EXHIBIT 99.5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (MARCH 31, 2005)
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Management's Discussion) concerns Fulton Financial Corporation (the
Corporation), a financial holding company incorporated under the laws of the
Commonwealth of Pennsylvania in 1982, and its wholly owned subsidiaries. This
discussion and analysis should be read in conjunction with the consolidated
financial statements and notes 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, management of
net interest income and margin, the ability to realize gains on equity
investments, allowance and provision for loan losses, expected levels of certain
non-interest expenses and the liquidity position of the Corporation and Parent
Company. 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, risks and uncertainties, actual
results could differ materially from forward-looking statements.
In addition to the factors identified herein, the following could cause actual
results to differ materially from such forward-looking statements: pricing
pressures on loan and deposit products, actions of bank and non-bank
competitors, changes in local and national economic conditions, changes in
regulatory requirements, actions of the Federal Reserve Board (FRB),
creditworthiness of current borrowers, customers' acceptance of the
Corporation's products and services and acquisition pricing and the ability of
the Corporation to continue making acquisitions.
The Corporation's forward-looking statements are relevant only as of the date on
which such statements are made. By making any forward-looking statements, the
Corporation assumes no duty to update them to reflect new, changing or
unanticipated events or circumstances.
RESULTS OF OPERATIONS
Overview
As a financial institution with a focus on traditional banking activities,
Fulton Financial Corporation generates the majority of its revenue through net
interest income, or the difference between interest income earned on loans and
investments and interest paid on deposits and borrowings. Growth in net interest
income is dependent upon balance sheet growth and maintaining or increasing the
net interest margin, which is net interest income as a percentage of average
interest-earning assets. The Corporation also generates revenue through fees
earned on the various services and products offered to its customers and through
sales of assets, such as loans or investments. Offsetting these revenue sources
are provisions for credit losses on loans, other operating expenses and income
taxes.
The Corporation's net income for the first quarter of 2005 increased $5.7
million, or 15.8%, from $35.8 million in 2004 to $41.4 million in 2005. Diluted
net income per share increased $0.01, or 4.0%, from $0.25 in 2004 to $0.26 in
2005. The percentage increase in net income per share was lower than the net
income increase as the average number of shares outstanding increased as a
result of shares issued for acquisitions. The Corporation realized annualized
returns on average assets of 1.50% and average equity of 13.43% during the first
quarter of 2005. The annualized return on average tangible equity, which is net
income, as adjusted for intangible amortization, net of tax, divided by average
shareholders' equity, excluding goodwill and intangible assets, was 19.84% for
the quarter.
The Corporation adopted Statement of Financial Accounting Standards No. 123R,
"Share-Based Payment" (Statement 123R) in the quarter ended September 30, 2005.
Statement 123R requires that the fair value of equity awards to employees be
recognized as compensation expense over the period during which an employee is
required to provide
85
service in exchange for such award. The Corporation adopted Statement 123R using
"modified retrospective application" and, therefore, all financial information
in this report has been restated to reflect the impact of adoption. See Note E,
"Stock-Based Compensation" in the Notes to Consolidated Financial Statements for
information on the impact of adopting Statement 123R and its effect on prior
periods.
The increase in net income compared to the first quarter of 2004 resulted from
an $15.3 million increase in net interest income, a $6.3 million increase in
other income (excluding security gains) and a $940,000 decrease in the provision
for loan losses, offset by a $2.5 million decrease in security gains, an $11.5
million increase in other expenses and a $2.9 million increase in income taxes.
Net interest income growth resulted from increases in average earning assets,
due to the acquisitions of Resource Bancshares Corporation (Resource) in April
2004 and First Washington FinancialCorp (First Washington) in December 2004 (see
"Acquisitions" below). The net interest margin increased 4.2% compared to the
first quarter of 2004, compounding the impact of the earning asset growth.
The following summarizes some of the more significant factors that influenced
the Corporation's first quarter 2005 results.
Interest Rates - The FRB raised short-term interest rates seven times since
March, 2004, resulting in a 175 basis point increase in both the Federal funds
rate (from 1.00% to 2.75%) and the prime lending rate, (from 4.00% to 5.75%).
These increases have had a positive impact on the Corporation's net interest
margin and earnings as floating rate assets immediately adjusted to higher
rates. The offsetting increase in rates on deposits and borrowings has not been
as pronounced, however competitive pressure to reprice deposits has recently
increased.
Longer-term rates also increased over the past twelve months. The national
monthly average of 30-year mortgage rates increased 42 basis points from 5.59%
in 2004 to 6.01% in 2005. In a rising rate environment, the Corporation expects
improvements in net interest income, as discussed in the "Market Risk" section
of Management's Discussion. Continued increases in long-term rates, however, may
have a detrimental impact on mortgage loan origination volumes and related gains
on sales of mortgage loans.
Earning Assets - The Corporation's interest-earning assets increased
significantly, as a result of acquisitions and strong internal loan growth. This
growth also contributed to the increase in net interest income. With improving
regional economic conditions and with the slowdown of mortgage loan refinances,
the Corporation is optimistic that internal loan growth in the short-term will
continue to be positive.
From 2004 to 2005, the Corporation experienced a shift in its composition of
interest-earning assets from investments (23.8% of total average
interest-earning assets in 2005, compared to 31.2% in 2004) to loans (74.8% in
2005 compared to 68.6% in 2004). This change resulted as funds from investment
maturities, primarily mortgage-backed securities were reinvested in loans. The
movement to higher-yielding loans has had a positive effect on the Corporation's
net interest income and net interest margin.
Asset Quality - Asset quality refers to the underlying credit characteristics of
borrowers and the likelihood that defaults on contractual payments will result
in charge-offs of account balances. Asset quality is generally a function of
economic conditions, but can be managed through conservative underwriting and
sound collection policies and procedures.
The Corporation continued to maintain excellent asset quality, attributable to
its credit culture and underwriting policies. Asset quality measures such as
non-performing assets to total assets and net charge-offs to average loans
improved in comparison to 2004, resulting in a lower provision for loan losses
in the first quarter 2005. While overall asset quality has remained strong,
deterioration in quality of one or several significant accounts could have a
detrimental impact and result in losses that may not be foreseeable based on
current information. In addition, rising interest rates could increase the total
payments of borrowers and could have a negative impact on the ability of some to
pay according to the terms of their loans.
86
Equity Markets - As noted in the "Market Risk" section of Management's
Discussion, equity valuations can have an impact on the Corporation's financial
performance. In particular, bank stocks account for a significant portion of the
Corporation's equity investment portfolio. Gains on sales of these equities have
been a recurring component of the Corporation's earnings for many years,
including the first quarters of 2005 and 2004 with total gains of $2.5 million
and $4.8 million, respectively. If this portfolio declines in value, this
component of earnings could contract.
Acquisitions - In April 2004, the Corporation acquired Resource, an $890 million
financial holding company located in Virginia Beach, Virginia whose primary
subsidiary was Resource Bank. This was the Corporation's first acquisition in
Virginia, allowing it to enter a new geographic market. In December 2004, the
Corporation acquired First Washington, a $490 million bank holding company
located in Windsor, New Jersey whose primary subsidiary was First Washington
State Bank. Results for 2005 in comparison to 2004 were impacted by these
acquisitions (referred to collectively as the "Acquisitions").
On January 11, 2005, the Corporation entered into a merger agreement to acquire
SVB Financial Services, Inc. (SVB) of Somerville, New Jersey. SVB is a $475
million bank holding company whose primary subsidiary is Somerset Valley Bank,
which operates eleven community-banking offices in Somerset, Hunterdon and
Middlesex counties in New Jersey. The acquisition is expected to be completed in
the third quarter of 2005. For additional information on the terms of this
pending acquisition, see Note H, "Acquisitions", in the Notes to Consolidated
Financial Statements.
Acquisitions have long been a supplement to the Corporation's internal growth.
These recent and pending acquisitions provide the opportunity for additional
growth as they will allow the Corporation's existing products and services to be
sold in new markets. The Corporation's acquisition strategy focuses on high
growth areas with strong market demographics and targets organizations that have
a comparable corporate culture, strong performance and good asset quality, among
other factors. Under its "super-community" banking philosophy, acquired
organizations generally retain their status as separate legal entities, unless
consolidation with an existing affiliate bank is practical. Back office
functions are generally consolidated to maximize efficiencies.
Merger and acquisition activity in the financial services industry has been very
competitive in recent years, as evidenced by the prices paid for certain
acquisitions. While the Corporation has been an active acquirer, management is
committed to basing its pricing on rational economic models. Management will
continue to focus on generating growth in the most cost-effective manner.
Quarter ended March 31, 2005 versus quarter ended March 31, 2004
Net Interest Income
Net interest income increased $15.3 million, to $98.2 million in 2005 from $83.0
million in 2004. This increase was due to both average balance growth, with
total earning assets increasing 15.8%, and an improving net interest margin. The
average yield on earning assets increased 49 basis points (a 9.7% increase) over
2004 while the cost of interest-bearing liabilities increased 38 basis points (a
22.5% increase). This resulted in a 16 basis point increase in net interest
margin compared to the same period in 2004. The Corporation continues to manage
its asset/liability position and interest rate risk through the methods
discussed in the "Market Risk" section of Management's Discussion.
87
The following table provides a comparative average balance sheet and net
interest income analysis for the first quarter of 2005 as compared to the same
period in 2004 (dollars in thousands):
QUARTER ENDED MARCH 31, 2005 QUARTER ENDED MARCH 31, 2004
--------------------------------- --------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE (1) BALANCE INTEREST RATE (1)
----------- -------- -------- ---------- -------- --------
ASSETS
Interest-earning assets:
Loans and leases .................. $ 7,675,034 $116,628 6.16% $6,187,988 $ 88,466 5.75%
Taxable investment securities ..... 1,983,864 18,261 3.73 2,402,420 21,736 3.64
Tax-exempt investment securities .. 335,355 2,849 3.45 276,143 2,533 3.69
Equity securities ................. 123,800 1,084 3.55 131,553 952 2.91
----------- -------- ---- ---------- -------- ----
Total investment securities .......... 2,443,019 22,194 3.68 2,810,116 25,221 3.61
Mortgage loans held for sale ...... 112,619 1,812 6.53 15,212 239 6.32
Other interest-earning assets ..... 28,699 176 2.49 3,741 10 1.08
----------- -------- ---- ---------- -------- ----
Total interest-earning assets ........ 10,259,371 140,810 5.57% 9,017,057 113,936 5.08%
Noninterest-earning assets:
Cash and due from banks ........... 322,793 300,789
Premises and equipment ............ 149,017 121,428
Other assets ...................... 571,316 317,311
Less: Allowance for loan losses ... (90,489) (78,732)
----------- ----------
Total Assets ................... $11,212,008 $9,677,853
=========== ==========
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Demand deposits ................... $ 1,494,984 $ 2,970 0.81% $1,268,671 $ 1,355 0.43%
Savings deposits .................. 1,911,820 4,466 0.95 1,760,104 2,507 0.57
Time deposits ..................... 2,996,377 20,372 2.76 2,431,742 16,488 2.73
----------- -------- ---- ---------- -------- ----
Total interest-bearing deposits ...... 6,403,181 27,808 1.76 5,460,517 20,350 1.50
Short-term borrowings ............. 1,239,454 6,824 2.23 1,345,285 3,327 0.99
Long-term debt .................... 681,450 7,930 4.72 570,075 7,292 5.14
----------- -------- ---- ---------- -------- ----
Total interest-bearing liabilities ... 8,324,085 42,562 2.07% 7,375,877 30,969 1.69%
Noninterest-bearing liabilities:
Demand deposits ................... 1,509,118 1,257,541
Other ............................. 127,148 93,352
----------- ----------
Total Liabilities .............. 9,960,351 8,726,770
Shareholders' equity ................. 1,251,657 951,083
----------- ----------
Total Liabilities and
Shareholders' Equity ........ $11,212,008 $9,677,853
=========== ==========
Net interest income .................. $ 98,248 $ 82,967
======== ========
Net interest margin (FTE) ............ 3.95% 3.79%
==== ====
(1) Yields on tax-exempt securities are not fully taxable equivalent (FTE).
88
The following table summarizes the changes in interest income and expense due to
changes in average balances (volume) and changes in rates:
2005 VS. 2004
INCREASE (DECREASE) DUE
TO CHANGE IN
--------------------------
VOLUME RATE NET
------- ------ -------
(in thousands)
Interest income on:
Loans and leases ........................ $21,684 $6,478 $28,162
Taxable investment securities ........... (3,997) 522 (3,475)
Tax-exempt investment securities ........ 495 (179) 316
Equity securities ....................... (60) 192 132
Mortgage loans held for sale ............ 1,565 8 1,573
Other interest-earning assets ........... 139 27 166
------- ------ -------
Total interest-earning assets ........ $19,826 $7,048 $26,874
======= ====== =======
Interest expense on:
Demand deposits ......................... $ 274 $1,341 $ 1,615
Savings deposits ........................ 228 1,731 1,959
Time deposits ........................... 3,706 178 3,884
Short-term borrowings ................... (281) 3,778 3,497
Long-term debt .......................... 1,289 (651) 638
------- ------ -------
Total interest-bearing liabilities ... $ 5,216 $6,377 $11,593
======= ====== =======
Interest income increased $26.9 million, or 23.6%, mainly as a result of the
growth in average balances. Total interest-earning assets increased 13.8%,
resulting in a $19.8 million increase in interest income. An additional $7.0
million increase was realized from the 49 basis point increase in rates.
Average loans and leases increased $1.5 billion, or 24.0%. The following
summarizes the growth in average loans by category:
THREE MONTHS ENDED
MARCH 31 INCREASE (DECREASE)
----------------------- -------------------
2005 2004 $ %
---------- ---------- ---------- -----
(dollars in thousands)
Commercial - industrial and financial ..... $2,004,879 $1,606,165 $ 398,714 24.8%
Commercial - agricultural ................. 326,699 349,198 (22,499) (6.4)
Real estate - commercial mortgage ......... 2,439,800 2,013,488 426,312 21.2
Real estate - commercial construction ..... 362,953 253,824 109,129 43.0
Real estate - residential mortgage ........ 560,431 441,848 118,583 26.8
Real estate - residential construction .... 309,902 43,463 266,439 613.0
Real estate - home equity ................. 1,106,937 898,567 208,370 23.2
Consumer .................................. 500,465 512,947 (12,482) (2.4)
Leasing and other ......................... 62,968 68,488 (5,520) (8.1)
---------- ---------- ---------- -----
Total .................................. $7,675,034 $6,187,988 $1,487,046 24.0%
========== ========== ========== =====
89
The Acquisitions contributed approximately $1.0 billion to the increase in
average balances. The following table presents the average balance impact of the
Acquisitions, by type:
THREE MONTHS ENDED MARCH 31
---------------------------
2005 2004
---------- ----
(in thousands)
Commercial - industrial and financial ..... $ 212,101 $--
Commercial - agricultural ................. 1,604 --
Real estate - commercial mortgage ......... 275,022 --
Real estate - commercial construction ..... 103,562 --
Real estate - residential mortgage ........ 90,883 --
Real estate - residential construction .... 252,280 --
Real estate - home equity ................. 50,157 --
Consumer .................................. 6,287 --
Leasing and other ......................... 8,664 --
---------- ---
Total .................................. $1,000,560 $--
========== ===
The following table presents the growth in average loans, by type, excluding the
average balances contributed by the Acquisitions:
THREE MONTHS ENDED MARCH 31 INCREASE (DECREASE)
--------------------------- -------------------
2005 2004 $ %
---------- ---------- -------- -----
(dollars in thousands)
Commercial - industrial and financial ..... $1,792,778 $1,606,165 $186,613 11.6%
Commercial - agricultural ................. 325,095 349,198 (24,103) (6.9)
Real estate - commercial mortgage ......... 2,164,778 2,013,488 151,290 7.5
Real estate - commercial construction ..... 259,391 253,824 5,567 2.2
Real estate - residential mortgage ........ 469,548 441,848 27,700 6.3
Real estate - residential construction .... 57,622 43,463 14,159 32.6
Real estate - home equity ................. 1,056,780 898,567 158,213 17.6
Consumer .................................. 494,178 512,947 (18,769) (3.7)
Leasing and other ......................... 54,304 68,488 (14,184) (20.7)
---------- ---------- -------- -----
Total .................................. $6,674,474 $6,187,988 $486,486 7.9%
========== ========== ======== =====
Excluding the impact of the acquisitions, loan growth continued to be
particularly strong in the commercial and commercial mortgage categories, which
together increased $319.4 million, or 7.6%. Residential mortgage and residential
construction increased $41.9 million, or 8.6%. Home equity loans increased
$158.2 million, or 17.6%, due to promotional efforts and customers using home
equity loans as a cost-effective refinance alternative. Consumer loans decreased
slightly, reflecting repayment of these loans with tax-advantaged residential
mortgage or home equity loans. Leasing and other loans decreased $14.2 million,
or 20.7%.
The average yield on loans during the first quarter of 2005 was 6.16%, a 41
basis point, or 7.1%, increase over 2004. This reflects the impact of a
significant portfolio of floating rate loans, which immediately reprice to
higher rates when interest rates rise, as they have over the past twelve months.
Average investment securities decreased $367.1 million, or 13.1%. Excluding the
impact of the Acquisitions, this decrease was $697.7 million, or 24.8%. During
the past twelve months, the Corporation did not reinvest a significant portion
of investment maturities in order to minimize interest rate risk in expectation
of rising rates and to help fund loan growth. The average yield on investment
securities increased 7 basis points from 3.61% in 2004 to 3.68% in 2005.
90
Interest expense increased $11.6 million, or 37.4%, to $42.6 million in the
first quarter of 2005 from $31.0 million in the first quarter of 2004. Interest
expense increased $5.2 million due to an increase in average balances, with the
remaining $6.4 million increase resulting from the 38 basis point increase in
the cost of total interest-bearing liabilities. The cost of interest-bearing
deposits increased 26 basis points, or 17.3%, from 1.50% in 2004 to 1.76% in
2005. This increase was due to rising rates in general as a result of the FRB's
rate increases over the past twelve months.
The following table summarizes the growth in average deposits by category:
THREE MONTHS ENDED
MARCH 31 INCREASE
----------------------- -----------------
2005 2004 $ %
---------- ---------- ---------- ----
(dollars in thousands)
Noninterest-bearing demand ... $1,509,118 $1,257,541 $ 251,577 20.0%
Interest-bearing demand ...... 1,494,984 1,268,671 226,313 17.8
Savings/money market ......... 1,911,820 1,760,104 151,716 8.6
Time deposits ................ 2,996,377 2,431,742 564,635 23.2
---------- ---------- ---------- ----
Total ..................... $7,912,299 $6,718,058 $1,194,241 17.8%
========== ========== ========== ====
The Acquisitions accounted for approximately $1.1 billion of the increase in
average balances. The following table presents the average balance impact of the
Acquisitions, by type:
THREE MONTHS ENDED
MARCH 31
------------------
2005 2004
---------- ----
(in thousands)
Noninterest-bearing demand ... $ 116,911 $--
Interest-bearing demand ...... 110,971 --
Savings/money market ......... 117,488 --
Time deposits ................ 705,219 --
---------- ---
Total ..................... $1,050,589 $--
========== ===
The following table presents the growth in average deposits, by type, excluding
the contribution of the Acquisitions:
THREE MONTHS ENDED
MARCH 31 INCREASE (DECREASE)
----------------------- -------------------
2005 2004 $ %
---------- ---------- --------- ----
(dollars in thousands)
Noninterest-bearing demand ... $1,392,207 $1,257,541 $ 134,666 10.7%
Interest-bearing demand ...... 1,384,013 1,268,671 115,342 9.1
Savings/money market ......... 1,794,332 1,760,104 34,228 1.9
Time deposits ................ 2,291,158 2,431,742 (140,584) (5.8)
---------- ---------- --------- ----
Total ..................... $6,861,710 $6,718,058 $ 143,652 2.1%
========== ========== ========= ====
Average borrowings increased slightly from the first quarter of 2004. The
Acquisitions added $227.1 million to short-term borrowings and $115.5 million to
long-term debt. Excluding the Acquisitions, average short-term borrowings
decreased $332.9 million, or 24.7%, to $1.0 billion in 2005, while average
long-term debt
91
decreased $4.1 million or 0.7%, to $565.9 million. The decrease in short-term
borrowings was mainly due to a decrease in Federal funds purchased which were
reduced with funds from maturing securities.
Provision and Allowance for Loan Losses
The following table summarizes loans outstanding (net of unearned income) as of
the dates shown:
MARCH 31 December 31 March 31
2005 2004 2004
---------- ----------- ----------
(in thousands)
Commercial - industrial and financial ... $1,975,981 $1,946,962 $1,621,583
Commercial - agricultural ............... 319,647 326,176 339,032
Real-estate - commercial mortgage ....... 2,540,554 2,461,016 2,042,234
Real-estate - commercial construction ... 366,624 348,846 250,214
Real-estate - residential mortgage ...... 556,966 543,072 436,043
Real-estate - residential construction .. 323,701 277,940 39,057
Real estate - home equity ............... 1,110,126 1,108,249 914,891
Consumer ................................ 496,031 506,290 508,518
Leasing and other ....................... 57,671 65,996 65,505
---------- ---------- ----------
$7,747,301 $7,584,547 $6,217,077
========== ========== ==========
The following table summarizes the activity in the Corporation's allowance for
loan losses:
Three months ended
March 31
-----------------------
2005 2004
---------- ----------
(dollars in thousands)
Loans outstanding at end of period (net of unearned) .. $7,747,301 $6,217,077
========== ==========
Daily average balance of loans and leases ............. $7,675,034 $6,187,988
========== ==========
Balance at beginning of period ........................ $ 89,627 $ 77,700
Loans charged-off:
Commercial, financial and agricultural ............. 822 979
Real estate - mortgage ............................. 187 765
Consumer ........................................... 766 787
Leasing and other .................................. 44 133
---------- ----------
Total loans charged-off ............................ 1,819 2,664
---------- ----------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural ............. 697 517
Real estate - mortgage ............................. 450 446
Consumer ........................................... 366 499
Leasing and other .................................. 6 33
---------- ----------
Total recoveries ................................... 1,519 1,495
---------- ----------
Net loans charged-off ................................. 300 1,169
Provision for loan losses ............................. 800 1,740
---------- ----------
Balance at end of period .............................. $ 90,127 $ 78,271
========== ==========
Net charge-offs to average loans (annualized) ......... 0.02% 0.08%
========== ==========
Allowance for loan losses to loans outstanding ........ 1.16% 1.26%
========== ==========
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The following table summarizes the Corporation's non-performing assets as of the
indicated dates:
MARCH 31 DECEMBER 31 MARCH 31
2005 2004 2004
-------- ----------- --------
(dollars in thousands)
Non-accrual loans .................... $19,232 $22,574 $19,594
Loans 90 days past due and accruing .. 6,545 8,318 10,758
Other real estate owned (OREO) ....... 3,244 2,209 356
------- ------- -------
Total non-performing assets .......... $29,021 $33,101 $30,708
======= ======= =======
Non-accrual loans/Total loans ........ 0.25% 0.30% 0.32%
Non-performing assets/Total assets ... 0.25% 0.30% 0.32%
Allowance/Non-performing loans ....... 350% 290% 258%
The provision for loan losses for the first quarter of 2005 totaled $800,000, a
decrease of $940,000, or 54.0%, from the same period in 2004. Net charge-offs
totaled $300,000, or 0.02% of average loans on an annualized basis, during the
first quarter of 2005, an $869,000 improvement over the $1.2 million, or 0.08%,
in net charge-offs for the first quarter of 2004. Non-performing assets
decreased to $29.0 million, or 0.25% of total assets, at March 31, 2005, from
$30.7 million, or 0.32% of total assets, at March 31, 2004.
Management believes that the allowance balance of $90.1 million at March 31,
2005 is sufficient to cover losses inherent in the loan portfolio on that date
and is appropriate based on applicable accounting standards.
Other Income
The following table details the components of other income:
THREE MONTHS ENDED
MARCH 31 INCREASE (DECREASE)
------------------ -------------------
2005 2004 $ %
------- ------- ------- -----
(in thousands)
Investment management and trust services .. $ 9,019 $ 8,645 $ 374 4.3%
Service charges on deposit accounts ....... 9,332 9,505 (173) (1.8)
Other service charges and fees ............ 5,556 5,026 530 10.5
Gain on sale of mortgage loans ............ 6,049 1,714 4,335 252.9
Investment securities gains ............... 3,315 5,828 (2,513) (43.1)
Other ..................................... 2,582 1,320 1,262 95.6
------- ------- ------- -----
Total .................................. $35,853 $32,038 $ 3,815 11.9%
======= ======= ======= =====
Total other income for the quarter ended March 31, 2005 was $35.9 million, an
increase of $3.8 million, or 11.9%, over the comparable period in 2004.
Excluding investment securities gains, which decreased from $5.8 million in 2004
to $3.3 million in 2005, other income increased $6.3 million, or 24.1%. The
Acquisitions contributed $4.9 million to total other income in the first quarter
of 2005.
Gains on sale of mortgage loans increased $4.3 million with Resource Bank
contributing $3.7 million of the increase. Service charges on deposit accounts
decreased $173,000, or 1.8%, (excluding the Acquisitions, service charges on
deposit accounts decreased $456,000). The decrease was mainly due to increases
in existing customers' balances resulting in lower service charges for those
accounts. Other income increased $1.3 million or 95.6%. The Acquisitions
contributed $673,000 of the increase in other income with the remaining increase
due to the change in the fair values of certain derivatives related to forward
commitments for loan sales.
93
Investment securities gains decreased $2.5 million, or 43.1%. Investment
securities gains during the first quarter of 2005 consisted of net realized
gains of $2.5 million on the sale of equity securities and $790,000 on the sale
of available for sale debt securities. Investment securities gains during the
first quarter of 2004 consisted of net realized gains of $4.8 million on the
sale of equity securities and $1.0 million on the sale of available for sale
debt securities.
Other Expenses
The following table details the components of other expenses:
THREE MONTHS ENDED
MARCH 31 INCREASE
------------------ --------------
2005 2004 $ %
------- ------- ------- ----
(dollars in thousands)
Salaries and employee benefits .. $44,297 $36,830 $ 7,467 20.3%
Net occupancy expense ........... 7,498 5,518 1,980 35.9
Equipment expense ............... 3,070 2,641 429 16.2
Data processing ................. 3,169 2,819 350 12.4
Advertising ..................... 1,973 1,528 445 29.1
Intangible amortization ......... 1,179 991 188 19.0
Other ........................... 12,641 12,017 624 5.2
------- ------- ------- ----
Total ........................ $73,827 $62,344 $11,483 18.4%
======= ======= ======= ====
Total other expenses increased $11.5 million, or 18.4%, in 2005, including $10.8
million due to the Acquisitions, detailed as follows:
THREE MONTHS ENDED
MARCH 31
------------------
2005 2004
------- ----
(in thousands)
Salaries and employee benefits .. $ 5,893 $--
Net occupancy expense ........... 1,133 --
Equipment expense ............... 556 --
Data processing ................. 503 --
Advertising ..................... 220 --
Intangible amortization ......... 260 --
Other ........................... 2,233 --
------- ---
Total ........................ $10,798 $--
======= ===
The following table presents the components of other expenses, excluding the
amounts contributed by the Acquisitions, for the quarter ended March 31, 2005:
THREE MONTHS ENDED
MARCH 31 INCREASE (DECREASE)
------------------ -------------------
2005 2004 $ %
------- ------- ------- -----
(dollars in thousands)
Salaries and employee benefits .. $38,404 $36,830 $ 1,574 4.3%
Net occupancy expense ........... 6,365 5,518 847 15.3
Equipment expense ............... 2,514 2,641 (127) (4.8)
Data processing ................. 2,666 2,819 (153) (5.4)
Advertising ..................... 1,753 1,528 225 14.7
Intangible amortization ......... 919 991 (72) (7.3)
Other ........................... 10,408 12,017 (1,609) (13.4)
------- ------- ------- -----
Total ........................ $63,029 $62,344 $ 685 1.1%
======= ======= ======= =====
The discussion that follows addresses changes in other expenses, excluding the
Acquisitions.
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Salaries and employee benefits increased $1.6 million, or 4.3%, in comparison to
the first quarter of 2004. The salary expense component increased $1.0 million,
or 3.5%, driven by salary increases for existing employees, as total average
full-time equivalent employees remained relatively consistent at approximately
2,900. Employee benefits increased $533,000, or 7.8%, in comparison to the first
quarter of 2004 driven mainly by continued increases in healthcare costs.
Net occupancy expense increased $847,000, or 15.3%, to $6.4 million in 2005. The
increase resulted from the expansion of the branch network and the addition of
new office space for existing affiliates. Equipment expense decreased $127,000
or 4.8%, due to lower depreciation expense as certain equipment became fully
depreciated.
Data processing expense decreased $153,000, or 5.4%, mainly as a result of
renegotiations of key processing contracts with certain vendors. Advertising
expense increased $225,000, or 14.7%, due to normal retail promotional
campaigns. Intangible amortization decreased $72,000, or 7.3%, in the first
quarter of 2005. Intangible amortization consists of the amortization of
unidentifiable intangible assets related to branch and loan acquisitions, core
deposit intangible assets, and other identified intangible assets. Since many of
these intangibles are amortized using accelerated methods, amortization expense
of existing intangibles decreases over time. Other expense decreased $1.6
million, or 13.4%, mainly as a result of several non-recurring items, including
a reduction of the reserve for legal contingencies and an adjustment in deferred
origination costs.
Income Taxes
Income tax expense for the first quarter of 2005 was $18.0 million, a $2.9
million, or 19.1%, increase from $15.1 million in 2004. The Corporation's
effective tax rate was approximately 30.3% in 2005 as compared to 29.7% in 2004.
The effective rate is lower than the Federal statutory rate of 35% due mainly to
investments in tax-free municipal securities and federal tax credits from
investments in low and moderate income housing partnerships.
FINANCIAL CONDITION
Total assets of the Corporation increased $259.9 million, or 2.3%, to $11.4
billion at March 31, 2005, compared to $11.2 billion at December 31, 2004.
Investment securities decreased $64.5 million, or 2.6%, as a result of
investment maturities exceeding investment purchases, and a $25.1 million
increase in unrealized losses due to rising interest rates. Loans outstanding,
net of unearned income, increased $162.8 million, or 2.1%, during the period.
Commercial loans, commercial mortgages, residential mortgages and home equity
loans each increased slightly, offset by declines in consumer and leasing and
other loans.
Cash and due from banks increased $58.0 million, or 20.9%, to $336.0 million at
March 31, 2005. Due to the nature of these accounts, daily balances can
fluctuate up or down in the normal course of business.
Other short-term investments, Federal funds sold and mortgage loans held for
sale increased $51.6 million, or 26.4%, mainly due to a $43.0 million increase
in Federal funds sold which was offset by an increase in Federal funds
purchased. Other assets increased $49.5 million, or 30.0%, primarily due to an
increase in receivables related to unsettled investment security sales.
Deposits increased $85.6 million, or 1.1%, from December 31, 2004.
Noninterest-bearing deposits increased $71.6 million, or 4.7%, while
interest-bearing demand deposits decreased $22.4 million, or 1.5%, and savings
deposits were unchanged. Time deposits increased $36.6 million reflecting a
slight shift by customers to longer term investments as rates on time deposits
have increased due to competitive pressures resulting from the FRB's two
short-term interest rate increases during the first quarter of 2005.
Short-term borrowings, which consist mainly of Federal funds purchased and
customer cash management accounts, increased $70.8 million, or 5.9%, during the
first quarter of 2005. This was mainly due to an
95
increase in Federal funds purchased. Long-term debt increased $88.9 million, or
13.0%, mainly due to $100.0 million of subordinated debt issued in March 2005.
See the "Liquidity" section of Management's Discussion for a summary of the
terms of this debt.
Other liabilities increased $19.1 million, or 16.7%, due to a $6.7 million
increase in accrued Federal income taxes and a $9.5 million increase in payables
related to unsettled investment security purchases.
Capital Resources
Total shareholders' equity decreased $6.8 million, or 0.5%, during the first
three months of 2005. Increases due to net income of $41.4 million and $4.9
million in stock issuances were offset by $22.3 million in unrealized losses on
securities, $20.8 million in cash dividends to shareholders, $6.9 million in
stock repurchases and $3.2 million in unrealized losses on derivative financial
instruments.
The Corporation periodically implements stock repurchase plans for various
corporate purposes. In addition to evaluating the financial benefits of
implementing repurchase plans, management also considers liquidity needs, the
current market price per share and regulatory limitations. In 2002, the Board of
Directors approved a stock repurchase plan, which was extended in both 2003 and
2004. On December 21, 2004 the Board of Directors approved an additional
extension of the plan from December 31, 2004 to June 30, 2005 and increased the
total number of shares that could be repurchased to 5.0 million. The plan
originally permitted the Corporation to purchase 5.0 million shares. Prior to
the date of the extension, there were only 1.9 million of the original 5.0
million shares still available to be repurchased. During the first quarter of
2005, 399,800 shares were purchased under this plan. As of March 31, 2005, there
were approximately 4.6 million shares remaining that may be repurchased.
The Corporation and its subsidiary banks are subject to various regulatory
capital requirements administered by banking regulators. Failure to meet minimum
capital requirements can initiate certain actions by regulators that could have
a material effect on the Corporation's financial statements. The regulations
require that banks maintain minimum amounts and ratios of total and Tier I
capital (as defined in the regulations) to risk weighted assets (as defined),
and Tier I capital to average assets (as defined). As of March 31, 2005, the
Corporation and each of its bank subsidiaries met the minimum requirements. In
addition, the Corporation and each of its bank subsidiaries' capital ratios
exceeded the amounts required to be considered "well-capitalized" as defined in
the regulations. The following table summarizes the Corporation's capital ratios
in comparison to regulatory requirements as of March 31:
REGULATORY MINIMUM
----------------------
MARCH 31 DECEMBER 31 CAPITAL WELL
2005 2004 ADEQUACY CAPITALIZED
-------- ----------- -------- -----------
Total Capital (to Risk Weighted Assets) ... 13.2% 11.8% 8.0% 10.0%
Tier I Capital to (Risk Weighted Assets) .. 10.9% 10.6% 4.0% 6.0%
Tier I Capital (to Average Assets) ........ 8.4% 8.8% 3.0% 5.0%
Liquidity
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. In addition, the Corporation can borrow on a secured
basis from the Federal Home Loan Bank to meet short-term liquidity needs.
The Corporation's sources and uses of cash were discussed in general terms in
the net interest income section of Management's Discussion. The Consolidated
Statements of Cash Flows provide additional information. The Corporation
generated $39.9 million in cash from operating activities during the first
quarter of 2005, mainly due to net income. Investing activities resulted in a
net cash outflow of $205.5
96
million, as purchases of investment securities and loan originations exceeded
sales and maturities of investment securities. Finally, financing activities
resulted in a net inflow of $223.6 million due to increases in both deposits and
borrowings.
Liquidity must also be managed at the Fulton Financial Corporation Parent
Company level. For safety and soundness reasons, banking regulations limit the
amount of cash that can be transferred from subsidiary banks to the Parent
Company in the form of loans and dividends. Generally, these limitations are
based on the subsidiary banks' regulatory capital levels and their net income.
Until 2004, the Parent Company had been able to meet its cash needs through
normal, allowable dividends and loans. However, as a result of increased
acquisition activity and stock repurchase plans, the Parent Company's cash needs
have increased, requiring additional sources of funds.
In July 2004, the Parent Company entered into a revolving line of credit
agreement with an unaffiliated bank. Under the terms of the agreement, the
Parent Company can borrow up to $50.0 million (may be increased to $100.0
million upon request) with interest calculated at the one-month London Interbank
Offering Rate (LIBOR) plus 0.625%. The credit agreement requires the Corporation
to maintain certain financial ratios related to capital strength and earnings.
The Corporation was in compliance with all required covenants under the credit
agreement as of March 31, 2005. As of March 31, 2005, there were no borrowings
against this line.
On March 28, 2005 the Corporation issued $100 million of ten-year subordinated
notes at a fixed rate of 5.35%. See also Note K "Subordinated Debt " in the
Notes to Consolidated Financial Statements.
These borrowing arrangements supplement the liquidity available from
subsidiaries through dividends and borrowings and provide some flexibility in
Parent Company cash management. Management continues to monitor the liquidity
and capital needs of the Parent Company and will implement appropriate
strategies, as necessary, to remain well capitalized and to meet its cash needs.
In addition to its normal recurring and operating cash needs, the Parent Company
will also pay cash for a portion of the SVB acquisition, which is expected to be
completed in the third quarter of 2005. Based on the terms of the merger
agreement, the Parent Company will pay a minimum of approximately $17.0 million
and a maximum of approximately $34.0 million to consummate the acquisition. See
Note H, " Acquisitions" in the Notes to Consolidated Financial Statements for a
summary of the terms of this transaction.
97