
|
|