Organic Growth
Fulton Financial Corporation Annual Report 2005
What makes the sapling flourish? Somewhere deep in its grain flows the instinct to reach with root
and limb for what it needs to grow. Following that instinct – each in its own way – trees grow together to
create a rich, thriving forest.
Fulton Financial Corporation seeks out that natural inclination toward growth. We find it in the people who
are a part of our organization. And in each of the independent community banks that have joined our family.
Respect for organic wisdom – knowing how best to grow in one’s own environment – shapes our corporate
philosophy. And our unique business model, grounded in a deep regard for the ability of the individual,
has been the foundation for our history of strong, consistent growth.
By valuing the wisdom of our people and of our local affiliate banks, we increase our collective wisdom,
thus leading to collective success for our customers, our employees, and the communities we serve.
The result is a thriving environment of growth ... which yields consistent returns for our shareholders.
2 | Fulton Financial Corporation
Trees He Has Planted.
Planting a tree is the ultimate act of optimism...
of generosity...of vision for the future.
Rufus A. Fulton, Jr., retired chairman and CEO, understands
that kind of optimism and vision. But the trees planted on his
farm over the years are just one sign of the man’s dedication
to the future.
Rufus has planted and cultivated much since joining
Fulton National Bank in 1966. Beginning his Fulton career
as the bank’s first management trainee, Rufus has held
“It is often said that the mark of a leader toward
career’s end is not so much what he did but what
he left his people capable of doing.
I believe that my mark, if I leave one, will be
the leadership that is now in place to take Fulton
Financial Corporation to greater heights for
many years to come.”
positions from trust administrator to trust officer, vice
for a bank to be a good fit with the Corporation, it must be
In describing Scott Smith, the company’s new chairman,
president to senior vice president, president of Fulton
located in an area that’s growing. It must have high asset
CEO and president, Rufus says, “I have worked with
Financial Corporation to CEO, and ultimately, chairman.
quality. But most importantly, a bank must have employees
Scott for more than 25 years. As a member of the FFC
Along the way, he’s seen the organization grow from one
bank in Pennsylvania to fifteen banks in five states; assets
have grown from $86.4 million to $13.7 billion following our
recent acquisition of Columbia Bancorp; and shareholders
who have the same values as the employees at Fulton
board of directors and as a shareholder, I have complete
Financial. “You can teach people to do banking,” he says,
confidence in Scott as he steps up to head our company.”
“but it’s much harder to teach them how to treat co-workers
and customers well if they don’t already know how.”
As all who know him will attest, Rufus would rather talk
about the exciting future of the company than dwell on his
have increased from 2,400 to 51,000. When Rufus became
Since his retirement, Rufus has left behind a legacy
personal achievements – just the kind of perspective you’d
president of the company in 1987, net income was $15.1
of lessons shared: about banking, and about caring for
expect from one who plants trees. What’s rewarding isn’t
million; during his tenure, it has increased more than tenfold.
everyone involved – from customer and co-worker to
the praise; but rather, the knowledge that the seeds he
shareholder and community. He also leaves in place an
planted will grow for a long, long time.
His philosophy for successful growth relies on a balance
between the internal and the external. According to Rufus,
experienced, dedicated organization of people who
have grown under his leadership.
Fulton Financial Corporation | 3
Together, we grow.
LETTER TO OUR SHAREHOLDERS
Whether you’re a longtime shareholder or relatively
is adjusted for the five-for-four stock split paid in
We currently operate 254 branches located in
new to the Fulton Financial Corporation family,
June 2004. Long-term shareholders have realized
Pennsylvania, New Jersey, Delaware, Maryland
I hope you’ve been pleased by the consistent,
an attractive return on their investment in Fulton
and Virginia.
reliable performance of our unique business model.
Financial. For example, if you owned 100 shares
Engineered for enduring growth and attractive
of Fulton Financial Corporation common stock on
returns, our way of doing business has yielded
June 30, 1982, when the Corporation was formed,
another year of solid achievement.
your investment was $1,750. By doing nothing more
Our performance this year is reflected in our
financial highlights, as well as in some significant
additional accomplishments:
In 2005, our diluted net income per share increased
6.1% to $1.05 on total net income of $166.1 million.
These results represent a return on average assets
of 1.41% and a return on average tangible equity
of 20.28%. The Corporation’s total capital was
$1.3 billion at December 31, 2005, representing
a book value per share of $8.17 and a tangible
book value per share of $5.32.
After two extraordinarily strong years of total
shareholder returns in 2003 and 2004, Fulton Financial
Corporation’s stock closed the year at $17.60 per
share, compared to the 2004 close of $18.65, which
than holding onto those shares, as of December 31,
• Somerville, New Jersey-based SVB Financial
2005, you would have owned 2,056 shares, valued at
Services, Inc., along with its sole banking subsidiary,
approximately $36,000, for a compounded annual
Somerset Valley Bank, joined Fulton Financial
rate of return of 14% over the 24-year period. If you
Corporation in July. This acquisition has reinforced
had taken advantage of our dividend reinvestment
our presence in central New Jersey with 12
plan, that same investment of $1,750 in 1982
community banking offices in Somerset, Hunterdon,
would have had a 2005 year-end market value of
and Middlesex counties ... while also helping us
approximately $82,000, representing 4,641 shares,
further enhance banking convenience for our
for a compounded annual rate of return of 18%.
existing New Jersey customers. With the 2004
We currently have roughly $13.7 billion in assets and
a market capitalization of approximately $2.9 billion,
which makes us the second largest commercial bank
headquartered in the Third Federal Reserve District.
addition of First Washington State Bank and this
year’s acquisition of Somerset Valley, we now serve
14 of New Jersey’s 21 counties, providing more than
65 community banking locations in those markets.
4 | Fulton Financial Corporation
• Columbia Bancorp, based in Columbia, Maryland,
Rufus was the first graduate of our Management
firsthand their dedication to our customers, our
signed a definitive agreement in July to join Fulton
Training Program, and has been an excellent example
employees, our shareholders, and our communities.
Financial Corporation. This acquisition, completed
of how our Corporation attracts and retains people of
Together, we look forward to building on the foundation
on February 1, 2006, was Fulton Financial’s third
talent and dedication. Our organization is fortunate to
that Rufus has set, and I’m confident that we’re poised
acquisition in Maryland, and our largest acquisition
have formed our new senior management team with
for strong, consistent growth as we meet the challenges
to date. Columbia Bancorp’s sole banking subsidiary,
several experienced long-term Fulton employees:
and opportunities of the future ... as always, keeping
The Columbia Bank establishes a Fulton Financial
Charles J. Nugent, who continues to serve as senior
our keen focus on satisfying customers, retaining
presence in Howard, Montgomery, Prince George’s
executive vice president and chief financial officer;
valuable employees, and delivering consistent growth
and Baltimore counties, as well as in Baltimore City
Richard J. Ashby, Jr., senior executive vice president
for our shareholders.
with 20 full-service community banking offices and
and head of the Corporation’s new Community
five retirement community banking offices.
Banking Group; James E. Shreiner, senior executive
Another significant event was the retirement of our
chairman and CEO, Rufus A. Fulton, Jr. We’ll miss
him, his dedication, and his genuine care for the
people of the corporation and the community.
But he’s been generous with his legacy – the wisdom,
vice president and senior administrative services officer;
Craig H. Hill, senior executive vice president and head
of human resources; and E. Philip Wenger, senior
executive vice president and chairman and CEO of
Fulton Bank, the Corporation’s largest banking affiliate.
the values, and the high standards which have
It’s exciting to have such collective experience on our
energized and will continue to fuel the growth
senior management team. I’ve worked with each of
of our organization.
these colleagues for many years, and I have experienced
R. Scott Smith, Jr.
Chairman, Chief Executive Officer, and President
Fulton Financial Corporation | 5
Strong Roots. Solid Growth.
Dan Schantz is a man of humble roots. When he and
his wife, Mildred, purchased a small farm outside of
Allentown, Pennsylvania, in 1957, he was looking simply
to pursue his love of horticulture. But his 40 years
of dedication, perseverance, and solid commitment
to customer service grew his farm from a one-man
operation into what has become a $25 million flower,
specialty plant, and holiday bulb grower and distributor.
Today, Dan Schantz Farm and Greenhouses supplies
some of the largest retail stores in the country.
Dan is a wise businessman who has always believed
in the power of community. But as his profits continued
Dan Schantz, customer of Lafayette Ambassador Bank,
inspecting his poinsettia crop at the Dan Schantz Farm
and Greenhouses near Allentown, Pennsylvania.
to climb, fewer and fewer local banks could provide the
And, backed by Fulton Financial Corporation, the largest
As Lisa can testify, this unique model of banking has been
level of support that his multi-million dollar corporation
bank agricultural lender in the northeastern United States,
integral to the success of Dan’s business. “We conduct a
needed to thrive. As Lisa Myers, Dan’s company
Lafayette Ambassador can supply Dan with significant
lot of banking transactions each week. It’s nice to be able
controller explains, “We were happy with our previous
buying power and large cash management opportunities.
to do everything locally, but still have constant access to
local bank, but we needed a certain amount of
As John Ditbrenner, Dan’s personal relationship manager
fully integrated services – like investment management,
financing, and they were just tapped out.”
at Lafayette Ambassador Bank recalls, “Dan’s been doing
cash management, and brokerage services.”
So, in the process of a company change and looking
to refinance, Dan joined Lafayette Ambassador Bank
in 2000. As Lisa says, “We liked Lafayette Ambassador
because of their customer service. But they were also
business with us for about five years now. We make our
lending decisions much more expediently than a larger
bank could, but we also provide him a lot more financial
assistance than most local banks could.”
And it’s through that combination of services that Dan has
managed to remain a community businessman – even as
he’s evolved from local grower to national distributor, and
from hometown farmer to “Pennsylvania Master Farmer.”
able to make us the most comprehensive offer because
In addition to a company retirement plan, cash management
As John Ditbrenner will tell anyone, “We can meet all of
of their affiliation with Fulton Financial Corporation.
opportunities, and access to immediate credit, Fulton
Dan’s business objectives through our relationship with
They promised to take care of us, and they have.”
affiliation has also broadened Dan’s banking power
Fulton Financial. But we meet Dan’s most important
As a long-time agricultural lender, the Corporation has an
intimate understanding of the local farming community,
so it’s easy to relate to Dan’s personal interests and goals.
geographically. As Lisa explains,“We often conduct business
needs simply through our close relationship with him and
in Reading, Pennsylvania, which has no Lafayette Ambassador
our understanding of his relationship to the community.”
branches. But, because there’s another Fulton affiliate
located there, we can still do our banking through them.”
Fulton Financial Corporation | 7
An expanding circle of success.
It starts with our people – people who arrive here
assistant, and also completed the Management
already motivated to grow and achieve. We invest in
Training Program. “Each time I was ready for a new
them through support, mentoring, and training ... as well
challenge,” she says, “company growth presented
as in the benefits and development opportunities they
a new opportunity.”
need to succeed in a well-rounded, well-balanced way.
Fulton Bank president and chief operating officer
Treated with value and respect, they pass those same
Craig Roda also began as a Fulton Bank management
qualities along to each other and to our customers. The
trainee in 1979. “I knew from day one I’d found a home,”
result is a community of highly skilled, close-knit and
he says. “Whether it’s shareholders, customers, or
highly loyal co-workers, an impressive employee retention
employees, there’s a culture here of putting people first.”
rate, and highly satisfied customers – customers who
Once on the receiving end of mentoring within the
enable us to continue investing in our people.
Fulton organization, Craig is now able to continue
People like Beth Bowers. She began her Fulton career in
the company’s Management Training Program in 1979.
She’s now senior vice president of Loan Documentation for
Fulton Bank. “From the time I arrived, senior management
the cycle, perpetuating the values which have fueled
the company’s growth. “The people really do make the
difference here,” he says. “I’ve seen and experienced
just how true that is.”
Four graduates of the Management Training Program (from left to right):
Phil Wenger, Beth Bowers, Carolyn Pennabecker and Craig Roda.
Beth, Carolyn, Craig, Phil and many other graduates
set a good example,” she says. “They demonstrated a
“It’s a great place to work,” says Phil Wenger. That could
of the Management Training Program have grown into
genuine desire to recognize the worth of employees.”
explain his longevity at Fulton; Phil arrived in 1979,
seasoned officer-level employees; these one-time
Beth says it is this corporate culture, combined with the
when he too joined the Management Training Program.
trainees and others like them now provide leadership
bank’s commitment to the surrounding community, that
Of the program, Phil says it’s what helps to create and
to their company as well as to the co-workers following
has proven to be a winning combination – for employees,
retain such a highly-skilled, multi-dimensional team of
in their footsteps.
customers, and shareholders.
employees. “It’s a great way for newcomers to discover
Carolyn Pennabecker is executive vice president of
the Wealth Management Division of Fulton Financial
Advisors. But she didn't start there; she originally
joined Fulton Bank as a personal trust administrative
what they can do here, to experience a lot of different
aspects of the business, and to see what Fulton Financial
is all about.” Phil would know – he’s now chairman and
CEO of Fulton Bank and senior executive vice president
for Fulton Financial Corporation.
“It’s a dynamic, growing organization,” Phil says, “and that
growth yields many career opportunities for many folks.”
And thus, our circle of success continues to grow.
Fulton Financial Corporation | 9
Sowing Success.
Since its founding in 1990, Skylands Community Bank has
been known for relationship-style banking. With a solid
mission, strong team, and a strong reputation for small
business banking, the bank offered customers some of
the best service in its community. But joining Fulton
Financial Corporation in 2000 enabled Skylands to offer
some of the best service in the state of New Jersey.
Fulton Financial affiliation gave Skylands the means
to offer a higher lending capacity and new services like
investment management and cash management. As it
added these new amenities to its unique personality,
the bank flourished.
Yet, Skylands’ strong growth in market share, loans,
deposits, and customer satisfaction hasn’t altered
management team.
Mike Halpin, president and CEO of Skylands Bank, holding a picture of his
its accessible image or quality local reputation.
In its seamless union with Fulton Financial, Skylands
And it was important to Mike to hold on to that team.
role in our success,” according to Mike. “That culture
enjoys the continued loyalty of its existing customers
Because he, like every good leader, sees his hardworking
of respect is apparent to our customers, too. And that
while attracting scores of new ones. “Unlike many
employees as his biggest asset. “At Skylands Community
makes everyone happy.”
mergers, ours was very effective – with no disruption,”
Bank, we make it a point to value everyone’s contributions
says Mike Halpin, president and CEO of Skylands
equally. All of our employees feel genuinely respected
Community Bank.
and needed,” states Mike.
Skylands Community Bank is an example of how
Fulton Financial’s affiliate banks can maintain autonomy
while tapping into the holding company’s resources and
In gaining access to Fulton Financial’s considerable
As they have leveraged their founding philosophies with
enjoying inspiring growth. Mike Halpin agrees. “This is
assets and services, Skylands retained its local
the financial strength of Fulton Financial Corporation,
a great affiliation. We are living proof that the Fulton
management and decision-making authority. “One
the Skylands team has blossomed. They can now
Financial way of doing business is mutually beneficial –
of the best things about joining Fulton Financial was
add greater customer borrowing power and broader
for the holding company and its shareholders, and for
that just about everyone was able to keep their
investment opportunities to their repertoire of services.
the affiliate bank and its customers.”
jobs – which is a rarity,” says Mike.
“Everyone agrees that Fulton Financial plays a critical
Fulton Financial Corporation | 11
Fulton Financial Corporation
Senior Management
Fulton Financial
Corporation
Fulton Bank
Divisional Boards
R. Scott Smith, Jr.
Chairman, Chief Executive Officer
and President
Charles J. Nugent
Senior Executive Vice President/
Chief Financial Officer
Richard J. Ashby, Jr.
Senior Executive Vice President/
Community Banking Group
James E. Shreiner
Senior Executive Vice President/
Senior Administrative Services Officer
Craig H. Hill
Senior Executive Vice President/
Human Resources
E. Philip Wenger
Senior Executive Vice President/
Chairman and CEO of Fulton Bank
Seated: R. Scott Smith, Jr.
Standing, from left: James E. Shreiner, E. Philip Wenger,
Charles J. Nugent, Craig H. Hill, Richard J. Ashby, Jr.
12 | Fulton Financial Corporation
Board of Directors
Capital Division
East Petersburg
Jeffrey G. Albertson, Esq.
Robert S. Jones, Chairman
John M. Bond, Jr.
James C. Byerly
Donald C. Emich, Chairman
William R. Gamber II
Donald M. Bowman, Jr.
Samuel T. Cooper III, Esq.
Kenneth L. Kreider
Craig A. Dally, Esq.
Clark S. Frame
Patrick J. Freer
Rufus A. Fulton, Jr.
Eugene H. Gardner
George W. Hodges
Carolyn R. Holleran
Clyde W. Horst
Thomas W. Hunt
Willem Kooyker
Donald W. Lesher, Jr.
Joseph J. Mowad, M.D.
Abraham S. Opatut
Mary Ann Russell
John O. Shirk, Esq.
R. Scott Smith, Jr.
Gary A. Stewart
Fulton Bank
Board of Directors
Larry D. Bashore
Dana A. Chryst
Eugene H. Gardner
James M. Herr
George A. Parmer
Harlowe R. Prindle
A. Richard Pugh
Craig A. Roda
John O. Shirk, Esq.
E. Philip Wenger
James S. Wisotzkey
Steven S. Etter
Dolores Liptak
Barry E. Musser, C.P. A.
Drovers Division
David W. Freeman,
Chairman
Vernon L. Bracey
Sally J. Dixon
Robert S. Freed
Roger L. Holland
Gary A. Stewart, Jr.
Delaine A. Toerper
Constance L. Wolf
Great Valley Division
Gerald A. Nau, Chairman
Michael Fromm
Kathryn G. Goodman
Daniel M. Goodyear
Carolyn R. Holleran
Jessica H. May
Elizabethtown
Sherri L. Gorman, Chairman
Nancy Z. Garber
David B. Mueller
David W. Sweigart III
Gap
Aldus R. King, Chairman
A. Charles Artinian
Ruth D. Doutrich
Hershey/Hummelstown
Charles J. DeHart III, Esq.,
Chairman
Jack B. Billmyer
Thomas S. Davis, M.D.
Joan E. Spire
Daniel A. Verdelli
Leola
William G. Koch, Sr., C.P. A.
Joanne B. Ladley, Chairman
Robert M. Bard
Richard M. Hurst
Lititz
Ronald L. Miller, C.P. A.,
Chairman
Irel D. Buckwalter
Wilbur G. Rohrer
Paul W. Stauffer
Fulton Bank
Advisory Boards
Akron/Lincoln/Ephrata
Larry L. Loose, Chairman
Fred N. Buch
Richard A. Hess
Louis G. Hurst
Kent M. Martin
Denver
Michael L. Weinhold, C.P.A.,
Chairman
Larry L. Gensemer
Gerald L. Harding
Ralph W. Roseboro
Affiliate Bank
Board of Directors
Manheim
Peter J. Hondru,
Chairman
H. Reid Graybill
Peter B. McCracken
Lebanon Valley
Farmers Bank
Randall I. Ebersole
Patrick J. Freer
Robert J. Funk
Robert W. Obetz, Jr.
Robert P. Hoffman
Joanne E. Wade
Larry D. Sauder
Wendie DiMatteo Holsinger
J. David Young, Jr., Esq.
Donald W. Lesher, Jr.
Robert J. Longo
Andrew M. Marhevsky
Albert B. Murry
M. Randolph Tice
Joseph J. Mowad, M.D.
Lawrence M. DiVietro, Jr.
Thomas E. Mackell, M.D.
FNB Bank, N.A.
Robert O. Booth
Richard A. Grafmyre
James D. Hawkins
Hagerstown Trust
Donald M. Bowman, Jr.
James C. Bryan
Jack B. Castle
Paul N. Crampton, Jr.
Raymond A. Grahe
Joseph F. Adams, C.P. A.
Daniel E. Cohen
Jeffrey G. Albertson, Esq.
Clark S. Frame
Dennis N. DeSimone
John J. Ginley
Sandra J. Gubbine
Scott H. Kintzing
Warner A. Knobe
Ross Levitsky, Esq.
Sarah (Sally) Love
Robert R. McHarness
Angela M. Snyder
Barry J. Miles, Sr.
Daniel A. Nesi, M.D.
Neil W. Norton
Thomas M. O’Mara
Brian R. Rich
Ezio U. Rossi
Richard F. Ryon
Daniel G. Timms, D.D.S.
Gerald Schatz
The Bank
Premier Bank
Somerset Valley Bank
Swineford National Bank
Donald R. Harsh, Jr.
Thomas C. Clark, Esq.
Richard F. Erdley
Ann E. Kaye
Michael N. O’Keefe
Edwin A. Rhoads
Michael R. Wimer
Gene D. Zartman
Lafayette Ambassador
Bank
Gary A. Clewell
Craig A. Dally, Esq.
L. Anderson Daub
Doris E. Lehman
Bernard P. Lesky
Paul C. Mellott, Jr.
Delaware National Bank
Dale R. Dukes
Jeffrey M. Fried
Amy A. Higgins
Mark E. Huntley
Greg N. Johnson
Terry A. Megee
Ronald T. Moore
Ralph W. Simpers
Paul J. Tully
The Peoples Bank
of Elkton
Harry C. Brown
Judy E. Hart
Donald S. Hicks
Mark E. Huntley
Robert O. Palsgrove
Nancy R. Simpers
David K. Williams, Jr.
Skylands Community
Bank
Sara (Sally) Jane Gammon
David T. Wilgus
Norman S. Baron
Thomas J. Maloney, Esq.
Gordon E. Wood Sr., Esq.
Daniel M. DiCarlo, Jr.
John C. Soffronoff
Irving N. Stein
HelenBeth Garofalo Vilcek
John A. Zebrowski
Resource Bank
Alfred E. Abiouness
T.A. Grell, Jr.
Thomas W. Hunt
Louis R. Jones
A. Russell Kirk
Lawrence N. Smith
Elizabeth Addington Twohy
Harry L. Lundy, Jr.
Alan B. McFall, Esq.
Jamie P. Musselman
Edith Ritter
Robert A. Rupel
John J. Simon
Robert C. Wood
First Washington
State Bank
James N. Corcodilos
Michael Halpin
Raymond Nisivoccia, C.P. A.
Harry Horowitz
Denis H. O’Rourke
Paul J. Pinizzotto
Leslie E. Smith, Jr.
Mark F. Strauss, Esq.
Norman Worth
James R. Johnson, Jr.
Jerry Kokes
Joe J. Mayes, Jr.
Abraham S. Opatut
Steven I. Pfeffer
C. Herbert Schneider
New Holland
R. Douglas Good, Esq.,
Chairman
Vernon R. Martin
John D. Yoder
Oxford
Wilmer L. Hostetter
James D. McLeod, Jr.
Quarryville
Dwight E. Wagner,
Chairman
Frank M. Abel, V.M.D.
John E. Chase
James W. Hostetter, Sr.,
C.P.A.
Agricultural Advisory
Board
Harry H. Bachman
Amos J. Balsbaugh
I. Hershey Bare
Henry M. Berger
Richard E. Brandt
P. Larry Groff, Sr.
Dennis L. Grumbine
William Hostetter
Amos M. Hursh
Aldus R. King
Jay H. Kopp
Peter B. McCracken
Bernard Bernstein
Robert P. Corcoran
John K. Kitchen
Willem Kooyker
Frank Orlando
Gilbert E. Pittenger
Frederick D. Quick
Anthony J. Santye, Jr.
Donald Sciaretta
Herman Simonse
Donald Tourville, Ph.D.
The Columbia Bank
Anand S. Bhasin
John M. Bond, Jr.
Robert R. Bowie, Jr., Esq.
Garnett Y. Clark, Jr.
Hugh F. Cole, Jr.
William L. Hermann
Charles C. Holman
Winfield M. Kelly, Jr.
Herschel L. Langenthal
Raymond G. Laplaca, Esq.
Morris A. Little
Kenneth H. Michael
James R. Moxley, III
James R. Moxley, Jr.
Vincent D. Palumbo, M.D.
John A. Scaldara, Jr.
Mary S. Scrivener
Lawrence A. Shulman, Esq.
Maurice M. Simpkins
Robert N. Smelkinson
Theodore G. Venetoulis
James J. Winn, Jr., Esq.
Fulton Financial Corporation | 13
FINANCIAL HIGHLIGHTS
PER-SHARE DATA
Net income (diluted)
Cash dividends
Shareholders’ equity
2005
$1.05
0.567
8.17
2004
$0.99
0.518
7.92
2003
$0.96
0.475
6.67
AT YEAR END (Dollars in thousands)
Total assets
$12,402,000
$11,160,000
$9,769,000
Loans, net of unearned
8,425,000
Deposits
Shareholders’ equity
8,805,000
1,283,000
7,534,000
7,896,000
1,244,000
6,140,000
6,752,000
948,000
P E R C E N T C H A N G E
2005/2004
2004/2003
6%
9%
3%
11%
12%
12%
3%
3%
9%
19%
14%
23%
17%
31%
Shares outstanding
157,017,000
Number of shareholders
Number of employees
51,000
4,379
NET INCOME PER SHARE
(diluted)
$ 0.96
$ 0.99
$ 1.05
03
04
05
DIVIDENDS PER SHARE
$ 0.475
$ 0.518
$ 0.567
03
04
05
RETURN ON AVERAGE EQUITY*
20.28 %
18.58 %
17.33 %
03
04
05
1.5
0.75
0
0.6
0.3
0
20.0
15.0
10.0
*Net income, as adjusted for intangible
amortization (net of tax) divided by average
shareholders’ equity, net of goodwill and
intangible assets.
14 | Fulton Financial Corporation
Investor Information
Stock Listing
Form 10-K
Common shares of Fulton Financial Corporation are traded
A copy of the Corporation’s Annual Report to the
under the symbol “FULT” and are listed in the National
Securities and Exchange Commission, Form 10-K,
Bank Subsidiaries
Fulton Bank
Lebanon Valley Farmers Bank
Swineford National Bank
Market System of NASDAQ.
Dividend Calendar
Dividends on Fulton Financial Corporation’s common stock
are customarily payable on or about the 15th of January,
April, July and October.
Dividend Reinvestment Plan and Direct Deposit
of Cash Dividends
Fulton Financial Corporation offers its shareholders the
convenience of a Dividend Reinvestment and Stock Purchase
Plan, and direct deposit of cash dividends.
Holders of stock may have their quarterly dividends
automatically reinvested in additional shares of the
Corporation’s common stock by utilizing the Dividend
Reinvestment Plan.
Shareholders participating in the Plan may also make voluntary
cash contributions not to exceed $5,000 per month.
In addition, shareholders also have the option of having
their cash dividends sent directly to their financial institution
for deposit into their checking or savings account.
Shareholders may receive information on either the Dividend
Reinvestment Plan and Stock Purchase Plan or direct deposit
of cash dividends by writing to:
Stock Transfer Department
Fulton Financial Advisors, N.A.
P.O. Box 3215
Lancaster, PA 17604-3215
or calling: (717) 291-2546 or 1-800-626-0255.
can be viewed on the Corporation’s website at
www.fult.com. In addition, copies may be obtained
Lafayette Ambassador Bank
without charge to shareholders by writing to:
Corporate Secretary
Fulton Financial Corporation
P.O. Box 4887
Lancaster, PA 17604-4887
The Annual Meeting and Luncheon of Shareholders
of Fulton Financial Corporation will be held on
Tuesday, May 2, 2006, at noon in the Great American
Hall of the Hershey Lodge and Convention Center,
West Chocolate Avenue and University Drive,
FNB Bank, N.A.
Hagerstown Trust
Delaware National Bank
The Bank
The Peoples Bank of Elkton
Skylands Community Bank
Premier Bank
Resource Bank
Hershey, PA. Please note that any shareholder who
First Washington State Bank
would like to attend MUST HAVE A RESERVATION.
You may let us know that you will attend by returning
the Reservation Form included in your proxy mailing.
Somerset Valley Bank
The Columbia Bank
Your reservation will help ensure that we have
adequate seating for all shareholders who plan to
join us that day.
Residential lending offered through Fulton
Mortgage Company and Resource Mortgage
Financial Services Affiliates
Fulton Financial Advisors, N.A.
Deardon, Maguire, Weaver,
and Barrett, LLC
Fulton Insurance Services Group, Inc.
Fulton Financial Corporation One Penn Square P.O. Box 4887 Lancaster, PA 17604 1.800.FULTON.4 www.fult.com
Fulton Financial Corporation
Description
Page
5-Year Consolidated Summary of Financial Results.........................................................................
Management’s Discussion and Analysis of Results of Operations and Financial Condition............
2
3
Consolidated Balance Sheets .............................................................................................................
35
Consolidated Statements of Income...................................................................................................
36
Consolidated Statements of Shareholders’ Equity and Comprehensive Income...............................
37
Consolidated Statements of Cash Flows............................................................................................
38
Notes to Consolidated Financial Statements .....................................................................................
39
Management Report on Internal Control Over Financial Reporting .................................................
70
Reports of Independent Registered Public Accounting Firm ............................................................
71
Quarterly Consolidated Results of Operations (Unaudited) ..............................................................
74
Fulton Financial Corporation
5-YEAR CONSOLIDATED SUMMARY OF FINANCIAL RESULTS
(dollars in thousands, except per-share data)
2005
2004
SUMMARY OF INCOME
Interest income ............................................ $ 625,797
Interest expense ...........................................
213,219
Net interest income......................................
412,578
Provision for loan losses..............................
3,120
Other income ...............................................
144,268
Other expenses.............................................
316,291
Income before income taxes........................
237,435
Income taxes ................................................
71,361
Net income................................................... $ 166,074
PER-SHARE DATA (1)
Net income (basic)....................................... $
Net income (diluted)....................................
Cash dividends.............................................
1.06
1.05
0.567
For the Year
2003
$ 435,531
131,094
304,437
9,705
134,370
233,651
195,451
59,084
$ 136,367
2002
2001
$ 469,288
158,219
311,069
11,900
114,012
226,046
187,135
56,181
$ 130,954
$ 518,680
227,962
290,718
14,585
102,057
220,292
157,898
46,136
$ 111,762
$ 493,643
135,994
357,649
4,717
138,864
277,515
214,281
64,673
$ 149,608
$
$
1.00
0.99
0.518
$
0.97
0.96
0.475
$
0.93
0.92
0.425
0.79
0.78
0.385
RATIOS
Return on average assets .............................
Return on average equity.............................
Return on average tangible equity (2) .........
Net interest margin ......................................
Efficiency ratio ............................................
Average equity to average assets.................
Dividend payout ratio ..................................
1.41%
1.45%
1.55%
13.24
20.28
3.93
55.50
10.70
54.00
13.98
18.58
3.83
55.90
10.30
52.30
15.23
17.33
3.82
54.00
10.20
49.50
1.66%
15.61
17.25
4.35
52.70
10.60
46.20
1.49%
14.33
15.97
4.27
55.50
10.40
49.40
PERIOD-END BALANCES
Total assets .................................................. $12,401,555
Loans, net of unearned income....................
8,424,728
Deposits .......................................................
8,804,839
Federal Home Loan Bank advances
and long-term debt.............................
Shareholders' equity.....................................
860,345
1,282,971
AVERAGE BALANCES
Total assets .................................................. $11,779,096
Loans, net of unearned income....................
7,981,604
Deposits .......................................................
8,364,435
Federal Home Loan Bank advances
and long-term debt.............................
Shareholders' equity.....................................
837,305
1,254,476
$11,160,148
7,533,915
7,895,524
$ 9,768,669
6,140,200
6,751,783
$ 8,388,915
5,295,459
6,245,528
$ 7,771,598
5,373,020
5,986,804
684,236
1,244,087
568,730
948,317
535,555
864,879
456,802
812,341
$10,344,768
6,857,386
7,285,134
$ 8,803,285
5,564,806
6,505,371
$ 7,901,398
5,381,950
6,052,667
$ 7,520,763
5,341,497
5,771,089
637,654
1,069,904
566,437
895,616
476,415
839,111
500,162
779,706
(1) Adjusted for stock dividends and stock splits.
(2) Net income, as adjusted for intangible amortization (net of tax), divided by average shareholders’ equity, net of goodwill and intangible assets.
2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fulton Financial Corporation
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) concerns
Fulton Financial Corporation (the Corporation), a financial holding company registered under the Bank Holding Company Act and
incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly owned subsidiaries. This discussion and
analysis should be read in conjunction with the consolidated financial statements and other financial information presented in this
report.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The Corporation has made, and may continue to make, certain forward-looking statements with respect to acquisition and growth
strategies, market risk, the effect of competition on net interest margin and net interest income, investment strategy and income
growth, investment securities gains, other-than-temporary impairment of investment securities, deposit and loan growth, asset quality,
balances of risk-sensitive assets to risk-sensitive liabilities, employee benefits and other expenses, amortization of intangible assets,
goodwill impairment, capital and liquidity strategies and other financial and business matters for future periods. The Corporation
cautions that these forward-looking statements are subject to various assumptions, risks and uncertainties. Because of the possibility
that the underlying assumptions may change, actual results could differ materially from these forward-looking statements.
In addition to the factors identified herein, the following risk factors could cause actual results to differ materially from such forward-
looking statements:
(cid:120)(cid:3) Changes in interest rates may have an adverse effect on the Corporation’s profitability.
(cid:120)(cid:3) Changes in economic conditions and the composition of the Corporation’s loan portfolios could lead to higher loan charge-offs or
an increase in Fulton’s allowance for loan losses and may reduce the Corporation’s income.
(cid:120)(cid:3) Fluctuations in the value of the Corporation’s equity portfolio, or assets under management by the Corporation’s trust and
investment management services, could have a material impact on the Corporation’s results of operations.
(cid:120)(cid:3)
(cid:120)(cid:3)
If the Corporation is unable to acquire additional banks on favorable terms or if it fails to successfully integrate or improve the
operations of acquired banks, the Corporation may be unable to execute its growth strategies.
If the goodwill that the Corporation has recorded in connection with its acquisitions becomes impaired, it could have a negative
impact on the Corporation’s profitability.
(cid:120)(cid:3) The competition the Corporation faces is increasing and may reduce the Corporation’s customer base and negatively impact the
Corporation’s results of operations.
(cid:120)(cid:3) The supervision and regulation by various regulatory authorities to which the Corporation is subject can be a competitive
disadvantage.
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.
OVERVIEW
As a financial institution with a focus on traditional banking activities, the Corporation generates the majority of its revenue through
net interest income, 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 (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 or investments. Offsetting these revenue sources are provisions for credit losses on loans, operating expenses and
income taxes.
3
Fulton Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Corporation’s net income for 2005 increased $16.5 million, or 11.0%, from $149.6 million in 2004 to $166.1 million in 2005.
Diluted net income per share increased $0.06, or 6.1%, from $0.99 per share in 2004 to $1.05 per share in 2005. In 2005, the
Corporation realized a return on average assets of 1.41% and a return on average tangible equity of 20.28%, compared to 1.45% and
18.58%, respectively, in 2004. Net income for 2004 increased $13.2 million, or 9.7%, from $136.4 million in 2003. Diluted net
income per share increased $0.03, or 3.1%, from $0.96 per share in 2003.
In 2005, the Corporation adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (Statement 123R),
using modified retrospective application. 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 service in exchange for such award and,
under the modified retrospective application, prior period results are restated. As a result, all financial information in this report has
been restated to reflect the impact of adoption. For the year ended December 31, 2004, net income and diluted net income per share
were reduced by $3.3 million and $0.02, respectively. For the year ended December 31, 2003, net income and diluted net income per
share were reduced by $1.8 million and $0.02, respectively. See Note M, “Stock-Based Compensation Plans and Shareholders’
Equity”, in the Notes to Consolidated Financial Statements for information on the impact of adopting Statement 123R and its effect on
prior periods.
The 2005 increase in earnings was driven by a $54.9 million, or 15.4%, increase in net interest income due to both internal and
external growth and a year-over-year increase in net interest margin. Also contributing to the increase in earnings was a $16.5 million,
or 13.6%, increase in other income (excluding securities gains), primarily as a result of acquisitions. These items were offset by a
$38.8 million, or 14.0%, increase in other expenses, also primarily due to recent acquisitions, and an $11.1 million, or 62.6%,
reduction in investment securities gains.
The following summarizes some of the more significant factors that influenced the Corporation’s 2005 results.
Interest Rates – Changes in the interest rate environment generally impact both the Corporation’s net interest income and its non-
interest income. The interest rate environment reflects both the level of short-term rates and the slope of the U. S. Treasury yield
curve, which plots the yields on treasury issues over various maturity periods. During the past year, the yield curve has flattened, with
short-term rates increasing at a faster pace than longer-term rates.
Floating rate loans, short-term borrowings and savings and time deposit rates are generally influenced by short-term rates. During
2005, the Federal Reserve Board (FRB) raised the Federal funds rate eight times, for a total increase of 200 basis points since
December 31, 2004, with the overnight borrowing, or Federal funds, rate ending the year at 4.25%. The Corporation’s prime lending
rate had a corresponding increase, from 5.25% to 7.25%. The increase in short-term rates benefited the Corporation during the first
half of 2005 as floating rate loans quickly adjusted to higher rates, while increases in deposit rates – which are more discretionary –
were less pronounced. Throughout the remainder of the year, competitive pressures resulted in increases in deposit rates. While the
net interest margin for the year increased over the prior year, during 2005 it was flat, which is shown in the following table:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Year to Date
2005
3.95%
3.92
3.92
3.92
3.93
2004
3.79%
3.73
3.88
3.92
3.83
With respect to longer-term rates, the 10-year treasury yield, which is a common benchmark for evaluating residential mortgage rates,
increased to 4.39% at December 31, 2005 as compared to 4.24% at December 31, 2004. Mortgage rates have been historically low
over the past several years, generating strong refinance activity and significant gains for the Corporation as fixed-rate residential
mortgages are generally sold in the secondary market. With only a minimal increase in long-term rates from the prior year, origination
volumes and the resulting gains on sales of these loans remained strong, continuing to contribute to the Corporation’s non-interest
income. If rates continue to rise and the yield curve steepens, residential mortgage volume could decrease, resulting in a negative
impact on non-interest income, as gains on sale would decline. The “Market Risk” section of Management’s Discussion summarizes
the expected impact of rate changes on net interest income.
4
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fulton Financial Corporation
Earning Assets - The Corporation’s interest-earning assets increased from 2004 to 2005 as a result of acquisitions, as well as internal
loan growth. This growth also contributed to the increase in net interest income.
From 2004 to 2005, the Corporation experienced a shift in its composition of interest-earning assets from investments (23.2% of total
average interest-earning assets in 2005, compared to 26.8% in 2004) to loans (74.1% in 2005, compared to 71.7% in 2004). This
change resulted from strong loan demand being partially funded with the proceeds from maturing investment securities. 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
loan payments will result in charge-offs of account balances. Asset quality is generally a function of economic conditions, but can be
managed through conservative underwriting and sound collection policies and procedures.
The Corporation has been able to maintain strong asset quality through different economic cycles, attributable to its credit culture and
underwriting policies. This trend continued in 2005 as net charge-offs to average loans decreased from 0.06% in 2004 to 0.04% in
2005. Non-performing assets to total assets increased to 0.38% at December 31, 2005, from 0.30% at December 31, 2004, however,
this level is still relatively low in absolute terms. While overall asset quality has remained strong, deterioration in quality of one or
several significant accounts could have a detrimental impact and result in losses that may not be foreseeable based on current
information. In addition, rising interest rates could increase the total payments of borrowers and could have a negative impact on their
ability to pay according to the terms of their loans.
Equity Markets – As disclosed 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. Historically, gains on sales of these equities have been a recurring component of the Corporation’s earnings,
although realized gains have decreased in recent quarters. Declines in bank stock portfolio values could have a detrimental impact on
the Corporation’s ability to recognize gains in the future.
Acquisitions – In July 2005, the Corporation acquired SVB Financial Services, Inc. (SVB) of Somerville, New Jersey, a $530 million
bank holding company whose primary subsidiary was Somerset Valley Bank. In December 2004, the Corporation acquired First
Washington FinancialCorp (First Washington), of Windsor, New Jersey, a $490 million bank holding company whose primary
subsidiary was First Washington State Bank. In April 2004, the Corporation acquired Resource Bankshares Corporation (Resource);
an $890 million financial holding company located in Virginia Beach, Virginia whose primary subsidiary was Resource Bank. Period-
to-period comparisons in the “Results of Operations” section of Management’s Discussion are impacted by these acquisitions when
2005 results are compared to 2004. Results for 2004 in comparison to 2003 were impacted by the acquisitions of First Washington,
Resource and Premier Bancorp, Inc., which was acquired in August 2003. The discussion and tables within the “Results of
Operations” section of Management’s Discussion highlight the contributions of these acquisitions in addition to internal changes.
On February 1, 2006, the Corporation completed its acquisition of Columbia Bancorp (Columbia), of Columbia, Maryland. Columbia
was a $1.3 billion bank holding company whose primary subsidiary was The Columbia Bank, which operates 19 full-service
community-banking offices and five retirement community offices in Howard, Montgomery, Prince George’s and Baltimore Counties
and Baltimore City. For additional information on the terms of these acquisitions, see Note Q, “Mergers and Acquisitions”, in the
Notes to Consolidated Financial Statements.
Acquisitions have long been a supplement to the Corporation’s internal growth, providing the opportunity for the Corporation’s
existing products and services to be sold in new markets. The Corporation’s acquisition strategy focuses on high growth areas with
strong market demographics and targets organizations that have a comparable corporate culture, strong performance and good asset
quality, among other factors. Under its “supercommunity” banking philosophy, acquired organizations generally retain their status as
separate legal entities, unless consolidation with an existing affiliate bank is practical. Back office functions are generally
consolidated to maximize efficiencies.
5
Fulton Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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.
6
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fulton Financial Corporation
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the most significant component of the Corporation’s net income, accounting for approximately 75% of total
2005 revenues, excluding investment securities gains. The ability to manage net interest income over a variety of interest rate and
economic environments is important to the success of a financial institution. Growth in net interest income is generally dependent
upon balance sheet growth and maintaining or growing the net interest margin. The “Market Risk” section of Management’s
Discussion 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 2005 compared to 2004 and
2003. Interest income and yields are presented on a fully taxable-equivalent (FTE) basis, using a 35% Federal tax rate. The discussion
following this table is based on these tax-equivalent amounts.
Year Ended December 31
Yield/
Rate (1)
Average
Balance
2005
Interest
$ 520,595
75,150
17,971
5,333
98,454
14,940
1,586
635,575
Yield/
Rate (1)
Average
Balance
6.52%
3.76
4.87
4.02
3.94
6.17
3.27
5.90
$ 6,857,386
2,161,195
264,578
133,870
2,559,643
135,758
6,067
9,558,854
2004
Interest
$ 398,190
76,792
14,353
4,974
96,119
8,407
103
502,819
5.82%
3.55
5.43
3.72
3.74
6.19
1.70
5.26
(dollars in thousands)
Average
Balance
ASSETS
Interest-earning assets:
Loans and leases (2) ................... $ 7,981,604
Taxable inv. securities (3) ..........
1,994,740
Tax-exempt inv. securities (3) ....
368,845
Equity securities (3)....................
132,564
Total investment securities ...........
2,496,149
Loans held for sale......................
241,996
Other interest-earning assets.......
48,357
Total interest-earning assets .........
10,768,106
Non-interest-earning assets:
Cash and due from banks ...........
Premises and equipment .............
Other assets (3) ...........................
Less: Allowance for
loan losses..............................
(92,780)
Total Assets......................... $ 11,779,096
346,535
158,526
598,709
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits ........................ $ 1,547,766
Savings deposits .........................
2,055,503
Time deposits .............................
3,171,901
Total interest-bearing deposits......
6,775,170
Short-term borrowings................
1,186,464
Long-term debt ...........................
837,305
Total interest-bearing liabilities....
8,798,939
Non-interest-bearing liabilities:
Demand deposits ........................
1,589,265
Other...........................................
136,416
Total Liabilities ..................
10,524,620
Shareholders' equity......................
1,254,476
Total Liabs. and Equity ...... $ 11,779,096
$ 15,370
27,116
98,288
140,774
34,414
38,031
213,219
0.99%
1.32
3.10
2.08
2.87
4.54
2.42
316,170
128,902
425,825
(84,983)
$ 10,344,768
$ 1,364,953
1,846,503
2,693,414
5,904,870
1,238,073
637,654
7,780,597
1,380,264
114,003
9,274,864
1,069,904
$ 10,344,768
$
7,201
11,928
70,650
89,779
15,182
31,033
135,994
0.53%
0.65
2.62
1.52
1.23
4.87
1.75
2003
Interest
$ 343,883
77,450
15,650
5,051
98,151
2,953
241
445,228
Yield/
Rate (1)
6.18%
3.57
5.87
3.90
3.80
5.99
1.06
5.43
$
6,011
10,770
77,417
94,198
7,373
29,523
131,094
0.52%
0.65
3.10
1.77
1.00
5.21
1.98
$ 5,564,806
2,170,889
266,426
129,584
2,566,889
49,271
22,708
8,203,684
279,980
123,172
271,758
(75,309)
$ 8,803,285
$ 1,158,333
1,655,325
2,496,234
5,309,892
738,527
566,437
6,614,856
1,195,479
97,334
7,907,669
895,616
$ 8,803,285
Net interest income/net interest
margin (FTE)..........................
Tax equivalent adjustment............
Net interest income.......................
3.93%
422,356
(9,778)
$ 412,578
3.83%
366,825
(9,176)
$ 357,649
3.82%
314,134
(9,697)
$ 304,437
(1) Presented on a fully tax equivalent (FTE) basis using a 35% Federal tax rate.
(2)
(3) Balances include amortized historical cost for available for sale securities. The related unrealized holding gains (losses) are included in other assets.
Includes non-performing loans.
7
Fulton Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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:
2005 vs. 2004
Increase (decrease) due
To change in
Rate
Volume
2004 vs. 2003
Increase (decrease) due
To change in
Rate
Net
Net
Volume
(in thousands)
Interest income on:
Loans and leases ....................................
Taxable investment securities ................
Tax-exempt investment securities ..........
Equity securities .....................................
Loans held for sale..................................
Short-term investments ..........................
$
70,346
(5,995)
5,224
(49)
6,559
1,310
$
52,059
4,353
(1,606)
408
(26)
173
$
122,405
(1,642)
3,618
359
6,533
1,483
$
77,526
(345)
(111)
164
5,353
(235)
$
(23,219)
(313)
(1,186)
(241)
101
97
Total interest-earning assets ............
$
77,395
$
55,361
$
132,756
$
82,352
$
(24,761)
Interest expense on:
Demand deposits ....................................
Savings deposits ....................................
Time deposits .........................................
Short-term borrowings ...........................
Long-term debt ......................................
$
1,076
1,488
13,677
(648)
9,346
$
7,093
13,700
13,961
19,880
(2,348)
$
8,169
15,188
27,638
19,232
6,998
$
1,088
1,236
5,796
5,839
3,551
$
102
(78)
(12,563)
1,970
(2,041)
$
$
$
54,307
(658)
(1,297)
(77)
5,454
(138)
57,591
1,190
1,158
(6,767)
7,809
1,510
Total interest-bearing liabilities .......
$
24,939
$
52,286
$
77,225
$
17,510
$
(12,610)
$
4,900
Note: Changes which are partly attributable to rate and volume are allocated based on the proportion of the direct changes attributable to rate and volume.
2005 vs. 2004
Net interest income (FTE) increased $55.5 million, or 15.1%, from $366.8 million in 2004 to $422.4 million in 2005, due to both
average balance growth and a higher net interest margin for 2005 in comparison to 2004.
Average interest-earning assets grew 12.7%, from $9.6 billion in 2004 to $10.8 billion in 2005. Acquisitions contributed
approximately $1.1 million to this increase in average balances. Interest income (FTE) increased $132.8 million, or 26.4%, partially
as a result of the increase in average earning assets, which contributed $77.4 million of the increase, with the remaining growth in
interest income (FTE) due to an increase in rates on interest-earning assets.
8
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fulton Financial Corporation
The increase in average interest-earning assets was due to loan growth, both internal and through acquisitions, as investment balances
remained relatively flat. Average loans increased by $1.1 billion, or 16.4%, to $8.0 billion in 2005. The following table presents the
growth in average loans, by type:
2005
Increase (decrease)
%
$
2004
(dollars in thousands)
Commercial - industrial and financial........................... $ 2,022,615
Commercial - agricultural .............................................
324,637
Real estate - commercial mortgage ...............................
2,621,730
Real estate - residential mortgage and home equity......
1,713,442
Real estate - construction ..............................................
732,847
Consumer ......................................................................
499,220
Leasing and other..........................................................
67,113
Total.................................................................. $ 7,981,604
$ 1,769,801
330,269
2,205,025
1,498,047
487,954
495,544
70,746
$ 6,857,386
$
252,814
(5,632)
416,705
215,395
244,893
3,676
(3,633)
$ 1,124,218
14.3%
(1.7)
18.9
14.4
50.2
0.7
(5.1)
16.4%
Acquisitions contributed approximately $694.5 million to the increase in average balances. The following table presents the average
balance impact of acquisitions, by type:
2005
2004
(in thousands)
Increase
Commercial - industrial and financial........................... $ 214,840
Commercial - agricultural .............................................
1,297
Real estate - commercial mortgage ...............................
381,411
Real estate - residential mortgage and home equity......
163,959
Real estate - construction ..............................................
418,283
Consumer ......................................................................
7,027
Leasing and other..........................................................
8,480
Total.................................................................. $ 1,195,297
$
$
84,080
520
133,705
63,411
213,340
1,725
4,001
500,782
$ 130,760
777
247,706
100,548
204,943
5,302
4,479
$ 694,515
The following table presents the growth in average loans, by type, excluding the average balances contributed by acquisitions:
2005
Increase (decrease)
%
2004
$
(dollars in thousands)
Commercial - industrial and financial........................... $ 1,807,775
Commercial - agricultural .............................................
323,340
Real estate - commercial mortgage ...............................
2,240,319
Real estate - residential mortgage and home equity......
1,549,483
Real estate - construction ..............................................
314,564
Consumer ......................................................................
492,193
Leasing and other..........................................................
58,633
Total.................................................................. $ 6,786,307
$ 1,685,721
329,749
2,071,320
1,434,636
274,614
493,819
66,745
$ 6,356,604
$
$
122,054
(6,409)
168,999
114,847
39,950
(1,626)
(8,112)
429,703
7.2%
(1.9)
8.2
8.0
14.5
(0.3)
(12.2)
6.8%
Excluding the impact of acquisitions, loan growth continued to be strong in the commercial and commercial mortgage categories,
which together increased $284.6 million, or 7.0%, over 2004. Construction loans grew $40.0 million, or 14.5%, in comparison to
9
Fulton Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
2004 due mainly to increased activity in the Pennsylvania and New Jersey markets. Residential mortgage and home equity loans
showed strong growth due to promotional efforts and customers using home equity loans as a cost-effective refinance alternative.
The average yield on loans during 2005 of 6.52% represents a 70 basis point, or 12.0%, increase in comparison to 2004. This increase
reflects the impact of a significant portfolio of floating rate loans, which repriced as interest rates increased throughout the year.
Average investments decreased $63.5 million, or 2.5%, in comparison to 2004. Excluding the impact of acquisitions, the investment
balances would have decreased $390.7 million, or 15.8%. During 2004, proceeds from investment maturities were used to fund loan
growth, however during 2005 the Corporation’s purchases of new investment securities exceeded proceeds from sales and maturities.
The average yield on investment securities improved 20 basis points from 3.74% in 2004 to 3.94% in 2005. This improvement was
due partially to premium amortization decreasing, which is accounted for as a reduction of interest income, from $10.5 million in
2004 to $6.9 million in 2005 as prepayments on mortgage-backed securities decreased. The remaining increase was due to the
maturity of lower yielding investments, with reinvestment at higher rates.
The following table presents the growth in average deposits, by type:
2005
2004
$
(dollars in thousands)
Increase
%
Non-interest-bearing demand.... $ 1,589,265
Interest-bearing demand............
1,547,766
Savings/money market..............
2,055,503
Time deposits ............................
3,171,901
Total ............................... $ 8,364,435
$ 1,380,264
1,364,953
1,846,503
2,693,414
$ 7,285,134
$
209,001
182,813
209,000
478,487
$ 1,079,301
15.1%
13.4
11.3
17.8
14.8%
Acquisitions accounted for approximately $956.0 million of the increase in average balances. The following table presents the
average balance impact of acquisitions, by type:
2005
2004
(in thousands)
Increase
Non-interest-bearing demand.... $
Interest-bearing demand............
Savings/money market..............
Time deposits ............................
153,483
147,493
285,104
795,538
Total ............................... $ 1,381,618
$
$
29,985
46,077
34,282
315,256
425,600
$
$
123,498
101,416
250,822
480,282
956,018
The following table presents the growth in average deposits, by type, excluding the contribution of acquisitions:
2005
Increase (decrease)
%
2004
$
(dollars in thousands)
Non-interest-bearing demand.... $ 1,435,782
Interest-bearing demand............
1,400,273
Savings/money market..............
1,770,399
Time deposits ............................
2,376,363
Total ............................... $ 6,982,817
$ 1,350,279
1,318,876
1,812,221
2,378,158
$ 6,859,534
$
$
85,503
81,397
(41,822)
(1,795)
123,283
6.3%
6.2
(2.3)
(0.1)
1.8%
10
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fulton Financial Corporation
Interest expense increased $77.2 million, or 56.8%, to $213.2 million in 2005 from $136.0 million in 2004. The increase in interest
expense was primarily due to a 67 basis point, or 38.3%, increase in the cost of total interest-bearing liabilities in 2005 in comparison
to 2004. Competitive pricing pressures have resulted in increased deposit rates in response to the FRB’s rate increases throughout
2005. The remaining increase in interest expense was due to a $1.0 billion, or 13.1%, increase in total interest-bearing liabilities,
partially due to acquisitions, and partially due to internal growth.
Average borrowings increased slightly during 2005, with the $51.6 million decrease in average short-term borrowings more than
offset by a $199.7 million increase in long-term debt. Excluding the impact of acquisitions, average short-term borrowings decreased
$147.4 million, or 13.4%, mainly due to a decrease in Federal funds purchased. In addition, customer cash management accounts,
which are included in short-term borrowings, decreased $20.6 million, or 5.1%, to an average of $385.7 million in 2005. Average
long-term debt increased $199.7 million, or 31.3%, to $837.3 million, with acquisitions contributing $51.7 million to the long-term
debt increase. The additional increase in long-term borrowings was due to the Corporation’s issuance of $100.0 million ten-year
subordinated notes in March 2005 and an increase in Federal Home Loan Bank advances as longer-term rates were locked in
anticipation of continued rate increases.
2004 vs. 2003
Net interest income (FTE) increased $52.7 million, or 16.8%, from $314.1 million in 2003 to $366.8 million in 2004, primarily as a
result of earning asset growth, as the Corporation’s net interest margin of 3.83% was only one basis point higher than the 2003 net
interest margin of 3.82%.
Average earning assets grew 16.5%, from $8.2 billion in 2003 to $9.6 billion in 2004. Acquisitions contributed approximately $900.0
million to this increase in average balances. Interest income increased $57.6 million, or 12.9%, mainly as a result of the 16.5%
increase in average earning assets, which resulted in an $82.4 million increase in interest income. This increase was partially offset by
the $24.8 million decrease in interest income that resulted from the decline in average yields earned.
Average loans increased by $1.3 billion, or 23.2%, to $6.9 billion in 2004. Acquisitions contributed approximately $675.6 million to
this increase in average balances. Loan growth was strong in the commercial and commercial mortgage categories. The growth
experienced in the commercial – agricultural category resulted from an agricultural loan portfolio purchased in December 2003. The
reduction in mortgage loan balances was due to customer refinance activity that occurred during 2003. The Corporation generally
sells newly originated fixed rate mortgages in the secondary market to promote liquidity and manage interest rate risk. Home equity
loans increased significantly due to promotional efforts and customers using home equity loans as a cost-effective refinance
alternative. Consumer loans decreased, reflecting customers’ repayment of these loans with tax-advantaged residential mortgage or
home equity loans. In addition, the indirect finance market remained extremely competitive with the participation of vehicle
manufacturers.
The average yield on loans during 2004 was 5.82%, a 36 basis point, or 5.8%, decline from 2003. Much of the loan growth during the
year was in the floating rate categories that tend to carry lower interest rates than fixed-rate products.
Average investments decreased slightly during 2004, however, without the impact of acquisitions, the investment balances would
have decreased $165.9 million, or 6.6%. The Corporation’s investment balances had increased over the last few years due to both
significant deposit growth and the use of limited strategies to manage the Corporation’s gap position and to take advantage of low
short-term borrowing rates. During 2004, the Corporation did not reinvest a significant portion of investment maturities in order to
minimize interest rate risk in expectation of a rising rate environment and to help fund loan growth.
The average yield on investment securities declined slightly from 3.80% in 2003 to 3.74% in 2004. Premium amortization, which is
accounted for as a reduction of interest income, was $20.0 million in 2003 compared to $10.5 million in 2004. The benefit from the
lower premium amortization was offset by the reduction in stated yields experienced throughout 2004.
Interest expense increased $4.9 million, or 3.7%, to $136.0 million in 2004 from $131.1 million in 2003, mainly as a result of a $1.2
billion increase in average interest-bearing liabilities, which included approximately $800 million added by acquisitions. The increase
in average interest-bearing liabilities resulted in an increase in interest expense of $17.5 million during 2004. This increase was
11
Fulton Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
partially offset by a $12.6 million decrease due to the 23 basis point decrease in the cost of total interest-bearing liabilities. The cost of
interest-bearing deposits declined 25 basis points, or 14.1%, from 1.77% in 2003 to 1.52% in 2004. This reduction was due to both
the impact of declining short-term interest rates in the first half of 2003 and the continuing shifts in the composition of deposits from
higher-rate time deposits to lower-rate demand and savings deposits. Customers continued to exhibit an unwillingness to invest in
certificates of deposit at the rates available, instead keeping their funds in demand and savings products. Acquisitions accounted for
approximately $595.4 million of the increase in average deposit balances.
Average borrowings increased significantly during 2004, with average short-term borrowings increasing $499.5 million, or 67.6%, to
$1.2 billion, and average long-term debt increasing $71.2 million, or 12.6%, to $637.7 million. Acquisitions added $174.6 million to
the short-term borrowings increase and $83.6 million to the long-term debt increase. The additional increase in short-term borrowings
resulted primarily from certain limited strategies employed during 2003 to manage the Corporation’s gap position and to take
advantage of low short-term borrowing rates. In addition, customer cash management accounts, which are included in short-term
borrowings, grew $54.9 million, or 15.6%, to an average of $406.2 million in 2004.
Provision and Allowance for Loan Losses
The Corporation accounts for the credit risk associated with lending activities through its allowance and provision for loan losses. The
provision is the expense recognized in the income statement to adjust the allowance to its proper balance, as determined through the
application of the Corporation’s allowance methodology procedures. These procedures include the evaluation of the risk
characteristics of the portfolio and documentation in accordance with the Securities and Exchange Commission’s (SEC) Staff
Accounting Bulletin No. 102, “Selected Loan Loss Allowance Methodology and Documentation Issues” (SAB 102). See the “Critical
Accounting Policies” section of Management’s Discussion for a discussion of the Corporation’s allowance for loan loss evaluation
methodology.
12
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fulton Financial Corporation
A summary of the Corporation's loan loss experience follows:
2005
2004
Year Ended December 31
2003
(dollars in thousands)
2002
2001
Loans outstanding at end of year ................................ $ 8,424,728 $7,533,915
Daily average balance of loans and leases ................... $ 8,022,782 $6,884,694
Balance of allowance for loan losses
at beginning of year.................................................. $
Loans charged-off:
Commercial, financial and agricultural....................
Real estate – mortgage .............................................
Consumer .................................................................
Leasing and other .....................................................
Total loans charged-off ............................................
4,095
467
3,436
206
8,204
3,482
1,466
3,476
453
8,877
89,627 $ 77,700
$ 6,140,200 $ 5,295,459 $ 5,373,020
$ 5,527,092 $ 5,366,772 $ 5,341,497
$
71,920 $
71,872 $
65,640
6,604
1,476
4,497
651
13,228
7,203
2,204
5,587
676
15,670
Recoveries of loans previously charged-off:
Commercial, financial and agricultural....................
Real estate – mortgage .............................................
Consumer .................................................................
Leasing and other .....................................................
Total recoveries........................................................
Net loans charged-off...................................................
Provision for loan losses ..............................................
Allowance purchased ...................................................
Balance at end of year.................................................. $
2,042
2,705
906
1,245
1,496
1,169
76
77
4,520
5,196
4,357
3,008
4,717
3,120
11,567
3,108
92,847 $ 89,627
1,210
711
1,811
97
3,829
9,399
9,705
5,474
77,700 $
842
669
2,251
56
3,818
11,852
11,900
-
71,920 $
$
6,296
767
6,683
529
14,275
703
364
2,683
87
3,837
10,438
14,585
2,085
71,872
Selected Asset Quality Ratios:
Net charge-offs to average loans..................................
Allowance for loan losses to loans
outstanding at end of year .......................................
Non-performing assets (1) to total assets .....................
Non-accrual loans to total loans...................................
(1) Includes accruing loans past due 90 days or more.
0.04%
0.06%
0.17%
0.22%
0.20%
1.10%
0.38%
0.43%
1.19%
0.30%
0.30%
1.27%
0.33%
0.37%
1.36%
0.47%
0.45%
1.34%
0.44%
0.42%
13
Fulton Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table presents the aggregate amount of non-accrual and past due loans and other real estate owned (3):
2005
2004
December 31
2003
(in thousands)
2002
2001
Non-accrual loans (1) (2).................................... $ 36,560 $ 22,574 $ 22,422 $ 24,090 $ 22,794
Accruing loans past due 90 days or more...........
9,368
9,012
Other real estate ..................................................
1,817
2,072
Totals.............................................................. $ 47,644 $ 33,101 $ 32,616 $ 39,123 $ 33,979
14,095
938
8,318
2,209
9,609
585
(1) As of December 31, 2005, the additional interest income that would have been recorded during 2005 if non-accrual loans
had been current in accordance with their original terms was approximately $3.0 million. The amount of interest income
on non-accrual loans that was included in 2005 income was approximately $2.2 million.
(2) Accrual of interest is generally discontinued when a loan becomes 90 days past due as to principal and interest. When
interest accruals are discontinued, interest credited to income is reversed. Non-accrual loans are restored to accrual status
when all delinquent principal and interest becomes current or the loan is considered secured and in the process of
collection. Certain loans, primarily residential mortgages, that are determined to be sufficiently collateralized may
continue to accrue interest after reaching 90 days past due.
(3) Excluded from the amounts presented at December 31, 2005 are $132.3 million in loans where possible credit problems
of borrowers have caused management to have serious doubts as to the ability of such borrowers to comply with the
present loan repayment terms. These loans are considered to be impaired under Statement 114, but continue to pay
according to their contractual terms and are therefore not included in non-performing loans. Non-accrual loans include
$13.2 million of impaired loans.
The following table summarizes the allocation of the allowance for loan losses by loan type:
2005
2004
December 31
2003
(dollars in thousands)
2002
2001
% of
Loans in
Each
Allowance Category Allowance Category Allowance Category Allowance Category Allowance Category
% of
Loans in
Each
% of
Loans in
Each
% of
Loans in
Each
% of
Loans in
Each
Comm’l, financial
& agriculture ...... $ 52,379
Real estate –
Mortgage ...........
Consumer, leasing
& other ...............
Unallocated .............
7,935
14,931
Totals.................. $ 92,847
17,602
28.2%
$ 43,207
30.1%
$ 34,247
31.7%
$ 33,130
31.6%
$ 22,531
27.8%
64.7
19,784
62.5
14,471
59.0
13,099
56.8
19,018
58.9
7.1
-
100.0%
16,289
10,347
$ 89,627
7.4
-
100.0%
16,279
12,703
$ 77,700
9.3
-
100.0%
14,178
11,513
$ 71,920
11.6
-
100.0%
10,855
19,468
$ 71,872
13.3
-
100.0%
The provision for loan losses decreased $1.6 million from $4.7 million in 2004 to $3.1 million in 2005, after decreasing $5.0 million
in 2004. These decreases resulted from the continued improvement in the Corporation’s asset quality, as reflected in lower net charge-
offs. Net charge-offs as a percentage of average loans were 0.04% in 2005, a two basis point decrease from 0.06% in 2004, which
was an 11 basis point decrease from 2003. Total net charge-offs of $3.0 million in 2005 and $4.4 million in 2004 approximated the
amounts recorded for the provision for loan losses in those years. Non-performing assets as a percentage of total assets increased
slightly from 0.30% at December 31, 2004 to 0.38% at December 31, 2005, after decreasing three basis points in 2004. While the
14
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fulton Financial Corporation
non-performing assets ratio increased eight basis points in comparison to 2004, the level of non-performing assets was still relatively
low in absolute terms.
The provision for loan losses is determined by the allowance allocation process, whereby an estimated “need” is allocated to impaired
loans as defined in Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan”, or to
pools of loans under Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies”. The allocation is based on
risk factors, collateral levels, economic conditions and other relevant factors, as appropriate. The Corporation also maintains an
unallocated allowance, which was approximately 16% at December 31, 2005. 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 Management’s Discussion. Management believes that the allowance balance of $92.8 million at December
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 and Expenses
2005 vs. 2004
Other Income
The following table presents the components of other income for the past two years:
2005
Increase (decrease)
%
$
2004
(dollars in thousands)
Investment management and trust services .... $
Service charges on deposit accounts ...............
Other service charges and fees ........................
Gain on sale of loans........................................
Gain on sale of deposits...................................
Investment securities gains ..............................
Other ................................................................
Total ............................................................ $
35,669
40,198
24,200
25,468
2,200
6,625
9,908
144,268
$
$
34,817
39,451
20,494
19,262
-
17,712
7,128
138,864
$
$
852
747
3,706
6,206
2,200
(11,087)
2,780
5,404
2.4%
1.9
18.1
32.2
N/A
(62.6)
39.0
3.9%
The following table presents the amounts included in the above totals which were contributed by acquisitions:
2005
2004
Increase (decrease)
(in thousands)
Investment management and trust services ............ $
Service charges on deposit accounts .......................
Other service charges and fees ................................
Gain on sale of loans................................................
Investment securities losses.....................................
Other ........................................................................
Total ..................................................................... $
1,446
1,410
877
17,422
(269)
4,076
24,962
$
$
490
186
151
11,108
-
2,529
14,464
$
$
956
1,224
726
6,314
(269)
1,547
10,498
As shown in the preceding table, recent acquisitions did not make a significant contribution to other income, except mortgage banking
income, which is a significant line of business for Resource Bank.
15
Fulton Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table presents the components of other income for each of the past two years, excluding the amounts contributed by
acquisitions:
2005
Increase (decrease)
%
$
2004
(dollars in thousands)
Investment management and trust services .... $
Service charges on deposit accounts ...............
Other service charges and fees ........................
Gain on sale of loans........................................
Gain on sale of deposits...................................
Investment securities gains ..............................
Other ................................................................
Total ............................................................ $
34,223
38,788
23,323
8,046
2,200
6,894
5,832
119,306
$
$
34,327
39,265
20,343
8,154
-
17,712
4,599
124,400
$
$
(104)
(477)
2,980
(108)
2,200
(10,818)
1,233
(5,094)
(0.3)%
(1.2)
14.6
(1.3)
N/A
(61.1)
26.8
(4.1)%
The discussion that follows, unless otherwise noted, addresses changes in other income, excluding acquisitions.
In 2005, total other income decreased $5.1 million, or 4.1%. Excluding investment securities gains, other income increased $5.7
million, or 5.4%.
Investment management and trust services decreased slightly by $104,000, or 0.3%. The 2005 decrease was due to brokerage revenue
decreasing $242,000, or 2.0%, offset by trust commission income increasing $138,000, or 0.6%.
Total service charges on deposit accounts decreased $477,000, or 1.2%. The decrease was due to the Corporation reducing service
charges on deposit accounts in an effort to remain competitive and the impact of rising interest rates on commercial deposit account
service charge credits. This decrease was offset by increases in overdraft and cash management fees. Overdraft fees increased
$778,000, or 4.7%, and cash management fees increased $229,000, or 3.0%. During 2005, the rising interest rate environment began
to make cash management services more attractive for business customers.
Other service charges and fees increased $3.0 million, or 14.6%. The increase was driven by growth in letter of credit fees ($553,000
or 15.6%, increase), merchant fees ($2.2 million, or 44.4%, increase) and debit card fees ($712,000, or 12.6%, increase). The growth
in merchant fees resulted from a one-time fee adjustment and continued penetration in new markets. Debit card fees increased due to
increased volume.
Gains on sales of loans decreased only $108,000, or 1.3%, as overall volumes remained strong despite a slight increase in longer-term
mortgage rates. Other income increased $1.2 million, or 26.8%, due to growth in net servicing income on mortgage loans and gains on
sales of other real estate owned.
The gain on sale of deposits resulted from the Corporation selling three branches and related deposits in two separate transactions
during the second quarter of 2005. Virtually the entire $2.2 million gain resulted from the premiums received on the $36.7 million of
deposits sold.
Including the impact of acquisitions, investment securities gains decreased $11.1 million, or 62.6%, in 2005. Investment securities
gains included realized gains on the sale of equity securities of $5.8 million in 2005, down from $14.8 million in 2004, reflecting the
general decline in the equity markets and bank stocks in particular, and $843,000 and $3.1 million in 2005 and 2004, respectively, on
the sale of debt securities, which were generally sold to take advantage of the interest rate environment.
16
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fulton Financial Corporation
Other Expenses
The following table presents the components of other expenses for each of the past two years:
2005
2004
(dollars in thousands)
$
Increase
%
Salaries and employee benefits ....................... $
Net occupancy expense ..................................
Equipment expense .........................................
Data processing ...............................................
Advertising ......................................................
Intangible amortization....................................
Other ...............................................................
Total ............................................................ $
181,889
29,275
11,938
12,395
8,823
5,311
66,660
316,291
$
$
166,026
23,813
10,769
11,430
6,943
4,726
53,808
277,515
$
$
15,863
5,462
1,169
965
1,880
585
12,852
38,776
9.6%
22.9
10.9
8.4
27.1
12.4
23.9
14.0%
The following table presents the amounts included in the above totals which were contributed by acquisitions:
2005
2004
(in thousands)
Increase
Salaries and employee benefits ....................... $
Net occupancy expense ..................................
Equipment expense .........................................
Data processing ...............................................
Advertising ......................................................
Intangible amortization....................................
Other ...............................................................
Total ............................................................ $
28,215
5,620
2,662
2,005
1,357
1,751
15,964
57,574
$
$
13,371
1,986
1,097
716
633
381
5,331
23,515
$
$
14,844
3,634
1,565
1,289
724
1,370
10,633
34,059
The following table presents the components of other expenses for each of the past two years, excluding the amounts contributed by
acquisitions:
2005
Increase (decrease)
%
$
2004
(dollars in thousands)
Salaries and employee benefits ....................... $
Net occupancy expense ..................................
Equipment expense .........................................
Data processing ...............................................
Advertising ......................................................
Intangible amortization....................................
Other ...............................................................
Total ............................................................ $
153,674
23,655
9,276
10,390
7,466
3,560
50,696
258,717
$
$
152,655
21,827
9,672
10,714
6,310
4,345
48,477
254,000
$
$
1,019
1,828
(396)
(324)
1,156
(785)
2,219
4,717
0.7%
8.4
(4.1)
(3.0)
18.3
(18.1)
4.6
1.9%
The discussion that follows addresses changes in other expenses, excluding acquisitions.
Salaries and employee benefits increased $1.0 million, or 0.7%, in 2005, with the salary expense component increasing $856,000, or
0.7%. The increase was driven by normal salary increases for existing employees and a slight increase in the number of full-time
17
Fulton Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
employees, offset by a decrease in stock-based compensation expense from $3.9 million in 2004 to $1.0 million in 2005. The decrease
in stock-based compensation expense was primarily due to a change in vesting for stock options from 100% vesting for the 2004 grant
to a three-year vesting period for the 2005 grant. See additional discussion in Note M, “Stock-Based Compensation Plans and
Shareholders’ Equity”, in the Notes to Consolidated Financial Statements. Employee benefits increased $163,000, or 0.6%, due
primarily to increased retirement plan expenses, offset by lower healthcare expenses as the Corporation changed to a lower cost
healthcare provider in 2005. See additional discussion of certain retirement plans in Note L, “Employee Benefit Plans”, in the Notes
to Consolidated Financial Statements.
Net occupancy expense increased $1.8 million, or 8.4%. The increase resulted from the expansion of the branch network and the
addition of new office space for certain affiliates. Equipment expense decreased $396,000, or 4.1%, in 2005, due to lower
depreciation expense for equipment as items became fully depreciated, offset partially by increases due to additions for branch
network and office expansions.
Data processing expense decreased $324,000, or 3.0%, reflecting the Corporation’s success over the past few years in renegotiating
key processing contracts with certain vendors, most notably an automated teller service provider in 2005. Advertising expense
increased $1.2 million, or 18.3%, mainly due to growth in retail promotional campaigns.
Intangible amortization decreased $785,000, or 18.1%. Intangible amortization consists of the amortization of unidentifiable
intangible assets related to branch and loan acquisitions, core deposit intangible assets and other identified intangible assets. The
decrease in 2005 was related to lower amortization related to core deposit intangible assets, which are amortized on an accelerated
basis over the estimated life of the acquired core deposits.
Other expense increased $2.2 million, or 4.6%, in 2005 mainly due to a $2.2 million legal reserve recorded during the fourth quarter
of 2005 related to a settlement of a lawsuit, which is subject to court approval. The suit alleged that Resource Bank violated the
Telephone Consumer Protection Act (TCPA), prior to being acquired by Fulton Financial in April 2004. For further details, see Note
O, “Commitments and Contingencies”, in the Notes to Consolidated Financial Statements.
2004 vs. 2003
Other Income
Total other income increased $4.5 million, or 3.3%, from $134.4 million in 2003 to $138.9 million in 2004. Excluding investment
securities gains, other income increased $6.6 million, or 5.8%, in 2004. The acquisition of Resource contributed $14.4 million to total
other income in 2004. Premier did not have a significant impact on other income growth in 2004. The discussion that follows, unless
otherwise noted, addresses changes in other income, excluding acquisitions.
Investment management and trust services income grew $68,000, or 0.2%, in 2004. Brokerage revenue increased $484,000, or 4.1%,
while trust commission income decreased $416,000, or 1.9%.
Total service charges on deposit accounts increased $566,000, or 1.5%, in 2004. Overdraft fees increased $979,000, or 6.4%, and
cash management fees increased only $39,000, or 0.5%, due to the low interest rate environment making cash management services
less attractive for smaller business customers.
Other service charges and fees increased $1.4 million, or 7.2%, in 2004. The increase was driven by growth in letter of credit fees,
merchant fees and debit card fees. Letter of credit fees increased $104,000, or 3.1%, and merchant fees increased $370,000, or 8.2%,
all as a result of an increased focus on growing these business lines. Debit card fees increased $494,000, or 9.7%, due to an increase
in transaction volume.
Gains on sales of loans decreased $10.8 million, or 57.0%. The decrease was due to the increase in interest rates from their historic
lows and the resulting reduction in the level of mortgage refinancing activity. Other income increased $254,000, or 6.0%, in 2004.
Including the impact of acquisitions, investment securities gains decreased $2.1 million, or 10.8%. Investment securities gains
included realized gains on the sale of equity securities of $14.8 million, reflecting the general improvement in the equity markets and
18
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fulton Financial Corporation
bank stocks in particular, and $3.1 million on the sale of debt securities, which were generally sold to take advantage of the interest
rate environment. These gains were offset by write-downs of $137,000 in 2004 for specific equity securities deemed to exhibit other
than temporary impairment in value.
Other Expenses
Total other expenses increased $43.9 million, or 18.8%, in 2004, including $30.0 million due to acquisitions. The discussion that
follows addresses changes in other expenses, excluding acquisitions.
Salaries and employee benefits increased $11.5 million, or 8.5%. The salary expense component increased $6.4 million, or 5.7%,
driven by normal salary increases for existing employees, as total average full-time equivalent employees remained relatively
consistent at approximately 2,900. Employee benefits increased $5.1 million, or 21.7%, driven mainly by increases in healthcare costs
and retirement plan expenses.
Net occupancy expense increased $1.4 million, or 7.0%, to $20.9 million. The increase resulted from the expansion of the branch
network and the addition of new office space for certain affiliates. Equipment expense decreased $1.0 million, or 9.9%, mainly in
depreciation, as certain equipment became fully depreciated.
Data processing expense decreased $651,000, or 5.8%, due to the successful renegotiation of key processing contracts with certain
vendors. Advertising expense decreased $76,000, or 1.3%, due to efforts to control these discretionary expenses.
Intangible amortization increased $1.7 million, or 116.4%. The increase in 2004 primarily resulted from the amortization of intangible
assets related to the acquisition of an agriculture loan portfolio in December 2003.
Other expense increased $916,000, or 2.1%, as a result of compliance costs associated with the provisions of the Sarbanes-Oxley Act
of 2002. These costs were realized in external audit fees, which increased from $363,000 in 2003 to $1.6 million in 2004, as well as
an additional $400,000 in consulting expense during 2004. These cost increases were offset by reductions in operating risk loss, other
real estate expenses and legal fees.
Income Taxes
Income taxes increased $6.7 million, or 10.3%, in 2005 and $5.6 million, or 9.5%, in 2004. The Corporation’s effective tax rate
(income taxes divided by income before income taxes) remained fairly stable at 30.1%, 30.2% and 30.2% in 2005, 2004 and 2003,
respectively. In general, the variances from the 35% Federal statutory rate consisted of tax-exempt interest income and investments in
low and moderate income housing partnerships (LIH Investments), which generate Federal tax credits. Net credits were $4.9 million,
$4.5 million and $4.0 million in 2005, 2004 and 2003, respectively.
For additional information regarding income taxes, see Note K, “Income Taxes”, in the Notes to Consolidated Financial Statements.
19
Fulton Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
Total assets increased $1.2 billion, or 11.1%, to $12.4 billion at December 31, 2005, from $11.2 billion at December 31, 2004.
Excluding the SVB acquisition in July 2005, total assets increased $650.5 million, or 5.8%. During 2005, increases in deposits and
proceeds from short and long-term borrowings were used to fund loan growth. Total loans, net of the allowance for loan losses,
increased $887.6 million, or 11.9% ($585.9 million, or 7.9%, excluding the acquisition of SVB). Total deposits increased $909.3
million, or 11.5%, to $8.8 billion at December 31, 2005 ($435.8 million, or 5.5%, excluding the acquisition of SVB), and total
borrowings increased $280.5 million, or 14.9% ($255.8 million, or 13.6%, excluding the acquisition of SVB).
The table below presents a condensed ending balance sheet for the Corporation, adjusted for the balances recorded for the 2005
acquisition of SVB, in comparison to 2004 ending balances.
2005
2004
Increase (decrease) (3)
Fulton
Financial
Corporation
(As Reported)
SVB Financial
Services, Inc.
(1)
Fulton
Financial
Corporation
(2)
Fulton
Financial
Corporation
(dollars in thousands)
$
%
Assets:
Cash and due from banks ........... $
Other earning assets....................
Investment securities ..................
Loans, net allowance ..................
Premises and equipment .............
Goodwill and intangible assets...
Other assets ................................
368,043
275,310
2,562,145
8,331,881
170,254
448,422
245,500
$
$
20,035
61,046
124,916
301,660
9,345
63,273
10,608
$
348,008
214,264
2,437,229
8,030,221
160,909
385,149
234,892
$
278,065
246,192
2,449,859
7,444,288
146,911
389,322
205,511
69,943
(31,928)
(12,630)
585,933
13,998
(4,173)
29,381
25.2%
(13.0)
(0.5)
7.9
9.5
(1.1)
14.3
Total Assets .............................. $ 12,401,555
$
590,883
$ 11,810,672
$ 11,160,148
$
650,524
5.8%
Liabilities and Shareholders’ Equity:
Deposits...................................... $
Short-term borrowings ...............
Long-term debt ...........................
Other liabilities ...........................
8,804,839
1,298,962
860,345
154,438
$
473,490
-
24,710
2,290
$
8,331,349
1,298,962
835,635
152,148
$
7,895,524
1,194,524
684,236
141,777
$
435,825
104,438
151,399
10,371
5.5%
8.7
22.1
7.3
Total Liabilities ........................
11,118,584
500,490
10,618,094
9,916,061
$
702,033
7.1
Shareholders’ equity.....................
1,282,971
90,393
1,192,578
1,244,087
(51,509)
(4.1)
Total Liabilities and
Shareholders’ Equity.............. $ 12,401,555
$
590,883
$ 11,810,672
$ 11,160,148
$
650,524
5.8%
(1) Balances recorded for the July 1, 2005 acquisition of SVB Financial Services, Inc.
(2) Excluding balances recorded for SVB Financial Services, Inc.
(3) Fulton Financial Corporation, excluding balances recorded for SVB Financial Services, Inc. as compared to 2004.
20
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fulton Financial Corporation
Loans
The following table presents loans outstanding, by type, as of the dates shown:
2005
2004
December 31
2003
(in thousands)
2002
2001
Commercial – industrial and financial...... $
Commercial – agricultural ........................
Real-estate – commercial mortgage..........
Real-estate – residential mortgage and
home equity..........................................
Real-estate – construction.........................
Consumer ..................................................
Leasing and other......................................
Unearned income ......................................
Totals ................................................... $
2,044,010
331,659
2,831,405
1,774,260
851,451
519,094
79,738
8,431,617
(6,889)
8,424,728
$ 1,946,962
326,176
2,461,016
$ 1,594,451
354,517
1,992,650
$ 1,489,990
189,110
1,527,143
$ 1,341,280
154,100
1,428,066
1,651,321
595,567
486,877
72,795
7,540,714
(6,799)
$ 7,533,915
1,324,612
307,108
496,793
77,646
6,147,777
(7,577)
$ 6,140,200
1,244,783
248,565
521,431
84,063
5,305,085
(9,626)
$ 5,295,459
1,468,799
267,627
626,985
98,823
5,385,680
(12,660)
$ 5,373,020
Total loans, net of unearned income, increased $890.9 million, or 11.8%, in 2005 ($586.0 million, or 7.8%, excluding the acquisition
of SVB). The internal growth of $586.0 million included increases in total commercial loans ($31.5 million, or 1.4%), commercial
mortgage loans ($196.1 million, or 8.0%), construction loans ($255.9 million, or 43.0%), and residential mortgage and home equity
loans ($94.0 million, or 5.7%).
In 2004, total loans, net of unearned income, increased $1.4 billion, or 22.7% ($521.7 million, or 8.5%, excluding the 2004
acquisitions of Resource and First Washington). The internal growth of $521.7 million included increases in total commercial loans
($148.5 million, or 7.6%), commercial mortgage loans ($183.7 million, or 9.2%), construction loans ($11.5 million, or 3.8%), and
residential mortgages and home equity loans ($235.0 million, or 17.7%), offset partially by decreases in consumer loans ($50.0
million, or 10.0%) and leasing and other loans ($4.9 million, or 6.2%). In both 2005 and 2004, the Corporation experienced strong
overall loan growth as a result of favorable economic conditions and interest rates.
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:
HTM
2005
AFS
Total
HTM
December 31
2004
AFS
(in thousands)
Total
HTM
2003
AFS
Total
Equity securities ......................... $
U.S. Government securities ........
U.S. Government sponsored
agency securities........................
State and municipal.....................
Corporate debt securities ............
Mortgage-backed securities ........
Totals .................................... $
-
-
$ 135,532
35,118
$ 135,532
35,118
$
-
-
$ 170,065
68,449
$ 170,065 $
68,449
- $ 212,352
76,422
-
$ 212,352
76,422
7,512
5,877
-
4,869
18,258
205,182
438,987
65,834
1,663,234
$ 2,543,887
212,694
444,864
65,834
1,668,103
$ 2,562,145
$
6,903
10,658
650
6,790
25,001
60,476
332,455
71,127
1,722,286
$ 2,424,858
67,379
343,113
71,777
1,729,076
$ 2,449,859 $
6,017
7,728
298,030
4,462
28,656
640
10,163
2,282,680
22,993 $2,904,157
13,745
302,492
29,296
2,292,843
$ 2,927,150
21
Fulton Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Total investment securities increased $112.3 million, or 4.6% (decreased $12.6 million, or 0.5%, excluding the acquisition of SVB),
to a balance of $2.6 billion at December 31, 2005. In 2004, investment securities decreased $477.3 million, or 16.3%, to reach a
balance of $2.4 billion. The decrease in 2004 resulted from maturities and prepayments that were not reinvested due to rising short-
term interest rates.
The Corporation classified 99.3% of its investment portfolio as available for sale at December 31, 2005 and, as such, these
investments were recorded at their estimated fair values. As short-term interest rates increased throughout the year, the net unrealized
loss on non-equity available for sale investment securities increased $38.8 million from a net unrealized loss of $21.1 million at
December 31, 2004 to a net unrealized loss of $59.9 million at December 31, 2005.
At December 31, 2005, equity securities consisted of Federal Home Loan Bank (FHLB) and other government agency stock ($57.3
million), stocks of other financial institutions ($71.0 million) and mutual funds ($7.2 million). The bank stock portfolio has
historically been a source of capital appreciation and realized gains ($5.8 million in 2005, $14.8 million in 2004 and $17.3 million in
2003). Management periodically sells bank stocks when, in its opinion, valuations and market conditions warrant such sales.
Other Assets
Cash and due from banks increased $90.0 million, or 32.4% ($69.9 million, or 25.2%, excluding the acquisition of SVB), in 2005,
following a $22.9 million, or 7.6%, decrease in 2004. Because of the daily fluctuations that result in the normal course of business,
cash is more appropriately analyzed in terms of average balances. On an average balance basis, cash and due from banks increased
$30.4 million, or 9.6%, from $316.2 million in 2004 to $346.5 million in 2005, following a $36.2 million, or 12.9%, increase in 2004.
The increase in both years resulted from acquisitions and growth in the Corporation’s branch network.
Premises and equipment increased $23.3 million, or 15.9%, in 2005 to $170.3 million, which included $9.3 million as a result of the
acquisition of SVB. The remaining increase reflects additions primarily for the construction of various new branch and office
facilities.
Goodwill and intangible assets increased $59.1 million, or 15.2%, in 2005 primarily due to the acquisition of SVB, following a
$244.5 million, or 168.9%, increase in 2004, also as a result of acquisitions. Other assets increased $40.0 million, or 19.5%, in 2005
to $245.5 million, including $10.6 million as a result of the acquisition of SVB. The increase in other assets was due primarily to an
increase in the net deferred tax asset due to increases in unrealized losses on investment securities, an increase in accrued interest
receivable related to increases in loans and interest rates, and the additional funding of the defined benefit pension plan in 2005, offset
by a decrease in LIH Investments due to amortization of existing investments.
Deposits and Borrowings
Deposits increased $909.3 million, or 11.5%, to $8.8 billion at December 31, 2005 ($435.8 million, or 5.5%, excluding the acquisition
of SVB). This compares to an increase of $1.1 billion, or 16.9%, in 2004 ($118.9 million, or 1.8%, excluding the 2004 acquisitions of
Resource and First Washington). As in the prior year, the trend during the first half of 2005 was strong growth in core demand and
savings accounts, offset by declines in time deposits. In the second half of 2005, consumers began increasing investments in time
deposits due to rising long-term rates, resulting in an overall increase in time deposits for 2005. If longer-term rates continue to
increase in the future, a shift in deposit funds to higher cost time deposits could occur.
During 2005, total demand deposits increased $300.4 million, or 10.0% ($147.5 million, or 4.9%, excluding the acquisition of SVB),
savings deposits increased $208.3 million, or 10.9% ($36.5 million, or 1.9%, excluding the acquisition of SVB), and time deposits
increased $400.7 million, or 13.5% ($251.9 million, or 8.5%, excluding the acquisition of SVB).
During 2004, demand deposits increased $457.1 million, or 17.9% ($234.6 million, or 10.8%, excluding the 2004 acquisitions of
Resource and First Washington), savings deposits increased $165.7 million, or 9.5% ($58.7 million, or 3.8%, excluding the 2004
acquisitions of Resource and First Washington), and time deposits increased $520.9 million, or 21.3% (decrease of $174.5 million, or
7.2%, excluding the 2004 acquisitions of Resource and First Washington). The trend in 2004 was strong growth in core demand and
22
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fulton Financial Corporation
savings accounts due to consumers favoring banks over the equity markets. In addition, the relatively low interest rate environment
resulted in consumers favoring demand and savings products over time deposits, as incremental long-term rates were not attractive.
Short-term borrowings, which consist mainly of Federal funds purchased and customer cash management accounts, increased $104.4
million, or 8.7%, in 2005 after decreasing $202.2 million, or 14.5%, in 2004 ($329.9 million, or 23.6%, excluding the 2004
acquisitions of Resource and First Washington). The increase in 2005 was due to purchases of Federal funds as loan growth outpaced
deposit increases, offset by decreases in customer cash management accounts. In 2004, the decrease was due to strategies to reduce
overnight Federal funds purchased in a rising rate environment. Long-term debt increased $176.1 million, or 25.7% ($151.4 million,
or 22.1%, excluding the acquisition of SVB), primarily due to the Corporation’s issuance of $100.0 million of ten-year subordinated
notes in March 2005, and partially due to an increase in Federal Home Loan Bank advances.
Other Liabilities
Other liabilities increased $12.7 million, or 8.9% ($10.4 million, or 7.3%, excluding the acquisition of SVB), following a $38.6
million, or 37.5%, increase in 2004. The increase in 2005 was primarily attributable to an increase in dividends payable to
shareholders ($3.0 million), an increase in the fair value of derivative financial instruments ($5.9 million), and the additional legal
accrual for the TCPA lawsuit ($2.2 million). The increase in 2004 was primarily attributable to additional equity commitments for
low-income housing projects ($9.2 million increase), an increase in accrued retirement benefits ($2.4 million) and an increase in
dividends payable to shareholders ($2.5 million).
Shareholders’ Equity
Total shareholders’ equity increased $38.9 million, or 3.1%, to $1.3 billion, or 10.3% of ending total assets, as of December 31, 2005.
This growth was due primarily to 2005 net income of $166.1 million, offset by dividends to shareholders of $88.5 million. In
addition, equity increased $66.6 million for stock issued for the SVB acquisition, decreased $85.2 million for treasury stock
purchases, and decreased $30.5 million as a result of increased unrealized losses on investment securities.
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 for 7.3 million shares, which was
extended through June 30, 2004. During 2004, 1.6 million shares were repurchased under this plan. On June 15, 2004, the Board of
Directors approved a stock repurchase plan for 5.0 million shares through December 31, 2004. During 2004, 3.1 million shares were
repurchased under this plan, including 1.3 million shares acquired under an “Accelerated Share Repurchase” program (ASR). On
December 21, 2004, the Board of Directors extended the stock repurchase plan through June 30, 2005 and increased the total number
of shares that could be repurchased to 5.0 million. No shares were purchased under this extended plan in 2004. During 2005, 4.3
million shares were repurchased under this plan through an ASR.
Under an ASR, the Corporation repurchases shares immediately from an investment bank rather than over time. The investment bank,
in turn, repurchases shares on the open market over a period that is determined by the average daily trading volume of the
Corporation’s shares, among other factors. For the ASR in effect at December 31, 2005, which was implemented in the second quarter
of 2005, the Corporation settled its position with the investment bank at the termination of the ASR by paying cash in an amount
representing the difference between the initial prices paid and the actual price of the shares repurchased. The Corporation completed
the ASR in February of 2006, and paid the investment bank a total of $3.4 million for this difference.
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
Corporation’s financial statements. The regulations require that banks maintain minimum amounts and ratios of total and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined), and Tier I capital to average assets (as defined). As of December
31, 2005, the Corporation and each of its bank subsidiaries met the minimum capital requirements. In addition, the Corporation and
each of its bank subsidiaries’ capital ratios exceeded the amounts required to be considered “well-capitalized” as defined in the
regulations. See also Note J, “Regulatory Matters”, in the Notes to Consolidated Financial Statements.
23
Fulton Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 Corporation’s balance sheet as well as contractual obligations for purchased services or for operating leases.
The following table summarizes significant contractual obligations to third parties, by type, that are fixed and determinable at
December 31, 2005:
One Year
or Less
One to
Three Years
Payments Due In
Three to
Five Years
(in thousands)
Over Five
Years
Total
Deposits with no stated maturity (a).. $ 5,435,119
Time deposits (b)............................... 1,894,744
Short-term borrowings (c)................. 1,298,962
33,734
Long-term debt (c) ............................
10,437
Operating leases (d)...........................
13,719
Purchase obligations (e) ....................
$
-
969,418
-
289,282
17,356
25,736
$
-
211,047
-
128,238
11,329
14,349
$
-
294,511
-
409,091
33,186
-
$ 5,435,119
3,369,720
1,298,962
860,345
72,308
53,804
(a) Includes demand deposits and savings accounts, which can be withdrawn by customers at any time.
(b) See additional information regarding time deposits in Note H, “Deposits”, in the Notes to Consolidated Financial Statements.
(c) See additional information regarding borrowings in Note I, “Short-Term Borrowings and Long-Term Debt”, in the Notes to
Consolidated Financial Statements.
(d) See additional information regarding operating leases in Note N, “Leases”, in the Notes to Consolidated Financial Statements.
(e)
Includes significant information technology, telecommunication and data processing outsourcing contracts. Variable obligations,
such as those based on transaction volumes, are not included.
In addition to the contractual obligations listed in the preceding table, the Corporation is a party to financial instruments with off-
balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit and interest rate risk
that are not recognized in the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments issued to
guarantee the financial or performance obligation of a customer to a third party. Commitments and standby letters of credit do not
necessarily represent future cash needs as they may expire without being drawn.
The following table presents the Corporation’s commitments to extend credit and letters of credit as of December 31, 2005 (in
thousands):
Commercial mortgage, construction and land development............ $ 829,769
494,872
Home equity ....................................................................................
382,415
Credit card .......................................................................................
Commercial and other......................................................................
2,028,997
Total commitments to extend credit ........................................... $ 3,736,053
Standby letters of credit ................................................................... $ 599,191
Commercial letters of credit ............................................................
23,037
Total letters of credit................................................................... $ 622,228
24
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fulton Financial Corporation
CRITICAL ACCOUNTING POLICIES
The following is a summary of those accounting policies that the Corporation considers to be most important to the portrayal of its
financial condition and results of operations, as they require management’s most difficult judgments as a result of the need to make
estimates about the effects of matters that are inherently uncertain.
Allowance and Provision for Loan Losses – The Corporation accounts for the credit risk associated with its lending activities through
the allowance and provision for loan losses. The allowance is an estimate of the losses inherent in the loan portfolio as of the balance
sheet date. The provision is the periodic charge to earnings, which is necessary to adjust the allowance to its proper balance. On a
quarterly basis, the Corporation assesses the adequacy of its allowance through a methodology that consists of the following:
- Identifying loans for individual review under Financial Accounting Standards Board’s Statement of Financial Accounting
Standards No. 114, “Accounting by Creditors for Impairment of a Loan” (Statement 114). In general, these consist of large
balance commercial loans and commercial mortgages that are rated less than “satisfactory” based upon the Corporation’s
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 identified as impaired, calculating the estimated fair value, using observable market prices, discounted cash flows
or the value of the underlying collateral.
- Classifying all non-impaired large balance loans based on credit risk ratings and allocating an allowance for loan losses
based on appropriate factors, including recent loss history for similar loans.
- Identifying all smaller balance homogeneous loans for evaluation collectively under the provisions of Statement of Financial
Accounting Standards No. 5, “Accounting for Contingencies” (Statement 5). In general, these loans include residential
mortgages, consumer loans, installment loans, smaller balance commercial loans and mortgages and lease receivables.
- Statement 5 loans are segmented into groups with similar characteristics and an allowance for loan losses is allocated to each
segment based on recent loss history and other relevant information.
- Reviewing the results to determine the appropriate balance of the allowance for loan losses. This review gives additional
consideration to factors such as the mix of loans in the portfolio, the balance of the allowance relative to total loans and non-
performing assets, trends in the overall risk profile of the portfolio, trends in delinquencies and non-accrual loans and local
and national economic conditions.
- An unallocated allowance is maintained to recognize the inherent imprecision in estimating and measuring loss exposure.
- Documenting the results of its review in accordance with SAB 102.
The allowance review methodology is based on information known at the time of the review. Changes in factors underlying the
assessment could have a material impact on the amount of the allowance that is necessary and the amount of provision to be charged
against earnings. Such changes could impact future results.
Accounting for Business Combinations – The Corporation accounts for all business acquisitions using the purchase method of
accounting as required by Statement of Financial Accounting Standards No. 141, “Business Combinations” (Statement 141). Purchase
accounting requires the purchase price to be allocated to the estimated fair values of the assets acquired and liabilities assumed. It also
requires assessing the existence of and, if necessary, assigning a value to certain intangible assets. The remaining excess purchase
price over the fair value of net assets acquired is recorded as goodwill.
The purchase price is established as the value of securities issued for the acquisition, cash consideration paid and certain acquisition-
related expenses. The fair values of assets acquired and liabilities assumed are typically established through appraisals, observable
market values or discounted cash flows. Management has engaged independent third-party valuation experts to assist in valuing
certain assets, particularly intangibles. Other assets and liabilities are generally valued using the Corporation’s internal asset/liability
modeling system. The assumptions used and the final valuations, whether prepared internally or by a third party, are reviewed by
25
Fulton Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
management. Due to the complexity of purchase accounting, final determinations of values can be time consuming and, occasionally,
amounts included in the Corporation’s consolidated balance sheets and consolidated statements of income are based on preliminary
estimates of value.
Goodwill and Intangible Assets – Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”
(Statement 142) addresses the accounting for goodwill and intangible assets subsequent to acquisition. Intangible assets are amortized
over their estimated lives. Some intangible assets have indefinite lives and are, therefore, not amortized. All intangible assets must be
evaluated for impairment if certain events occur. Any impairment write-downs are recognized as expense in the consolidated income
statement.
Goodwill is not amortized to expense, but is evaluated at least annually for impairment. The Corporation completes its annual
goodwill impairment test as of October 31st of each year. The Corporation tests for impairment by first allocating its goodwill and
other assets and liabilities, as necessary, to defined reporting units. A fair value is then determined for each reporting unit. If the fair
values of the reporting units exceed their book values, no write-down of the recorded goodwill is necessary. If the fair values are less
than the book values, an additional valuation procedure is necessary to assess the proper carrying value of the goodwill. The
Corporation determined that no impairment write-offs were necessary during 2005, 2004 and 2003.
Business unit valuation is inherently subjective, with a number of factors based on assumptions and management judgments. Among
these are future growth rates for the reporting units, discount rates and earnings capitalization rates. Changes in assumptions and
results due to economic conditions, industry factors and reporting unit performance and cash flow projections could result in different
assessments of the fair values of reporting units and could result in impairment charges in the future.
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 not likely to be recovered, a valuation allowance must be recognized. The Corporation has determined that a valuation
allowance is not required for deferred tax assets as of December 31, 2005, except in the case of deferred tax benefits related to state
income tax net operating losses. The assessment of the carrying value of deferred tax assets is based on certain assumptions, changes
in which could have a material impact on the Corporation’s financial statements. See also Note K, “Income Taxes”, in the Notes to
Consolidated Financial Statements.
Recent Accounting Pronouncements
Note A, “Summary of Significant Accounting Policies”, in the Notes to Consolidated Financial Statements discusses the expected
impact of recently issued accounting standards adopted by the Corporation.
26
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fulton Financial Corporation
MARKET RISK
Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of
market risk exposures generally faced by financial institutions include interest rate risk, equity market price risk, foreign currency risk
and commodity price risk. Due to the nature of its operations, only equity market price risk and interest rate risk are significant to the
Corporation.
Equity Market Price Risk
Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial
position or results of operations of the Corporation. The Corporation’s equity investments consist of common stocks of publicly
traded financial institutions, U.S. Government sponsored agency stocks and money market mutual funds. The equity investments most
susceptible to equity market price risk are the financial institutions stocks, which had a cost basis of approximately $72.6 million and
a fair value of $71.0 million at December 31, 2005. Gross unrealized gains in this portfolio were approximately $2.0 million at
December 31, 2005.
Although the carrying value of the financial institutions stocks accounted only for 0.6% of the Corporation’s total assets, any
unrealized gains in the portfolio represent a potential source of revenue. The Corporation has a history of realizing gains from this
portfolio and, if values were to decline more significantly than the current year, this revenue could materially be impacted.
Management continuously monitors the fair value of its equity investments and evaluates current market conditions and operating
results of the companies. Periodic sale and purchase decisions are made based on this monitoring process. None of the Corporation’s
equity securities are classified as trading. Future cash flows from these investments are not provided in the table on page 31 as such
investments do not have maturity dates.
The Corporation has evaluated, based on existing accounting guidance, whether any unrealized losses on individual equity
investments constituted “other-than-temporary” impairment, which would require a write-down through a charge to earnings. Based
on the results of such evaluations, the Corporation recorded write-downs of $65,000 in 2005, $137,000 in 2004 and $3.3 million in
2003 for specific equity securities which were deemed to exhibit other-than-temporary impairment in value. Through December 31,
2005, gains of approximately $2.5 million had been realized on the sale of investments previously written down and, as of December
31, 2005, the impaired securities still held in the portfolio had recovered approximately $286,000 of the original write-down amount.
Additional impairment charges may be necessary depending upon the performance of the equity markets in general and the
performance of the individual investments held by the Corporation. See also Note C, “Investment Securities”, in the Notes to
Consolidated Financial Statements.
In addition to the risk of changes in the value of its equity portfolio, the Corporation’s investment management and trust services
revenue could also be impacted by fluctuations in the securities markets. A portion of the Corporation’s trust revenue is based on the
value of the underlying investment portfolios. If securities markets contract, the Corporation’s revenue could be negatively impacted.
In addition, the ability of the Corporation to sell its brokerage services is dependent, in part, upon consumers’ level of confidence in
the outlook for rising securities prices.
Interest Rate Risk, Asset/Liability Management and Liquidity
Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the Corporation’s liquidity position
and could affect its ability to meet obligations and continue to grow. Second, movements in interest rates can create fluctuations in the
Corporation’s net interest income and changes in the economic value of its equity.
The Corporation employs various management techniques to minimize its exposure to interest rate risk. An Asset/Liability
Management Committee (ALCO), consisting of key financial and senior management personnel, meets on a weekly basis. The ALCO
is responsible for reviewing the interest rate sensitivity position of the Corporation, approving asset and liability management policies,
and overseeing the formulation and implementation of strategies regarding balance sheet positions and earnings. The primary goal of
asset/liability management is to address the liquidity and net interest income risks noted above.
27
Fulton Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
From a liquidity standpoint, the Corporation must maintain a sufficient level of liquid assets to meet the ongoing cash flow
requirements of customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity
sources are found on both sides of the balance sheet. Liquidity is provided on a continuous basis through scheduled and unscheduled
principal reductions and interest payments on outstanding loans and investments. Liquidity is also provided through the availability of
deposits and borrowings.
The Corporation’s sources and uses of cash were discussed in general terms in the “Overview” section of Management’s Discussion.
The consolidated statements of cash flows provide additional information. The Corporation generated $146.5 million in cash from
operating activities during 2005, mainly due to net income. Investing activities resulted in a net cash outflow of $588.5 million,
compared to a net cash inflow of $184.9 million in 2004. In 2005, reinvestments in the investment securities portfolio and the net
increase in the loan portfolio exceeded proceeds from maturities and sales of investment securities. In 2004, funds provided by
investment maturities and sales of investment securities were greater than the reinvestments in investment securities and the net
increase in the loan portfolio. Financing activities resulted in net cash proceeds of $532.0 million in 2005, compared to a net cash
usage of $384.7 million in 2004 as net funds were provided by increases in deposits, primarily time deposits as a result of increasing
rates, as well as short-term borrowings and long-term debt. In 2004, funds provided by maturing investments were used to reduce
short-term borrowings.
Liquidity must also be managed at the Fulton Financial Corporation parent company level. For safety and soundness reasons, banking
regulations limit the amount of cash that can be transferred from subsidiary banks to the Parent Company in the form of loans and
dividends. Generally, these limitations are based on the subsidiary banks’ regulatory capital levels and their net income. Prior to 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 increased, requiring additional sources of
funds.
In 2005, the Corporation issued $100.0 million of ten-year subordinated notes, which mature April 1, 2015 and carry a fixed rate of
5.35%. Interest is paid semi-annually, commencing in October 2005. In 2004, the Parent Company entered into a revolving line of
credit agreement with an unaffiliated bank. Under the terms of the agreement, the Parent Company can borrow up to $50.0 million
with interest calculated at the one-month London Interbank Offering Rate (LIBOR) plus 0.27%. The credit agreement requires the
Corporation to maintain certain financial ratios related to capital strength and earnings. As of December 31, 2005 there were no
borrowings outstanding under the agreement. The Corporation was in compliance with all required covenants under the credit
agreement as of December 31, 2005.
In January 2006, the Corporation purchased all of the common stock of a new Delaware business trust, Fulton Capital Trust I, which
was formed for the purpose of issuing $150.0 million of trust preferred securities at an effective rate of approximately 6.50%. In
connection with this transaction the Parent Company issued $154.6 million of junior subordinated deferrable interest debentures to the
trust. These debentures carry the same rate and mature on February 1, 2036.
These borrowings, most notably the revolving line of credit agreement, supplement the liquidity available from subsidiaries through
dividends and provide some flexibility in Parent Company cash management. Management continues to monitor the liquidity and
capital needs of the Parent Company and will implement appropriate strategies, as necessary, to remain well-capitalized and to meet
its cash needs.
In addition to its normal recurring and operating cash needs, the Parent Company also paid cash for a portion of the Columbia
Bancorp acquisition, which was completed on February 1, 2006. Based on the terms of the merger agreement, the Parent Company
paid approximately $150 million in cash to consummate the acquisition. For further details, see Note Q, “Mergers and Acquisitions”,
in the Notes to Consolidated Financial Statements.
At December 31, 2005, 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
$3.2 billion, or 25.5% of total assets. This compares to $3.0 billion, or 26.5% of total assets, at December 31, 2004.
28
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fulton Financial Corporation
The following tables present the maturities of investment securities at December 31, 2005 and the weighted average yields of such
securities (calculated based on historical cost):
HELD TO MATURITY (at amortized cost)
MATURING
Within One Year
Yield
Amount
After One But
Within Five Years
Yield
Amount
After Five But
Within Ten Years
Yield
Amount
(dollars in thousands)
After Ten Years
Yield
Amount
U.S. Government sponsored
agency securities.................... $
State and municipal (1)...............
-
4,540
Totals....................................... $ 4,540
$ 7,512
-
3.95
991
3.95% $ 8,503
$
3.98%
5.13
4.11% $
-
346
346
-
5.42
5.42%
$
$
-
-
-
-
-
-
Mortgage-backed securities (2) .. $ 4,869
6.16%
AVAILABLE FOR SALE (at estimated fair value)
MATURING
Within One Year
Yield
Amount
After One But
Within Five Years
Yield
Amount
After Five But
Within Ten Years
Yield
Amount
(dollars in thousands)
-
$
-
After Ten Years
Yield
Amount
-
$
-
-
U.S. Government securities........ $ 35,118
U.S. Government sponsored
agency securities....................
State and municipal (1)...............
Other securities...........................
24,732
47,341
100
Totals....................................... $ 107,291
3.66%
$
-
174,404
3.65
190,300
4.99
7.51
2,029
4.25% $ 366,733
Mortgage-backed securities (2) .. $1,663,234
3.84%
6,046
4.82
176,450
4.57
4.51
2,329
4.69% $ 184,825
-
5.11
24,896
5.18
7.70
61,376
5.20% $ 86,272
-
6.98
7.54
7.38%
(1) Weighted average yields on tax-exempt securities have been computed on a fully tax-equivalent basis assuming a tax rate of 35 percent.
(2) Maturities for mortgage-backed securities are dependent upon the interest rate environment and prepayments on the underlying loans. For the purpose of this table,
the entire balance and weighted average rate is shown in one period.
The Corporation’s investment portfolio consists mainly of mortgage-backed securities which 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. The Corporation invests primarily in five and seven-year balloon mortgage-backed securities to limit interest
rate risk and promote liquidity.
29
Fulton Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table presents the approximate contractual maturity and interest rate sensitivity of certain loan types, excluding consumer
loans and leases, subject to changes in interest rates as of December 31, 2005:
One Year
or Less
One
Through
Five Years
More Than
Five Years
Total
(in thousands)
Commercial, financial and agricultural:
Floating rate ................................................ $ 491,639
224,145
Fixed rate.....................................................
Total ....................................................... $ 715,784
$ 667,365
274,652
$ 942,017
$
$
645,234
72,634
717,868
$ 1,804,238
571,431
$ 2,375,669
Real-estate – mortgage:
Floating rate ................................................ $ 516,839
305,984
Fixed rate.....................................................
Total ....................................................... $ 822,823
$ 1,375,377
887,971
$ 2,263,348
$ 1,189,013
330,481
$ 1,519,494
$ 3,081,229
1,524,436
$ 4,605,665
Real-estate – construction:
Floating rate ................................................ $ 489,646
66,163
Fixed rate.....................................................
Total ....................................................... $ 555,809
$ 140,433
31,601
$ 172,034
$
$
77,081
46,527
123,608
$ 707,160
144,291
$ 851,451
From a funding standpoint, the Corporation has been able to rely over the years on a stable base of "core" deposits. Even though the
Corporation has experienced notable changes in the composition and interest sensitivity of this deposit base, it has been able to rely on
this base to provide needed liquidity. In addition, the Corporation issues certificates of deposits in various denominations, including
jumbo time deposits, and repurchase agreements as potential sources of liquidity.
Contractual maturities of time deposits of $100,000 or more outstanding at December 31, 2005 are as follows (in thousands):
Three months or less.................................. $
Over three through six months ..................
Over six through twelve months................
Over twelve months...................................
Total ..................................................... $
179,168
153,169
188,586
228,672
749,595
Each of the Corporation's subsidiary banks is a member of the FHLB and has access to FHLB overnight and term credit facilities. At
December 31, 2005, the Corporation had $717.0 million in term advances from the FHLB with an additional $1.5 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.
30
3.93%
64,548
4.41%
275,310
7.05%
64,318
275,310
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fulton Financial Corporation
The following table provides information about the Corporation’s 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).
2006
2007
2008
2009
2010
Beyond
Total
Expected Maturity Period
Estimated
Fair Value
Fixed rate loans (1).................. $ 756,382
Average rate ........................
Floating rate loans (6) .............
Average rate ........................
1,524,818
7.41%
6.20%
$ 546,456
$ 429,512
$ 310,072
$ 201,492
$ 454,056
$ 2,697,970
$ 2,626,660
6.05%
769,190
7.10%
6.01%
6.19%
6.33%
6.03%
6.12%
588,158
504,913
412,056
1,908,322
5,707,457
5,676,553
7.11%
7.15%
6.77%
6.65%
7.01%
Fixed rate investments (2) .......
Average rate ........................
Floating rate investments (2) ...
Average rate ........................
3.82%
3.94%
-
-
314
4.09%
3.71%
2,319
4.54%
3.71%
157
4.27%
3.83%
588
5.36%
4.80%
61,170
4.40%
530,372
367,649
393,745
327,122
503,492
299,766
2,422,146
2,362,579
Other interest-earning assets....
Average rate ........................
275,310
7.05%
-
-
-
-
-
-
-
-
-
-
Total........................................ $ 3,086,882
Average rate........................
6.46%
$ 1,683,609
$ 1,413,734
$ 1,142,264
$1,117,628
$ 2,723,314
$11,167,431
$ 11,005,420
6.07%
5.83%
5.90%
5.36%
6.29%
6.11%
Fixed rate deposits (3) ............. $ 1,916,176
Average rate ........................
Floating rate deposits (4).........
Average rate ........................
1,846,132
3.31%
2.02%
Fixed rate borrowings (5) ........
Average rate ........................
Floating rate borrowings .........
Average rate ........................
623,843
3.14%
939,096
4.37%
$ 735,858
3.92%
290,231
0.89%
110,408
4.37%
$ 218,553
$
3.68%
89,483
$ 109,975
$ 274,563
$ 3,344,608
$ 3,321,800
3.95%
4.44%
4.26%
3.60%
240,226
240,226
233,311
2,615,166
5,465,292
5,465,292
0.70%
0.70%
0.66%
0.52%
1.07%
226,243
43,307
89,330
123,198
1,216,329
1,227,413
4.98%
4.77%
5.92%
-
-
-
-
-
-
-
-
5.23%
1,224
7.66%
4.07%
940,320
4.37%
940,320
Total........................................ $ 5,325,247
Average rate........................
3.03%
$ 1,136,497
$ 685,022
$ 373,016
$ 432,616
$ 3,014,151
3.19%
3.06%
1.95%
2.71%
1.06%
$ 10,966,549
2.46%
$ 10,954,825
Assumptions:
(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 and expected call on agency
and municipal securities.
(3) Amounts are based on contractual maturities of time deposits.
(4) Money market, Super NOW, NOW and savings accounts are allocated based on history of deposit flows.
(5) Amounts are based on contractual maturities of Federal Home Loan Bank advances, adjusted for possible calls.
(6) Floating rate loans include adjustable rate commercial mortgages.
The preceding table and discussion addressed the liquidity implications of interest rate risk and focused on expected cash flows from
financial instruments. Expected maturities, however, do not necessarily reflect the net interest income impact of interest rate changes.
Certain financial instruments, such as adjustable rate loans, have repricing periods that differ from expected cash flows. Fair market
value adjustments related to acquisitions are not included in the preceding table.
In addition to the interest rate sensitive instruments included in the preceding table, the Corporation also had interest rate swaps with a
notional amount of $280 million as of December 31, 2005. These swaps were used to hedge certain long-term fixed rate certificates of
deposit. The terms of the certificates of deposit and the interest rate swaps mirror each other and were committed to simultaneously.
Under the terms of the agreements, the Corporation is the fixed rate receiver and the floating rate payer (generally tied to the three
month London Interbank Offering Rate, or LIBOR, a common index used for setting rates between financial institutions). The
31
Fulton Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
combination of the interest rate swaps and the issuance of the certificates of deposit generates long-term floating rate funding for the
Corporation. As of December 31, 2005, the Corporation’s weighted average receive and pay rates were 4.19% and 4.34%,
respectively.
The Corporation entered into a forward-starting interest rate swap with a notional amount of $150 million in October 2005 in
anticipation of the January 2006 issuance of trust preferred securities. This was accounted for as a cash flow hedge as it hedges the
variability of interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. The total amount
paid in January 2006 as settlement of the forward-starting interest rate swap was $5.5 million.
The Corporation uses three complementary methods to measure and manage interest rate risk. They are static gap analysis, simulation
of earnings, and estimates of economic value of equity.
Static gap provides a measurement of repricing risk in the Corporation’s balance sheet as of a point in time. This measurement is
accomplished through stratification of the Corporation’s assets and liabilities into repricing periods. The sum of assets and liabilities
in each of these periods are compared for mismatches within that maturity segment. Core deposits having non-contractual maturities
are placed into repricing periods based upon historical balance performance. Repricing for mortgage loans and for mortgage-backed
securities includes the effect of expected cash flows. Estimated prepayment effects are applied to these balances based upon industry
projections for prepayment speeds. The Corporation’s policy limits the cumulative six-month gap to plus or minus 15% of total
earning assets. The cumulative six-month gap as of December 31, 2005 was negative 1.18%. The cumulative six-month ratio of rate
sensitive assets to rate sensitive liabilities (RSA/RSL) as of December 31, 2005 was 0.97. The following is a summary of the interest
sensitivity gaps for six and twelve month intervals as of December 31, 2005:
Six Months
Twelve
Months
Cumulative RSA/RSL...........
0.97
0.95
Cumulative GAP (% of
earning assets).......................
(1.18)%
(2.69)%
Simulation of net interest income is performed for the next twelve-month period. A variety of interest rate scenarios are used to
measure the effects of sudden and gradual movements upward and downward in the yield curve. These results are compared to the
results obtained in a flat or unchanged interest rate scenario. Simulation of earnings is used primarily to measure the Corporation’s
short-term earnings exposure to rate movements. The Corporation’s policy limits the potential exposure of net interest income to 10%
of the base case net interest income for every 100 basis point “shock” in interest rates. A “shock” is an immediate upward or
downward movement of short-term interest rates with changes across the yield curve based upon industry projections. The following
table summarizes the expected impact of interest rate shocks on net interest income:
Annual change
in net interest
income
+ $11.0 million
+ $7.5 million
+ $3.9 million
- $10.6 million
- $21.6 million
- $39.1 million
Rate Shock
+300 bp
+200 bp
+100 bp
-100 bp
-200 bp
-300 bp
% Change
+2.6%
+1.8%
+0.9%
-2.6%
-5.2%
-9.4%
Economic value of equity estimates the discounted present value of asset cash flows and liability cash flows. Discount rates are based
upon market prices for like assets and liabilities. Upward and downward shocks of interest rates are used to determine the
comparative effect of such interest rate movements relative to the unchanged environment. This measurement tool is used primarily to
evaluate the longer-term repricing risks and options in the Corporation’s balance sheet. A policy limit of 10% of economic equity may
32
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fulton Financial Corporation
be at risk for every 100 basis point “shock” movement in interest rates. The following table summarizes the expected impact of
interest rate shocks on economic value of equity:
Change in
economic value
of equity
+ $18.5 million
+ $14.5 million
+ $7.7 million
- $29.3 million
- $88.5 million
- $174.4 million
Rate Shock
+300 bp
+200 bp
+100 bp
-100 bp
-200 bp
-300 bp
% Change
+1.1%
+0.9%
+0.5%
-1.8%
-5.5%
-10.8%
As with any modeling system, the results of the static gap and simulation of net interest income and economic value of equity are a
function of the assumptions and projections built into the model. The actual behavior of the financial instruments could differ from
these assumptions and projections.
Common Stock
As of December 31, 2005, the Corporation had 157.0 million shares of $2.50 par value common stock outstanding held by 51,000
holders of record. The common stock of the Corporation is traded on the national market system of the National Association of
Securities Dealers Automated Quotation System (NASDAQ) under the symbol FULT.
The following table presents the quarterly high and low prices of the Corporation's common stock and per-share cash dividends
declared for each of the quarterly periods in 2005 and 2004. Per-share amounts have been retroactively adjusted to reflect the effect of
stock dividends and splits.
Price Range
High
Low
Per-Share
Dividend
2005
First Quarter ............ $ 18.82
18.00
Second Quarter ........
18.90
Third Quarter ..........
17.75
Fourth Quarter ........
2004
First Quarter............... $ 17.36
17.31
Second Quarter ..........
17.52
Third Quarter .............
18.88
Fourth Quarter ...........
$ 16.80
16.46
16.20
15.61
$ 15.89
15.31
16.00
16.84
$
$
0.132
0.145
0.145
0.145
0.122
0.132
0.132
0.132
33
Fulton Financial Corporation
(This page intentionally left blank)
34
Fulton Financial Corporation
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per-share data)
Assets
Cash and due from banks ................................................................................................................. $
Interest-bearing deposits with other banks .......................................................................................
Federal funds sold .............................................................................................................................
Loans held for sale ............................................................................................................................
Investment securities:
Held to maturity (estimated fair value of $18,317 in 2005 and $25,413 in 2004) ......................
Available for sale .........................................................................................................................
Loans, net of unearned income .........................................................................................................
Less: Allowance for loan losses .................................................................................................
Net Loans .................................................................................................................
Premises and equipment ...................................................................................................................
Accrued interest receivable ..............................................................................................................
Goodwill ...........................................................................................................................................
Intangible assets ................................................................................................................................
Other assets .......................................................................................................................................
December 31
2005
368,043
31,404
528
243,378
18,258
2,543,887
8,424,728
(92,847)
8,331,881
170,254
53,261
418,735
29,687
192,239
$
2004
278,065
4,688
32,000
209,504
25,001
2,424,858
7,533,915
(89,627)
7,444,288
146,911
40,633
364,019
25,303
164,878
Total Assets .............................................................................................................. $ 12,401,555
$ 11,160,148
Liabilities
Deposits:
Noninterest-bearing ..................................................................................................................... $ 1,672,637
Interest-bearing ............................................................................................................................
7,132,202
Total Deposits ..........................................................................................................
8,804,839
$ 1,507,799
6,387,725
7,895,524
Short-term borrowings:
Federal funds purchased ...............................................................................................................
Other short-term borrowings ........................................................................................................
Total Short-Term Borrowings .................................................................................
939,096
359,866
1,298,962
Accrued interest payable ..................................................................................................................
Other liabilities .................................................................................................................................
Federal Home Loan Bank advances and long-term debt...................................................................
Total Liabilities ........................................................................................................
38,604
115,834
860,345
11,118,584
Shareholders' Equity
Common stock, $2.50 par value, 600 million shares authorized, 172.3 million shares issued
in 2005 and 167.8 million shares issued in 2004..........................................................................
Additional paid-in capital .................................................................................................................
Retained earnings .............................................................................................................................
Accumulated other comprehensive loss ............................................................................................
Treasury stock (15.3 million shares in 2005 and 10.7 million shares in 2004), at cost ....................
Total Shareholders' Equity ......................................................................................
430,827
996,708
138,529
(42,285)
(240,808)
1,282,971
676,922
517,602
1,194,524
27,279
114,498
684,236
9,916,061
335,604
1,018,403
60,924
(10,133)
(160,711)
1,244,087
Total Liabilities and Shareholders' Equity .............................................................. $ 12,401,555
$ 11,160,148
See Notes to Consolidated Financial Statements
35
Fulton Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per-share data)
Interest Income
Loans, including fees ..................................................................................... $
Investment securities:
Taxable .....................................................................................................
Tax-exempt ...............................................................................................
Dividends ..................................................................................................
Loans held for sale ........................................................................................
Other interest income ....................................................................................
Total Interest Income ...........................................................
Interest Expense
Deposits .........................................................................................................
Short-term borrowings ...................................................................................
Long-term debt ..............................................................................................
Total Interest Expense ..........................................................
Net Interest Income ..............................................................
Provision for Loan Losses ...........................................................................
Net Interest Income After
75,150
12,114
4,564
14,940
1,586
625,797
140,774
34,414
38,031
213,219
412,578
3,120
Provision for Loan Losses .............................................
409,458
Other Income
Investment management and trust services ....................................................
Service charges on deposit accounts .............................................................
Other service charges and fees ......................................................................
Gain on sale of mortgage loans ......................................................................
Investment securities gains ............................................................................
Other ..............................................................................................................
Total Other Income ...............................................................
Other Expenses
Salaries and employee benefits .....................................................................
Net occupancy expense .................................................................................
Equipment expense ........................................................................................
Data processing .............................................................................................
Advertising .....................................................................................................
Intangible amortization...................................................................................
Other ..............................................................................................................
Total Other Expenses ...........................................................
Income Before Income Taxes ...............................................
Income Taxes ...............................................................................................
35,669
40,198
24,200
25,468
6,625
12,108
144,268
181,889
29,275
11,938
12,395
8,823
5,311
66,660
316,291
237,435
71,361
2005
Year Ended December 31
2004
2003
517,443
$
394,765
$
340,375
76,792
9,553
4,023
8,407
103
493,643
89,779
15,182
31,033
135,994
357,649
4,717
352,932
34,817
39,451
20,494
19,262
17,712
7,128
138,864
166,026
23,813
10,769
11,430
6,943
4,726
53,808
277,515
214,281
64,673
77,450
10,436
4,076
2,953
241
435,531
94,198
7,373
29,523
131,094
304,437
9,705
294,732
33,898
38,500
18,860
18,965
19,853
4,294
134,370
138,094
19,896
10,505
11,532
6,039
2,059
45,526
233,651
195,451
59,084
Net Income ............................................................................ $
166,074
$
149,608
$
136,367
Per-Share Data:
Net Income (Basic)......................................................................................... $
Net Income (Diluted)......................................................................................
Cash Dividends...............................................................................................
1.06
1.05
0.567
$
1.00
0.99
0.518
$
0.97
0.96
0.475
See Notes to Consolidated Financial Statements
36
Fulton Financial Corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Number of
Shares
Outstanding
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
(dollars in thousands)
Balance at January 1, 2003 ......................................................
139,338,000
$
259,943
$
493,538
$
127,128
$
34,801
$
(50,531)
$
864,879
Comprehensive Income:
Net Income................................................................
Unrealized loss on securities
(net of $5.2 million tax effect)..............................
Less - reclassification adjustment for
gains included in net income (net of
$6.9 million tax expense).....................................
Total comprehensive income...............................
Stock dividend - 5%..........................................................
Stock issued, including related tax benefits........................
Stock-based compensation awards.....................................
Stock issued for acquisition of
Premier Bancorp, Inc..................................................
Acquisition of treasury stock.............................................
Cash dividends - $0.475 per share......................................
136,367
(9,630)
(12,904)
707,000
6,058,000
(4,018,000)
12,998
(92,526)
79,491
(3,605)
2,092
11,539
76,639
(66,782)
9,458
(59,699)
136,367
(9,630)
(12,904)
113,833
(37)
5,853
2,092
88,178
(59,699)
(66,782)
Balance at December 31, 2003.................................................
142,085,000
$
284,480
$
648,155
$
104,187
$
12,267
$
(100,772)
$
948,317
Comprehensive Income:
Net Income................................................................
Unrealized loss on securities
(net of $5.6 million tax effect)..............................
Less - reclassification adjustment for
gains included in net income (net of
$6.2 million tax expense).....................................
Minimum pension liability adjustment
(net of $300,000 tax effect).................................
Total comprehensive income...............................
Stock dividend - 5%..........................................................
Stock issued, including related tax benefits........................
Stock-based compensation awards.....................................
Stock issued for acquisition of
149,608
(10,329)
(11,513)
(558)
1,310,000
15,278
(115,615)
100,247
(9,141)
3,900
Resource Bankshares Corporation..............................
11,287,000
21,498
164,365
Stock issued for acquisition of
First Washington FinancialCorp..................................
Acquisition of treasury stock.............................................
Cash dividends - $0.518 per share......................................
7,174,000
(4,706,000)
14,348
110,877
(77,256)
149,608
(10,329)
(11,513)
(558)
127,208
(90)
9,886
3,900
185,863
125,225
(78,966)
(77,256)
19,027
(78,966)
Balance at December 31, 2004.................................................
157,150,000
$
335,604
$
1,018,403
$
60,924
$
(10,133)
$
(160,711)
$
1,244,087
Comprehensive Income:
Net Income................................................................
Unrealized loss on securities
(net of $14.1 million tax effect)............................
Unrealized loss on derivative financial
instruments (net of $1.2 million tax
effect)..................................................................
Less - reclassification adjustment for
gains included in net income (net of
$2.3 million tax expense).....................................
Minimum pension liability adjustment
(net of $300,000 tax effect).................................
Total comprehensive income.........................
5-for-4 stock split paid in the form of a
25 % stock dividend............................................
Stock issued, including related tax benefits........................
Stock-based compensation awards.....................................
Stock issued for acquisition of
SVB Financial Services, Inc........................................
Acquisition of treasury stock.............................................
Cash dividends - $0.567 per share......................................
(26,219)
(2,185)
(4,306)
558
166,074
(88,469)
5,071
(85,168)
166,074
(26,219)
(2,185)
(4,306)
558
133,922
(68)
11,059
1,041
66,567
(85,168)
(88,469)
1,120,000
3,747,000
(5,000,000)
84,046
1,809
(84,114)
4,179
1,041
9,368
57,199
Balance at December 31, 2005.................................................
157,017,000
$
430,827
$
996,708
$
138,529
$
(42,285)
$
(240,808)
$
1,282,971
See Notes to Consolidated Financial Statements
37
Fulton Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ...................................................................................................................
$
166,074
$
149,608
$
136,367
Year Ended December 31
2004
2005
2003
Adjustments to reconcile net income to net cash provided by
Operating Activities:
Provision for loan losses ........................................................................................
Depreciation and amortization of premises and equipment ...................................
Net amortization of investment security premiums ................................................
Deferred income tax expense..................................................................................
Gain on sale of investment securities......................................................................
Gain on sale of loans...............................................................................................
Proceeds from sales of loans held for sale..............................................................
Originations of loans held for sale..........................................................................
Amortization of intangible assets ..........................................................................
Stock-based compensation expense........................................................................
(Increase) decrease in accrued interest receivable ..................................................
(Increase) decrease in other assets .........................................................................
Increase (decrease) in accrued interest payable ......................................................
(Decrease) increase in other liabilities ...................................................................
Total adjustments ............................................................................................
Net cash provided by operating activities ......................................................
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale ...............................................
Proceeds from maturities of securities held to maturity .........................................
Proceeds from maturities of securities available for sale .......................................
Purchase of securities held to maturity ..................................................................
Purchase of securities available for sale .................................................................
Decrease (increase) in short-term investments .......................................................
Net increase in loans ..............................................................................................
Net cash (paid for) received from acquisitions ......................................................
Net purchase of premises and equipment ...............................................................
Net cash (used in) provided by investing activities ........................................
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits ........................................................
Net increase (decrease) in time deposits ................................................................
Addition to long-term debt ....................................................................................
Repayment of long-term debt .................................................................................
Decrease (increase) in short-term borrowings ........................................................
Dividends paid .......................................................................................................
Net proceeds from issuance of common stock .......................................................
Acquisition of treasury stock .................................................................................
Net cash provided by (used in) financing activities ........................................
3,120
14,338
5,158
990
(6,625)
(25,468)
2,307,004
(2,315,410)
5,311
1,041
(10,501)
(1,530)
11,008
(8,019)
(19,583)
146,491
143,806
10,846
666,060
(4,403)
(861,897)
78,265
(589,053)
(3,791)
(28,336)
(588,503)
35,153
400,672
319,606
(168,207)
104,438
(85,495)
10,991
(85,168)
531,990
4,717
12,409
9,906
816
(17,712)
(19,262)
1,475,000
(1,456,465)
4,726
3,900
22
6,895
(759)
3,089
27,282
176,890
235,332
8,870
816,834
(11,402)
(269,776)
(9,188)
(577,403)
7,810
(16,161)
184,916
293,331
(174,453)
45,000
(63,509)
(338,845)
(74,802)
7,537
(78,966)
(384,707)
9,705
12,379
19,243
4,465
(19,853)
(18,965)
871,447
(815,291)
2,059
2,092
11,333
(14,595)
(6,136)
(7,370)
50,513
186,880
521,520
18,146
1,543,992
(8,514)
(2,445,592)
19,248
(485,332)
17,222
(4,730)
(824,040)
347,665
(295,760)
90,000
(157,360)
757,964
(64,628)
5,087
(59,699)
623,269
Net Increase (Decrease) in Cash and Due From Banks ............................................
Cash and Due From Banks at Beginning of Year .....................................................
Cash and Due From Banks at End of Year ...............................................................
89,978
278,065
368,043
$
(22,901)
300,966
278,065
$
(13,891)
314,857
300,966
$
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest ...................................................................................................................
Income taxes ..........................................................................................................
$
202,211
60,539
$
136,753
54,457
$
137,230
48,924
See Notes to Consolidated Financial Statements
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fulton Financial Corporation
NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: Fulton Financial Corporation (Parent Company) is a multi-bank financial holding company which provides a full range of
banking and financial services to businesses and consumers through its wholly owned banking subsidiaries: Fulton Bank, Lebanon
Valley Farmers Bank, Swineford National Bank, Lafayette Ambassador Bank, FNB Bank N.A., Hagerstown Trust, Delaware
National Bank, The Bank, The Peoples Bank of Elkton, Skylands Community Bank, Premier Bank, Resource Bank, First Washington
State Bank and Somerset Valley 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 other non-bank subsidiaries: Fulton Financial
Realty Company, Fulton Reinsurance Company, LTD, Central Pennsylvania Financial Corp., FFC Management, Inc. and FFC Penn
Square, Inc. Collectively, the Parent Company and its subsidiaries are referred to as the Corporation.
The Corporation's primary sources of revenue are interest income on loans and investment securities and fee income on its products
and services. Its expenses consist of interest expense on deposits and borrowed funds, provision for loan losses, other operating
expenses and income taxes. The Corporation’s primary competition is other financial services providers operating in its region.
Competitors also include financial services providers located outside the Corporation’s geographical market as a result of the growth
in electronic delivery systems. The Corporation is subject to the regulations of certain Federal and state agencies and undergoes
periodic examinations by such regulatory authorities.
The Corporation offers, through its banking subsidiaries, a full range of retail and commercial banking services throughout central
and eastern Pennsylvania, Maryland, Delaware, New Jersey and Virginia. Industry diversity is the key to the economic well being of
these markets and the Corporation is not dependent upon any single customer or industry.
Basis of Financial Statement Presentation: The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States and include the accounts of the Parent Company and all wholly owned
subsidiaries. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in
accordance with accounting principles generally accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of
the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates.
Investments: Debt securities are classified as held to maturity at the time of purchase when the Corporation has both the intent and
ability to hold these investments until they mature. Such debt securities are carried at cost, adjusted for amortization of premiums and
accretion of discounts using the effective yield method. The Corporation does not engage in trading activities, however, since the
investment portfolio serves as a source of liquidity, most debt securities and all marketable equity securities are classified as available
for sale. Securities available for sale are carried at estimated fair value with the related unrealized holding gains and losses reported in
shareholders' equity as a component of other comprehensive income, net of tax. Realized security gains and losses are computed using
the specific identification method and are recorded on a trade date basis. Securities are evaluated periodically to determine whether a
decline in their value is other than temporary. Declines in value that are determined to be other than temporary are recorded as
realized losses.
Loans and Revenue Recognition: Loan and lease financing receivables are stated at their principal amount outstanding, except for
loans held for sale which are carried at the lower of aggregate cost or market value. Interest income on loans is accrued as earned.
Unearned income on lease financing receivables is recognized on a basis which approximates the effective yield method. Premiums
and discounts on purchased loans are amortized as an adjustment to interest income using the effective yield method.
Accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal or interest, except for
adequately collateralized residential mortgage loans. When interest accruals are discontinued, unpaid interest credited to income is
reversed. Non-accrual loans are restored to accrual status when all delinquent principal and interest become current or the loan is
considered secured and in the process of collection.
Derivative Financial Instruments: As of December 31, 2005, interest rate swaps with a notional amount of $280 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 mirror
39
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
each other and were committed to simultaneously. Under the terms of the swap agreements, the Corporation is the fixed rate receiver
and the floating rate payer (generally tied to the three month London Interbank Offering Rate, or LIBOR, a common index used for
setting rates between financial institutions). The interest rate swaps are classified as fair value hedges and both the interest rate swaps
and the certificates of deposit are recorded at fair value. Changes in the fair values during the period are recorded in interest expense.
For interest rate swaps accounted for as a fair value hedge, ineffectiveness is the difference between the changes in the fair value of
the interest rate swap and the hedged item, in this case certificates of deposit. The Corporation’s analysis of hedge effectiveness
indicated they were 97.1% effective as of December 31, 2005. As a result, a $110,000 charge to expense was recorded for the year
ended December 31, 2005, compared to a $14,000 favorable adjustment to income for the year ended December 31, 2004.
The Corporation entered into a forward-starting interest rate swap with a notional amount of $150 million in October 2005 in
anticipation of the issuance of $150 million of trust preferred securities in January 2006. This was accounted for as a cash flow hedge
as it hedges the variability of interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt.
The Corporation’s analysis indicated the hedge was effective as of December 31, 2005. Therefore, during the year ended December
31, 2005, the Corporation recorded a $2.2 million other comprehensive loss (net of $1.2 million tax effect) to recognize the fair value
change of this derivative. The Corporation settled this derivative in January 2006 for a total of $5.5 million. The total amount
recorded to other comprehensive loss will be amortized to interest expense over the life of the related securities using the effective
interest method. The total amount of net losses in accumulated other comprehensive income that will be reclassified into earnings in
2006 is expected to be approximately $170,000.
Loan Origination Fees and Costs: Loan origination fees and the related direct origination costs are offset and the net amount is
deferred and amortized over the life of the loan using the effective interest method as an adjustment to interest income. For mortgage
loans sold, the net amount is included in gain or loss upon the sale of the related mortgage loan.
Allowance for Loan Losses: The allowance for loan losses is increased by charges to expense and decreased by charge-offs, net of
recoveries. Management's periodic evaluation of the adequacy of the allowance for loan losses is based on the Corporation's past loan
loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay, the
estimated fair value of the underlying collateral, and current economic conditions. Management believes that the allowance for loan
losses is adequate, however, future changes to the allowance may be necessary based on changes in any of these factors.
The allowance for loan losses consists of two components – specific allowances allocated to individually impaired loans, as defined
by the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards No. 114, “Accounting by
Creditors for Impairment of a Loan” (Statement 114), and allowances calculated for pools of loans under Statement of Financial
Accounting Standards No. 5, “Accounting for Contingencies” (Statement 5).
Commercial loans and commercial mortgages are reviewed for impairment under Statement 114 if they are both greater than $100,000 and
are rated less than “satisfactory” based upon the Corporation’s internal credit-rating process. A satisfactory loan does not present more than
a normal credit risk based on the strength of the borrower’s management, financial condition and trends, and the type and sufficiency of
underlying collateral. It is expected that the borrower will be able to satisfy the terms of the loan agreement.
A loan is considered to be impaired when, based on current information and events, it is probable that the Corporation will be unable
to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present
value of expected future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price or fair value
of the collateral if the loan is collateral dependent. An allowance is allocated to an impaired loan if the carrying value exceeds the
calculated estimated fair value.
All loans not reviewed for impairment are evaluated under Statement 5. In addition to commercial loans and mortgages not meeting
the impairment evaluation criteria discussed above, these include residential mortgages, consumer loans, installment loans and lease
receivables. These loans are segmented into groups with similar characteristics and an allowance for loan losses is allocated to each
segment based on quantitative factors such as recent loss history and qualitative factors such as economic conditions and trends.
Loans and lease financing receivables deemed to be a loss are written off through a charge against the allowance for loan losses.
Consumer loans are generally charged off when they become 120 days past due if they are not adequately secured by real estate. All
other loans are evaluated for possible charge-off when they reach 90 days past due. Such loans or portions thereof are charged-off
40
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
when it is probable that the balance will not be collected, based on the ability of the borrower to pay and the value of the underlying
collateral. Recoveries of loans previously charged off are recorded as an increase to the allowance for loan losses. Past due status is
determined based on contractual due dates for loan payments.
Lease financing receivables include both open and closed end leases for the purchase of vehicles and equipment. Residual values are
set at the inception of the lease and are reviewed periodically for impairment. If the impairment is considered to be other-than-
temporary, the resulting reduction in the net investment in the lease is recognized as a loss in the period.
Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision
for depreciation and amortization is generally computed using the straight-line method over the estimated useful lives of the related
assets, which are a maximum of 50 years for buildings and improvements and eight years for furniture and equipment. Leasehold
improvements are amortized over the shorter of 15 years or the noncancelable lease term. Interest costs incurred during the
construction of major bank premises are capitalized.
Other Real Estate Owned: Assets acquired in settlement of mortgage loan indebtedness are recorded as other real estate owned and
are included in other assets initially at the lower of the estimated fair value of the asset less estimated selling costs or the carrying
amount of the loan. Costs to maintain the assets and subsequent gains and losses on sales are included in other income and other
expense.
Mortgage Servicing Rights: The estimated fair value of mortgage servicing rights (MSR’s) related to loans sold is recorded as an
asset upon the sale of such loans. MSR’s are amortized as a reduction to servicing income over the estimated lives of the underlying
loans. In addition, MSR’s are evaluated quarterly for impairment based on prepayment experience and, if necessary, additional
amortization is recorded.
Income Taxes: The provision for income taxes is based upon income before income taxes, adjusted primarily for the effect of tax-
exempt income and net credits received from investments in low income housing partnerships. Certain items of income and expense
are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are
recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the
difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate.
Deferred income tax expenses or benefits are based on the changes in the deferred tax asset or liability from period to period.
Stock-Based Compensation: The Corporation accounts for its stock-based compensation awards in accordance with Statement of
Financial Accounting Standards No. 123R, “Share-Based Payment” (Statement 123R). Statement 123R requires public companies to
recognize compensation expense related to stock-based compensation awards in their income statements.
Net Income Per Share: The Corporation’s basic net income per share is calculated as net income divided by the weighted average
number of shares outstanding. For diluted net income per share, net income is divided by the weighted average number of shares
outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the
treasury stock method. The Corporation’s common stock equivalents consist of outstanding stock options. Excluded from the
calculation were anti-dilutive options totaling 1.1 million in 2005.
A reconciliation of the weighted average shares outstanding used to calculate basic net income per share and diluted net income per
share follows. There were no adjustments to net income to arrive at diluted net income per share.
Weighted average shares outstanding (basic) .............................
Impact of common stock equivalents ..........................................
Weighted average shares outstanding (diluted)...........................
156,413
1,930
158,343
149,294
1,614
150,908
140,335
1,176
141,511
2005
2004
(in thousands)
2003
41
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 fourteen separate banks, each engages in similar
activities, provides similar products and services, and operates in the same general geographical area. The Corporation’s non-banking
activities are immaterial and, therefore, separate information has not been disclosed.
Financial Guarantees: Financial guarantees, which consist primarily of standby and commercial letters of credit, are accounted for
by recognizing a liability equal to the fair value of the guarantees and crediting the liability to income over the term of the guarantee.
Fair value is estimated using the fees currently charged to enter into similar agreements with similar terms.
Business Combinations and Intangible Assets: The Corporation accounts for its acquisitions using the purchase accounting method
as required by Statement of Financial Accounting Standards No. 141, “Business Combinations”. Purchase accounting requires the
total purchase price to be allocated to the estimated fair values of assets and liabilities acquired, including certain intangible assets that
must be recognized. Typically, this results in a residual amount in excess of the net fair values, which is recorded as goodwill.
As required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (Statement 142),
goodwill is not amortized to expense, but is tested for impairment at least annually. Write-downs of the balance, if necessary as a
result of the impairment test, are to be charged to the results of operations in the period in which the impairment is determined. The
Corporation performed its annual tests of goodwill impairment on October 31 of each year. Based on the results of these tests the
Corporation concluded that there was no impairment and no write-downs were recorded. If certain events occur which might indicate
goodwill has been impaired, the goodwill is tested when such events occur.
As required by Statement of Financial Accounting Standards No. 147, “Acquisitions of Certain Financial Institutions” (Statement
147) the excess purchase price recorded in qualifying branch acquisitions are treated in the same manner as Statement 142 goodwill.
Variable Interest Entities: FASB Interpretation No. 46, “Consolidation of Variable Interest Entities – An Interpretation of ARB No.
51” (FIN 46), provides guidance on when to consolidate certain Variable Interest Entities (VIE’s) in the financial statements of the
Corporation. VIE’s are entities in which equity investors do not have a controlling financial interest or do not have sufficient equity at
risk for the entity to finance activities without additional financial support from other parties. Under FIN 46, a company must
consolidate a VIE if the company has a variable interest that will absorb a majority of the VIE’s losses, if they occur, and/or receive a
majority of the VIE’s residual returns, if they occur. For the Corporation, FIN 46 affects corporation-obligated mandatorily
redeemable capital securities issued by subsidiary trusts (Subsidiary Trusts) and its investments in low and moderate-income housing
partnerships (LIH investments).
The provisions of FIN 46 related to Subsidiary Trusts, as interpreted by the Securities and Exchange Commission, disallow
consolidation of Subsidiary Trusts in the financial statements of the Corporation. As a result, securities that were issued by the trusts
(Trust Preferred Securities) are not included in the Corporation’s consolidated balance sheets. The junior subordinated debentures
issued by the Parent Company to the Subsidiary Trusts remain in long-term debt (See Note I, “Short Term Borrowings and Long-
Term Debt”). The adoption of FIN 46 with respect to Subsidiary Trusts had no impact on net income or net income per share as the
terms of the junior subordinated debentures mirror the terms of the Trust Preferred Securities.
Current regulatory capital rules allow Trust Preferred Securities to be included as a component of regulatory capital. This treatment
has continued despite the adoption of FIN 46. If banking regulators make a determination that Trust Preferred Securities can no longer
be considered in regulatory capital, the securities become callable and the Corporation may redeem them.
LIH Investments are amortized under the effective interest method over the life of the Federal income tax credits generated as a result
of such investments, generally ten years. At December 31, 2005 and 2004, the Corporation’s LIH Investments totaled $44.2 million
and $52.0 million, respectively. The net income tax benefit associated with these investments was $4.9 million, $4.5 million, and $4.0
million in 2005, 2004 and 2003, respectively. None of the Corporation’s LIH Investments met the consolidation criteria of FIN 46 as
of December 31, 2005 or 2004.
Accounting for Certain Loans or Debt Securities Acquired in a Transfer: In December 2003, the Accounting Standards
Executive Committee issued Statement of Position 03-3 (SOP 03-3), “Accounting for Certain Loans or Debt Securities Acquired in a
42
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transfer”. SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected
from an investor’s initial investment in loans or debt securities acquired in a transfer, including business combinations, if those
differences are attributable, at least in part, to credit quality.
SOP 03-3 became effective for the Corporation on January 1, 2005 and was applicable to the July 2005 acquisition of SVB Financial
Services, Inc. Few of the loans acquired in this transaction met the scope of SOP 03-3 and, as such, there was no material impact on
the consolidated financial statements.
Other-Than-Temporary Impairment: In 2004, the Emerging Issues Task Force (EITF) released EITF Issue 03-01, “The Meaning
of Other-Than-Temporary Impairment and its Application to Certain Investments” (EITF 03-01), which provides guidance for
evaluating whether an investment is other-than-temporarily impaired and requires certain disclosures with respect to these
investments.
In June 2005, the FASB voted to nullify certain provisions of EITF 03-1 which addressed the evaluation of an impairment to
determine whether it was other-than-temporary. In general, these provisions required companies to declare their ability and intent to
hold other-than-temporarily impaired investments until they recovered their losses. If a company were unable to make this
declaration, write-downs of investment securities through losses charged to the income statement would be required. The effective
date of these provisions was originally delayed in September 2004, due to industry concerns about the potential impact of this
proposed accounting.
Adoption of the surviving provisions of EITF 03-1 did not have a material impact on the Corporation’s financial condition or results
of operations. The Corporation continues to apply the provisions of existing authoritative literature in evaluating its investments for
other-than-temporary impairment.
Loan Products That May Give Rise to a Concentration of Credit Risk: In December 2005, the FASB issued Staff Position No.
SOP 94-6-1, “Terms of Loan Products That May Give Rise to a Concentration of Credit Risk” (SOP 94-6-1), which requires separate
fair value disclosures for loan products that increase an entity’s exposure to credit risk. Loan products that result in an increased
exposure risk include, but are not limited to, products with characteristics such as: borrowers subject to significant payment increases,
loans with terms that permit negative amortization, or loans with high loan-to-value ratios. SOP 94-6-1 became effective for the
Corporation on December 31, 2005, and did not have a material impact on the Corporation’s consolidated financial statements.
Reclassifications and Restatements: Certain amounts in the 2004 and 2003 consolidated financial statements and notes have been
reclassified to conform to the 2005 presentation.
All share and per-share data have been restated to reflect the impact of the 5-for-4 stock split paid in the form of a 25% stock dividend
in June 2005. As a result of adopting Statement 123R in 2005 using the “modified retrospective application”, prior period financial
information has been restated. See Note M, “Stock-Based Compensation Plans and Shareholders’ Equity” for more information.
NOTE B – RESTRICTIONS ON CASH AND DUE FROM BANKS
The Corporation's subsidiary banks are required to maintain reserves, in the form of cash and balances with the Federal Reserve Bank,
against their deposit liabilities. The average amount of such reserves during 2005 and 2004 was approximately $106.9 million and
$100.8 million, respectively.
43
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C – INVESTMENT SECURITIES
The following tables present the amortized cost and estimated fair values of investment securities as of December 31:
2005 Held to Maturity
Amortized
Cost
Gross
Gross
Unrealized Unrealized
Gains
Losses
Estimated
Fair
Value
(in thousands)
U.S. Government sponsored
agency securities ............................ $
State and municipal securities .............
Mortgage-backed securities ................
$
7,512
5,877
4,869
18,258
2005 Available for Sale
137,462
35,124
Equity securities .................................. $
U.S. Government securities.................
U.S. Government sponsored
agency securities ............................
206,340
State and municipal securities .............
444,034
Corporate debt securities.....................
64,478
Mortgage-backed securities ................ 1,718,237
$ 2,605,675
$
$
$
$
- $
19
143
162 $
(103) $
-
-
(103) $
7,409
5,896
5,012
18,317
2,029 $
-
(3,959) $
(6)
135,532
35,118
92
1,044
1,860
928
5,953 $
205,182
(1,250)
438,987
(6,091)
65,834
(504)
1,663,234
(55,931)
(67,741) $ 2,543,887
2004 Held to Maturity
U.S. Government sponsored
agency securities ............................ $
State and municipal securities .............
Corporate debt securities.....................
Mortgage-backed securities ................
$
2004 Available for Sale
Equity securities ................................. $
U.S. Government securities ................
U.S. Government sponsored
agency securities............................
State and municipal securities ............
Corporate debt securities ....................
Mortgage-backed securities ................
6,903
10,658
650
6,790
25,001
$
$
78
65
1
323
467
$
(55) $
-
-
-
$
(55) $
6,926
10,723
651
7,113
25,413
163,249 $
68,497
7,822
-
$
(1,006) $ 170,065
68,449
(48)
60,332
328,726
68,215
1,750,080
$ 2,439,099 $
144
4,350
3,053
1,427
16,796
-
60,476
(621)
332,455
(141)
71,127
1,722,286
(29,221)
(31,037) $ 2,424,858
$
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated fair value of debt securities at December 31, 2005, 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.
Fulton Financial Corporation
Held to Maturity
Available for Sale
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
(in thousands)
Due in one year or less........................... $
Due from one year to five years.............
Due from five years to ten years ............
Due after ten years .................................
Mortgage-backed securities ...................
$
4,540
8,503
346
-
13,389
4,869
18,258
$
$
4,540
8,419
346
-
13,305
5,012
18,317
$ 107,387
371,204
186,879
84,506
749,976
1,718,237
$2,468,213
$ 107,291
366,733
184,825
86,272
745,121
1,663,234
$2,408,355
Gross gains totaling $5.9 million, $14.8 million and $17.5 million were realized on the sale of equity securities during 2005, 2004 and
2003, respectively. Gross losses, including losses recognized for other-than-temporary impairment as discussed below, totaling
$68,000, $149,000 and $3.5 million were realized during 2005, 2004 and 2003, respectively. Gross gains totaling $1.6 million, $3.1
million and $5.9 million were realized on the sale of available for sale debt securities during 2005, 2004 and 2003, respectively. Gross
losses totaling $811,000 were realized on the sale of available for sale debt securities during 2005.
Securities carried at $1.3 billion and $1.2 billion at December 31, 2005 and 2004, respectively, were pledged as collateral to secure
public and trust deposits and customer and brokered repurchase agreements.
The following table presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category
and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2005:
Less Than 12 months
Estimated Unrealized
Fair Value
Losses
12 Months or Longer
Total
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
(in thousands)
U.S. Government securities ................................ $ 32,659
172,338
U.S. Government sponsored agency securities...
275,519
State and municipal securities.............................
Corporate debt securities ....................................
17,083
376,984
Mortgage-backed securities ................................
874,583
Total debt securities .......................................
Equity securities..................................................
39,753
Total............................................................... $ 914,336
$
(6)
(1,250)
(4,012)
(335)
(6,681)
(12,284)
(3,281)
$ (15,565)
$
-
7,409
61,469
7,480
1,148,968
1,225,326
7,544
$ 1,232,870
$
$
-
(103)
(2,079)
(169)
(49,250)
(51,601)
(678)
32,659
179,747
336,988
24,563
1,525,952
2,099,909
47,297
$ (52,279) $ 2,147,206
$
(6)
(1,353)
(6,091)
(504)
(55,931)
(63,885)
(3,959)
$ (67,844)
Mortgage-backed securities primarily consist of five and seven-year balloon pools issued by the Federal Home Loan Mortgage
Corporation (FHLMC) and the Federal National Mortgage Association (FNMA) as well as sequential collateralized mortgage
obligations also issued by FHLMC and FNMA. The majority of the securities shown in the above table were purchased during 2003
and 2004 when mortgage rates were at historical lows. Unrealized losses on these securities at December 31, 2005 resulted from the
substantial increase in market rates over the past 18 months. Because FHLMC and FNMA guarantee the timely payment of principal,
the credit risk for these securities is minimal and, as such, no impairment write-offs were considered to be necessary. For similar
reasons, the Corporation does not consider unrealized losses associated with U.S. government sponsored equity securities or state and
municipal securities as an indication of impairment.
45
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Corporation evaluates whether unrealized losses on equity investments indicate other than temporary impairment. Based upon
this evaluation, losses of $65,000, $137,000 and $3.3 million were recognized in 2005, 2004 and 2003, respectively.
NOTE D – LOANS AND ALLOWANCE FOR LOAN LOSSES
Gross loans are summarized as follows as of December 31:
2005
2004
(in thousands)
Commercial - industrial and financial .................................................... $ 2,044,010
Commercial - agricultural.......................................................................
331,659
Real-estate - commercial mortgage ........................................................
2,831,405
Real-estate - residential mortgage and home equity...............................
1,774,260
Real-estate - construction .......................................................................
851,451
Consumer ...............................................................................................
519,094
Leasing and other ...................................................................................
79,738
8,431,617
(6,889)
$ 8,424,728
Unearned income....................................................................................
$ 1,946,962
326,176
2,461,016
1,651,321
595,567
486,877
72,795
7,540,714
(6,799)
$ 7,533,915
Changes in the allowance for loan losses were as follows for the years ended December 31:
2005
2004
(in thousands)
2003
Balance at beginning of year ........................................ $
89,627
$
77,700
$
71,920
Loans charged off.........................................................
Recoveries of loans previously charged off .................
Net loans charged off ..............................................
Provision for loan losses ..............................................
Allowance purchased ...................................................
(8,204)
5,196
(3,008)
3,120
3,108
(8,877)
4,520
(4,357)
4,717
11,567
(13,228)
3,829
(9,399)
9,705
5,474
Balance at end of year ................................................. $
92,847
$
89,627
$
77,700
The following table presents non-performing assets as of December 31:
Non-accrual loans................................................................................... $
Accruing loans greater than 90 days past due ........................................
Other real estate owned ..........................................................................
$
36,560
9,012
2,072
47,644
$
$
22,574
8,318
2,209
33,101
2005
2004
(in thousands)
Interest of approximately $3.0 million, $1.5 million and $1.8 million was not recognized as interest income due to the non-accrual
status of loans during 2005, 2004 and 2003, respectively.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fulton Financial Corporation
The recorded investment in loans that were considered to be impaired as defined by Statement 114 was $145.5 million and $130.6
million at December 31, 2005 and 2004, respectively. At December 31, 2005 and 2004, $13.2 million and $6.6 million of impaired
loans were included in non-accrual loans, respectively. At December 31, 2005 and 2004, impaired loans had related allowances for
loan losses of $49.5 million and $41.6 million, respectively. There were no impaired loans in 2005 and 2004 that did not have a
related allowance for loan losses. The average recorded investment in impaired loans during the years ended December 31, 2005,
2004 and 2003 was approximately $128.1 million, $108.0 million, and $78.4 million, respectively.
The Corporation applies all payments received on non-accruing impaired loans to principal until such time as the principal is paid off,
after which time any additional payments received are recognized as interest income. Payments received on accruing impaired loans
are applied to principal and interest according to the original terms of the loan. The Corporation recognized interest income of
approximately $7.7 million, $5.6 million and $3.9 million on impaired loans in 2005, 2004 and 2003, respectively.
The Corporation has extended credit to the officers and directors of the Corporation and to their associates. Related-party loans are
made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the normal risk of collectibility. The aggregate dollar amount of
these loans, including unadvanced commitments, was $267.2 million and $209.8 million at December 31, 2005 and 2004,
respectively. During 2005, additions totaled $74.5 million and repayments totaled $18.4 million. Somerset Valley Bank added $1.3
million to related party loans.
The total portfolio of mortgage loans serviced by the Corporation for unrelated third parties was $1.2 billion and $1.1 billion at
December 31, 2005 and 2004, respectively.
NOTE E – PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31:
2005
2004
(in thousands)
Land........................................................................................................ $
Buildings and improvements..................................................................
Furniture and equipment ........................................................................
Construction in progress.........................................................................
Less: Accumulated depreciation and amortization.................................
26,693
180,153
119,179
5,483
331,508
(161,254)
$ 170,254
$
25,253
149,700
105,406
10,967
291,326
(144,415)
$ 146,911
NOTE F – GOODWILL AND INTANGIBLE ASSETS
The following table summarizes the changes in goodwill:
2005
2004
(in thousands)
2003
Balance at beginning of year ........................................ $ 364,019
Goodwill additions .......................................................
54,716
Balance at end of year .................................................. $ 418,735
$ 127,202
236,817
$ 364,019
$
61,048
66,154
$ 127,202
See Note Q, “Mergers and Acquisitions” for information regarding goodwill acquired in 2005 and 2004.
47
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes intangible assets at December 31:
2005
Accumulated
Amortization
Gross
Net
Gross
(in thousands)
2004
Accumulated
Amortization
Amortizing:
Core deposit ........................... $
Non-compete..........................
Unidentifiable ........................
Total amortizing..................
Non-amortizing - Trade name...
$
35,824
475
8,875
45,174
1,280
46,454
$
$
(11,448)
(135)
(5,184)
(16,767)
-
$
(16,767)
$
24,376
340
3,691
28,407
1,280
29,687
$
$
27,678
475
7,706
35,859
900
36,759
$
$
(7,418)
(40)
(3,998)
(11,456)
-
$
(11,456)
$
Net
20,260
435
3,708
24,403
900
25,303
Core deposit intangible assets are amortized using an accelerated method over the estimated remaining life of the acquired core
deposits. As of December 31, 2005, these assets had a weighted average remaining life of approximately eight years. Unidentifiable
intangible assets related to branch acquisitions are amortized on a straight-line basis over ten years. Non-compete intangible assets are
being amortized on a straight-line basis over five years, which is the term of the underlying contracts. Amortization expense related to
intangible assets totaled $5.3 million, $4.7 million and $2.1 million in 2005, 2004 and 2003, respectively.
Amortization expense for the next five years is expected to be as follows (in thousands):
Year
2006 .................. $
2007 ..................
2008 ..................
2009 ..................
2010 ..................
5,692
5,115
4,276
3,790
3,215
NOTE G – MORTGAGE SERVICING RIGHTS
The following table summarizes the changes in mortgage servicing rights (MSR’s), which are included in other assets in the
consolidated balance sheets:
2005
2004
(in thousands)
2003
Balance at beginning of year................................ $
Originations of mortgage servicing rights............
Amortization expense...........................................
Balance at end of year .......................................... $
8,157
1,548
(2,190)
7,515
$
$
8,396
2,138
(2,377)
8,157
$
$
6,233
4,992
(2,829)
8,396
MSR’s represent the economic value to be derived by the Corporation based upon its existing contractual rights to service mortgage
loans that have been sold. Accordingly, to the extent mortgage loan prepayments occur the value of MSR’s can be impacted.
The Corporation estimates the fair value of its MSR’s by discounting the estimated cash flows of servicing revenue, net of costs, over
the expected life of the underlying loans at a discount rate commensurate with the risk associated with these assets. Expected life is
based on industry prepayment projections for mortgage-backed securities with rates and terms comparable to the loans underlying the
MSR’s. The estimated fair value of MSR’s was approximately $8.8 million and $8.5 million at December 31, 2005 and 2004,
respectively.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fulton Financial Corporation
Estimated MSR amortization expense for the next five years, based on balances at December 31, 2005 and the expected remaining
lives of the underlying loans follows (in thousands):
Year
2006 .................. $
2007 ..................
2008 ..................
2009 ..................
2010 ..................
1,779
1,594
1,381
1,139
864
NOTE H – DEPOSITS
Deposits consisted of the following as of December 31:
2005
2004
(in thousands)
Noninterest-bearing demand .................................................................. $ 1,672,637
Interest-bearing demand ......................................................................... 1,637,007
Savings and money market accounts .....................................................
2,125,475
Time deposits .........................................................................................
3,369,720
$ 8,804,839
$ 1,507,799
1,501,476
1,917,203
2,969,046
$ 7,895,524
Included in time deposits were certificates of deposit equal to or greater than $100,000 of $749.6 million and $536.0 million at
December 31, 2005 and 2004, respectively. The scheduled maturities of time deposits as of December 31, 2005 were as follows (in
thousands):
Year
2006 .................. $ 1,894,744
742,115
2007 ..................
227,303
2008 ..................
94,241
2009 ..................
116,806
2010 ..................
294,511
Thereafter..........
$ 3,369,720
49
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I – SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings at December 31, 2005, 2004, and 2003 and the related maximum amounts outstanding at the end of any month
in each of the three years then ended are presented below. The securities underlying the repurchase agreements remain in available for
sale investment securities.
2005
December 31
2004
2003
Maximum Outstanding
2004
2003
2005
(in thousands)
Federal funds purchased ...................................... $ 939,096
352,937
Securities sold under agreements to repurchase ..
2,000
FHLB overnight repurchase agreements .............
-
Revolving line of credit .......................................
4,929
Other ....................................................................
$ 676,922
500,206
-
11,930
5,466
$ 933,000 $ 939,096 $ 849,200
708,830
-
26,000
5,807
408,697
50,000
-
5,014
573,991
2,000
33,180
13,219
$ 933,000
429,819
50,000
-
6,387
$ 1,298,962
$ 1,194,524
$ 1,396,711
In 2004, the Corporation entered into a $50.0 million revolving line of credit agreement with an unaffiliated bank that provides for
interest to be paid on outstanding balances at the one-month London Interbank Offering Rate (LIBOR) plus 0.27%. There was no
balance outstanding on the line at December 31, 2005. The credit agreement requires the Corporation to maintain certain financial
ratios related to capital strength and earnings. The Corporation was in compliance with all required covenants under the credit
agreement as of December 31, 2005.
The following table presents information related to securities sold under agreements to repurchase:
2005
December 31
2004
(dollars in thousands)
2003
Amount outstanding at December 31 ............................ $ 352,937
Weighted average interest rate at year end ....................
Average amount outstanding during the year ................ $ 435,922
Weighted average interest rate during the year .............
2.12%
2.61%
$ 500,206
$ 408,697
1.03%
0.72%
$ 531,196
$ 351,302
0.97%
0.83%
Federal Home Loan Bank advances and long-term debt included the following as of December 31:
Federal Home Loan Bank advances ....................................................... $ 717,037
40,724
Junior subordinated deferrable interest debentures ................................
100,000
Subordinated debt...................................................................................
2,584
Other long-term debt, including unamortized issuance costs.................
$ 860,345
$ 645,461
34,022
-
4,753
$ 684,236
2005
2004
(in thousands)
Excluded from the preceding table is the Parent Company’s revolving line of credit with its subsidiary banks ($61.4 million and $70.5
million outstanding at December 31, 2005 and 2004, respectively). This line of credit is secured by equity securities and insurance
investments and bears interest at the prime rate. Although the line of credit and related interest have been eliminated in consolidation,
this borrowing arrangement is senior to the subordinated debt and the junior subordinated deferrable interest debentures.
In March 2005 the Corporation issued $100.0 million of ten-year subordinated notes, which mature April 1, 2015 and carry a fixed
rate of 5.35%. Interest is paid semi-annually in October and April of each year.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fulton Financial Corporation
The Parent Company owns all of the common stock of six Subsidiary Trusts, which have issued Trust Preferred Securities in
conjunction with the Parent Company issuing junior subordinated deferrable interest debentures to the trusts. The terms of the junior
subordinated deferrable interest debentures are the same as the terms of the Trust Preferred Securities. The Parent Company’s
obligations under the debentures constitute a full and unconditional guarantee by the Parent Company of the obligations of the trusts.
The Trust Preferred Securities are redeemable on specified dates, or earlier if the deduction of interest for Federal income taxes is
prohibited, the Trust Preferred Securities no longer qualify as Tier I regulatory capital, or if certain other contingencies arise. The
Trust Preferred Securities must be redeemed upon maturity. The following table details the terms of the debentures (dollars in
thousands):
Debentures Issued to
Premier Capital Trust ...............
PBI Capital Trust II..................
Resource Capital Trust II .........
Resource Capital Trust III........
Bald Eagle Statutory Trust I.....
Bald Eagle Statutory Trust II ...
Fixed/
Variable
Fixed
Variable
Variable
Variable
Variable
Variable
Rate at
December 31,
2005
Amount
Maturity
Callable
8.57 %
7.79 %
8.42 %
7.79 %
7.82 %
7.97 %
$
$
10,310
15,464
5,155
3,093
4,124
2,578
40,724
8/15/2028
11/7/2032
12/8/2031
11/7/2032
7/31/2031
6/26/2032
8/15/2008
11/7/2007
12/8/2006
11/7/2007
7/31/2006
6/26/2007
In January 2006, the Corporation purchased all of the common stock of a new Subsidiary Trust, Fulton Capital Trust I, which was
formed for the purpose of issuing $150.0 million of trust preferred securities at a fixed rate of 6.29% and an effective rate of
approximately 6.50% as a result of issuance costs. In connection with this transaction the Parent Company issued $154.6 million of
junior subordinated deferrable interest debentures to the trust. These debentures carry the same rate and mature on February 1, 2036.
Federal Home Loan Bank advances mature through March 2027 and carry a weighted average interest rate of 4.38%. As of December
31, 2005, the Corporation had an additional borrowing capacity of approximately $1.5 billion with the Federal Home Loan Bank.
Advances from the Federal Home Loan Bank are secured by Federal Home Loan Bank stock, qualifying residential mortgages,
investments and other assets.
The following table summarizes the scheduled maturities of Federal Home Loan Bank advances and long-term debt as of December
31, 2005 (in thousands):
Year
2006 .................. $
2007 ..................
2008 ..................
2009 ..................
2010 ..................
Thereafter..........
33,734
72,367
216,915
48,470
79,768
409,091
$ 860,345
NOTE J – REGULATORY MATTERS
Dividend and Loan Limitations
The dividends that may be paid by subsidiary banks to the Parent Company are subject to certain legal and regulatory limitations.
Under such limitations, the total amount available for payment of dividends by subsidiary banks was approximately $240 million at
December 31, 2005.
51
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under current Federal Reserve regulations, the subsidiary banks are limited in the amount they may loan to their affiliates, including
the Parent Company. Loans to a single affiliate may not exceed 10%, and the aggregate of loans to all affiliates may not exceed 20%
of each bank subsidiary's regulatory capital. At December 31, 2005, the maximum amount available for transfer from the subsidiary
banks to the Parent Company in the form of loans and dividends was approximately $320 million.
Regulatory Capital Requirements
The Corporation’s subsidiary banks are subject to various regulatory capital requirements administered by banking regulators. Failure
to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators
that, if undertaken, could have a direct material effect on the Corporation’s financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the subsidiary banks must meet specific capital guidelines that involve
quantitative measures of the subsidiary banks' assets, liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The subsidiary banks' capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the subsidiary banks to maintain minimum
amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets (as defined in the
regulations). Management believes, as of December 31, 2005, that all of its bank subsidiaries meet the capital adequacy requirements
to which they are subject.
As of December 31, 2005 and 2004, the Corporation's four significant subsidiaries, Fulton Bank, Lafayette Ambassador Bank, The
Bank and Resource Bank were well capitalized under the regulatory framework for prompt corrective action based on their capital
ratio calculations. To be categorized as well-capitalized, these banks must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the following table. There are no conditions or events since December 31, 2005 that management
believes have changed the institutions' categories.
The following tables present the total risk-based, Tier I risk-based and Tier I leverage requirements for the Corporation and its
significant subsidiaries with total assets in excess of $1.0 billion.
As of December 31, 2005
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
(dollars in thousands)
Well-Capitalized
Ratio
Amount
Total Capital (to Risk-Weighted Assets):
Corporation .................................................. $ 1,102,891
409,653
Fulton Bank..................................................
102,007
Lafayette Ambassador Bank ........................
101,532
The Bank ......................................................
105,343
Resource Bank .............................................
Tier I Capital (to Risk-Weighted Assets):
Corporation .................................................. $ 910,044
323,466
Fulton Bank..................................................
85,331
Lafayette Ambassador Bank ........................
80,820
The Bank ......................................................
86,825
Resource Bank .............................................
Tier I Capital (to Average Assets):
Corporation .................................................. $ 910,044
323,466
Fulton Bank..................................................
85,331
Lafayette Ambassador Bank ........................
80,820
The Bank ......................................................
86,825
Resource Bank .............................................
52
12.1% $ 730,115 8.0% $ 912,644
369,191
11.1
88,173
11.6
92,456
11.0
88,482
11.9
295,353 8.0
70,539 8.0
73,965 8.0
70,786 8.0
10.0%
10.0
10.0
10.0
10.0
10.0% $ 365,057 4.0% $ 547,586
221,515
52,904
55,474
53,089
147,676 4.0
35,269 4.0
36,983 4.0
35,393 4.0
8.8
9.7
8.7
9.8
7.7% $ 355,090 3.0% $ 591,817
228,462
7.1
60,821
7.0
57,676
7.0
55,194
7.9
137,077 3.0
36,492 3.0
34,606 3.0
33,116 3.0
6.0%
6.0
6.0
6.0
6.0
5.0%
5.0
5.0
5.0
5.0
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2004
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
(dollars in thousands)
Well-Capitalized
Ratio
Amount
Total Capital (to Risk-Weighted Assets):
Corporation ...................................................... $ 981,000
401,961
Fulton Bank......................................................
Lafayette Ambassador Bank ............................
95,631
89,891
The Bank ..........................................................
Resource Bank .................................................
83,274
Tier I Capital (to Risk-Weighted Assets):
Corporation ...................................................... $ 888,526
366,633
Fulton Bank......................................................
86,456
Lafayette Ambassador Bank ............................
81,252
The Bank ..........................................................
Resource Bank .................................................
75,503
Tier I Capital (to Average Assets):
Corporation ...................................................... $ 888,526
366,633
Fulton Bank......................................................
86,456
Lafayette Ambassador Bank ............................
81,252
The Bank ..........................................................
75,503
Resource Bank .................................................
NOTE K – INCOME TAXES
The components of the provision for income taxes are as follows:
11.8%
11.2
11.4
11.1
11.1
10.6%
10.2
10.3
10.0
10.0
$ 667,522 8.0%
286,697 8.0
67,124 8.0
64,969 8.0
60,241 8.0
$ 834,402
358,372
83,905
81,211
75,302
10.0%
10.0
10.0
10.0
10.0
$ 333,761 4.0%
143,349 4.0
33,562 4.0
32,485 4.0
30,121 4.0
$ 500,641
215,023
50,343
48,727
45,181
8.8%
8.4
7.4
7.7
7.7
$ 304,392 3.0%
130,290 3.0
35,166 3.0
31,762 3.0
29,304 3.0
$ 507,319
217,150
58,609
52,937
48,839
6.0%
6.0
6.0
6.0
6.0
5.0%
5.0
5.0
5.0
5.0
Current tax expense:
Federal.................................................................... $
State........................................................................
Deferred tax expense ...................................................
$
2005
Year ended December 31
2004
(in thousands)
2003
69,611
760
70,371
990
71,361
$
$
63,440
417
63,857
816
64,673
$
$
53,342
1,277
54,619
4,465
59,084
The differences between the effective income tax rate and the Federal statutory income tax rate are as follows:
Year ended December 31
2004
2003
2005
Statutory tax rate .........................................................
Effect of tax-exempt income .......................................
Effect of low income housing investments..................
State income taxes, net of Federal benefit...................
Other............................................................................
Effective income tax rate.............................................
35.0%
(2.8)
(2.1)
0.2
(0.2)
30.1%
35.0%
(2.9)
(2.1)
0.1
0.1
30.2%
35.0%
(3.3)
(2.1)
0.4
0.2
30.2%
53
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net deferred tax asset recorded by the Corporation is included in other assets and consists of the following tax effects of
temporary differences at December 31:
Deferred tax assets:
Allowance for loan losses.................................................................. $
Unrealized holding losses on securities available for sale ................
Deferred compensation......................................................................
LIH Investments ................................................................................
Post-retirement benefits.....................................................................
Other accrued expenses .....................................................................
Stock-based compensation ................................................................
Other than temporary impairment of investments .............................
Derivative financial instruments........................................................
Other..................................................................................................
Total gross deferred tax assets......................................................
Deferred tax liabilities:
Direct leasing.....................................................................................
Intangible assets and acquisition premiums/discounts ......................
Mortgage servicing rights..................................................................
Premises and equipment ....................................................................
Other..................................................................................................
Total gross deferred tax liabilities ................................................
2005
2004
(in thousands)
$
32,496
21,592
7,234
3,318
3,225
2,412
1,867
1,400
1,177
153
74,874
9,357
8,679
2,653
747
5,601
27,037
31,370
5,155
6,072
2,724
3,403
1,549
1,797
1,022
-
1,541
54,633
10,038
5,014
2,855
2,003
2,522
22,432
Net deferred tax asset ................................................................... $
47,837
$
32,201
The Corporation has net operating losses (NOL’s) for income taxes in certain states that are eligible for carryforward credit against
future taxable income for a specific number of years. The Corporation does not anticipate generating taxable income in these states
during the carryforward years and, as such, deferred tax assets have not been recognized for these NOL’s.
As of December 31, 2005 and 2004, the Corporation had not established any valuation allowance against net Federal deferred tax
assets since these tax benefits are realizable either through carryback availability against prior years' taxable income or the reversal of
existing deferred tax liabilities. Based on the Corporation’s historical and projected net income, a valuation allowance is not
considered necessary.
NOTE L – EMPLOYEE BENEFIT PLANS
Substantially all eligible employees of the Corporation are covered by one of the following plans or combination of plans:
Profit Sharing Plan – A noncontributory defined contribution plan where employer contributions are based on a formula providing
for an amount not to exceed 15% of each eligible employee’s annual salary (10% for employees hired subsequent to January 1, 1996).
Participants are 100% vested in balances after five years of eligible service. In addition, the profit sharing plan includes a 401(k)
feature which allows employees to defer a portion of their pre-tax salary on an annual basis, with no employer match. Contributions
under this feature are 100% vested.
Defined Benefit Pension Plans and 401(k) Plans – Contributions to the Corporation’s defined benefit pension plan (Pension Plan) are
actuarially determined and funded annually. Pension Plan assets are invested in money markets, fixed income securities, including
corporate bonds, U.S. Treasury securities and common trust funds, and equity securities, including common stocks and common stock
mutual funds. The Pension Plan has been closed to new participants, but existing participants continue to accrue benefits according to
the terms of the plan.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fulton Financial Corporation
Employees covered under the Pension Plan are also eligible to participate in the Fulton Financial Affiliates 401(k) Savings Plan,
which allows employees to defer a portion of their pre-tax salary on an annual basis. At its discretion, the Corporation may also make
a matching contribution up to 3%. Participants are 100% vested in the Corporation’s matching contributions after three years of
eligible service.
The following summarizes the Corporation's expense under the above plans for the years ended December 31:
Profit Sharing Plan....................................................... $
Pension Plan.................................................................
401(k) Plan...................................................................
$
2005
2004
(in thousands)
2003
7,801
3,468
1,376
12,645
$
$
8,251
3,072
967
12,290
$
$
6,606
3,025
596
10,227
The net periodic pension cost for the Corporation's Pension Plan, as determined by consulting actuaries, consisted of the following
components for the years ended December 31:
2005
2004
(in thousands)
2003
Service cost .................................................................. $
Interest cost ..................................................................
Expected return on assets.............................................
Net amortization and deferral ......................................
Net periodic pension cost............................................. $
2,486
3,370
(3,273)
885
3,468
$
$
2,307
3,102
(3,001)
664
3,072
$
$
2,178
2,952
(2,631)
526
3,025
The measurement date for the Pension Plan is September 30. The following table summarizes the changes in the projected benefit
obligation and fair value of plan assets for the indicated periods:
Plan Year Ended
September 30
2005
2004
(in thousands)
Projected benefit obligation, beginning.................................................. $
59,265
$
52,282
Service cost ............................................................................................
Interest cost ............................................................................................
Benefit payments ....................................................................................
Actuarial loss..........................................................................................
Experience (gain) loss ............................................................................
2,486
3,370
(1,673)
959
(767)
2,307
3,102
(1,270)
2,552
292
Projected benefit obligation, ending....................................................... $
63,640
Fair value of plan assets, beginning ....................................................... $
41,468
$
$
59,265
37,980
Employer contributions ..........................................................................
Actual return on assets ...........................................................................
Benefit payments ....................................................................................
10,652
3,010
(1,673)
2,622
2,136
(1,270)
Fair value of plan assets, ending ............................................................ $
53,457
$
41,468
55
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The funded status of the Pension Plan and the amounts included in the consolidated balance sheets as of December 31 follows:
2005
2004
(in thousands)
Projected benefit obligation.................................................................... $
Fair value of plan assets .........................................................................
Funded status.....................................................................................
(63,640) $
53,457
(10,183)
(59,265)
41,468
(17,797)
Unrecognized net transition asset...........................................................
Unrecognized prior service cost .............................................................
Unrecognized net loss ............................................................................
Intangible asset .......................................................................................
Accumulated other comprehensive loss .................................................
Pension asset (liability) recognized in the
consolidated balance sheets............................................................... $
(38)
72
15,254
-
-
5,105
Accumulated benefit obligation ............................................................. $
50,434
(51)
82
15,687
(82)
(858)
$
$
(3,019)
44,487
Accumulated other comprehensive income was reduced by $858,000 ($558,000, net of tax) as of December 31, 2004 to increase the
pension liability to an amount equal to the difference between the accumulated benefit obligation and the fair value of plan assets.
This adjustment was reversed in 2005 as a result of the Corporation making a $10.7 million contribution to the plan in September
2005.
The following rates were used to calculate net periodic pension cost and the present value of benefit obligations:
Discount rate-projected benefit obligation ...................
Rate of increase in compensation level ........................
Expected long-term rate of return on plan assets .........
2005
5.50%
4.00
8.00
2004
5.75%
4.50
8.00
2003
6.00%
4.50
8.00
The 5.50% discount rate used to calculate the present value of benefit obligations is determined using published long-term AA
corporate bond rates as of the measurement date, rounded to the nearest 0.25%. The 8.0% long-term rate of return on plan assets used
to calculate the net periodic pension cost is based on historical returns. Total returns for 2005, 2004 and 2003 approximated this rate.
The expected long-term return is considered to be appropriate based on the asset mix and the historical returns realized.
The following table summarizes the weighted average asset allocations as of September 30:
Cash and equivalents..................................................... 17.0%
Equity securities ............................................................
Fixed income securities.................................................
44.0
39.0
2005
2004
6.0%
50.0
44.0
Total ......................................................................... 100.0%
100.0%
56
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity securities consist mainly of equity common trust and mutual funds. Fixed income securities consist mainly of fixed income
common trust funds. Defined benefit plan assets are invested with a balanced growth objective, with target asset allocations between
40 and 70 percent for equity securities and 30 to 60 percent for fixed income securities. The Corporation expects to contribute $4.1
million to the pension plan in 2006. Estimated future benefit payments are as follows (in thousands):
Year
2006.................. $
2007..................
2008..................
2009..................
2010..................
2011 – 2015......
1,458
1,495
1,597
1,761
1,992
14,587
$ 22,890
Post-retirement Benefits
The Corporation currently provides medical benefits and a death benefit to certain retired full-time employees who were employees of
the Corporation prior to January 1, 1998. Certain full-time employees may become eligible for these discretionary benefits if they
reach retirement age while working for the Corporation. Benefits are based on a graduated scale for years of service after attaining the
age of 40.
The components of the expense for post-retirement benefits other than pensions are as follows:
2005
Service cost ................................... .............................. $
Interest cost ................................... ..............................
Expected return on plan assets .....................................
Net amortization and deferral.......................................
Net post-retirement benefit cost .... .............................. $
406
524
(5)
(226)
699
$
2004
(in thousands)
$
2003
$
$
281
446
(2)
(287)
438
364
474
(2)
(230)
606
The following table summarizes the changes in the accumulated post-retirement benefit obligation and fair value of plan assets for the
years ended December 31:
2005
2004
(in thousands)
Accumulated post-retirement benefit obligation, beginning .................. $
8,929
$
7,815
Service cost ............................................................................................
Interest cost ............................................................................................
Benefit payments ....................................................................................
Change due to change in experience ......................................................
Change due to change in assumptions....................................................
406
524
(359)
419
930
Accumulated post-retirement benefit obligation, ending ....................... $
10,849
Fair value of plan assets, beginning ....................................................... $
Employer contributions ..........................................................................
Actual return on assets ...........................................................................
Benefit payments ....................................................................................
150
350
5
(359)
364
474
(268)
296
248
8,929
165
251
2
(268)
$
$
Fair value of plan assets, ending ............................................................ $
146
$
150
57
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The funded status of the plan and the amounts included in other liabilities as of December 31 follows:
2005
2004
(in thousands)
Accumulated post-retirement benefit obligation ................................. $
Fair value of plan assets ......................................................................
Funded status..................................................................................
(10,849) $
146
(10,703)
Unrecognized prior service cost ..........................................................
Unrecognized net loss (gain)...............................................................
Post-retirement benefit liability recognized
in the consolidated balance sheets.................................................. $
(453)
1,311
(9,845) $
(9,497)
(8,929)
150
(8,779)
(679)
(39)
For measuring the post-retirement benefit obligation, the annual increase in the per capita cost of health care benefits was assumed to
be 9.0% in year one, declining to an ultimate rate of 4.5% by year nine. This health care cost trend rate has a significant impact on the
amounts reported. Assuming a 1.0% increase in the health care cost trend rate above the assumed annual increase, the accumulated
post-retirement benefit obligation would increase by approximately $1.4 million and the current period expense would increase by
approximately $141,000. Conversely, a 1% decrease in the health care cost trend rate would decrease the accumulated post-retirement
benefit obligation by approximately $1.2 million and the current period expense by approximately $115,000.
The discount rate used in determining the accumulated post-retirement benefit obligation, which is determined using published long-
term AA corporate bond rates as of the measurement date, rounded to the nearest 0.25%, was 5.50% at December 31, 2005 and 5.75%
at December 31, 2004. The expected long-term rate of return on plan assets was 3.00% at December 31, 2005 and 2004.
NOTE M – STOCK-BASED COMPENSATION PLANS AND SHAREHOLDERS' EQUITY
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 service in exchange for such award. During the third quarter of 2005, the
Corporation adopted Statement 123R using “modified retrospective application”, electing to restate all prior periods including all per-
share amounts. The principal accounts impacted by the restatement were salaries and employee benefits expense, additional paid-in
capital, retained earnings, other assets and taxes. The Corporation’s equity awards consist of stock options and restricted stock granted
under its Stock Option and Compensation Plans (Option Plans) and shares purchased by employees under its Employee Stock
Purchase Plan (ESPP).
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the impact of modified retrospective application on the previously reported results for the periods
shown:
Fulton Financial Corporation
2004
2003
(in thousands, except per-share data)
Income before income taxes, originally reported ................. $
Stock-based compensation expense under the fair value
218,181
$
197,543
method (1).......................................................................
Income before income taxes, restated................................... $
(3,900)
214,281
(2,092)
195,451
$
Net income, originally reported............................................ $
Stock-based compensation expense under the fair value
152,917
$
138,180
method, net of tax (1)......................................................
Net income, restated ............................................................. $
(3,309)
149,608
Net income per share (basic), originally reported (2).......... $
Net income per share (basic), restated..................................
1.02
1.00
Net income per share (diluted), originally reported (2)........ $
Net income per share (diluted), restated ...............................
1.01
0.99
$
$
$
(1,813)
136,367
0.98
0.97
0.98
0.96
(1) Stock-based compensation expense, originally reported, was $0.
(2) Originally reported amounts have been restated for the impact of the 5-for-4 stock split paid in June 2005.
As a result of the retrospective adoption of Statement 123R, as of January 1, 2003 retained earnings decreased $11.4 million,
additional paid-in capital increased $12.5 million and deferred tax assets increased $1.1 million. These changes reflect a combination
of compensation expense for prior stock option grants to employees and related tax benefits.
The following table presents compensation expense and related tax benefits for equity awards recognized in the consolidated income
statements:
Compensation expense................................................................. $
Tax benefit ...................................................................................
Net income effect ......................................................................... $
1,041
(321)
720
$
$
3,900
(591)
3,309
$
$
2,092
(279)
1,813
2005
2004
(in thousands)
2003
The tax benefit shown in the preceding table is less than the benefit that would be calculated using the Corporation’s 35% statutory
Federal tax rate. Under Statement 123R, tax benefits are recognized upon grant only for options that ordinarily will result in a tax
deduction when exercised (non-qualified stock options). The Corporation granted 440,000, 607,000 and 260,000 non-qualified stock
options in 2005, 2004 and 2003, respectively. Compensation expense and tax benefits for restricted stock awards for the year ended
December 31, 2005, included in the preceding table, were $270,000 and $94,000, respectively.
Under the Option Plans, stock options are granted to key employees for terms of up to ten years at option prices equal to the fair
market value of the Corporation's stock on the date of grant. Options are typically granted annually on July 1st and, prior to the July 1,
2005 grant, had been 100% vested immediately upon grant. For the July 1, 2005 grant, a three-year cliff-vesting feature was added
and, as a result, compensation expense associated with this grant will be recognized over the three-year vesting period. This change in
vesting resulted in a significant decrease in stock-based compensation expense in 2005 as compared to 2004. On July 1, 2005, 15,000
59
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares of restricted stock with a five-year cliff-vesting period were granted to one employee. Certain events as defined in the Option
Plans result in the acceleration of the vesting of both the stock options and restricted stock. As of December 31, 2005, the Option
Plans had 14.9 million shares reserved for future grants through 2013.
The following table provides information about options outstanding for the year ended December 31, 2005:
Stock
Options
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
(in millions)
Outstanding at December 31, 2004....
Granted ............................................
Exercised .........................................
Assumed from SVB Financial .........
Forfeited...........................................
Outstanding at December 31, 2005....
6,591,053
1,092,500
(1,051,719)
166,218
(20,364)
6,777,688
$ 10.74
17.98
7.50
13.08
16.53
$ 12.45
6.2 years
$34.9
Exercisable at December 31, 2005 ....
5,677,828
$ 11.42
5.5 years
$35.1
The following table provides information about nonvested options and restricted stock for the year ended December 31, 2005:
Stock Options
Restricted Stock
Weighted
Average
Grant Date
Fair Value
Shares
Weighted
Average
Grant Date
Fair Value
Options
Nonvested at December 31, 2004 ......
Granted.............................................
Vested...............................................
Forfeited ...........................................
Nonvested at December 31, 2005 ......
-
1,092,500
-
(7,800)
1,084,700
$ -
2.52
-
2.52
2.52
$
-
15,000
-
-
15,000
$ -
17.98
-
-
$ 17.98
As of December 31, 2005, there was $2.1 million of total unrecognized compensation cost related to nonvested stock options that will
be recognized as compensation expense over a weighted average period of 2.5 years.
The following table presents information about options exercised:
2005
2004
(dollars in thousands)
2003
Number of options exercised......................................
Total intrinsic value of options exercised................... $
Cash received from options exercised........................ $
Tax deduction realized from options exercised.......... $
1,051,719 1,388,773
10,675 $
6,774 $
7,049 $
13,577 $
6,341 $
6,936 $
532,181
4,503
2,216
1,960
Upon exercise, the Corporation issues shares from its authorized, but unissued, common stock to satisfy the options.
60
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of option awards under the Option Plans is estimated on the date of grant using the Black-Scholes valuation
methodology, which is dependent upon certain assumptions, as summarized in the following table.
Risk-free interest rate ...............................................................
Volatility of Corporation’s stock .............................................
Expected dividend yield...........................................................
Expected life of options ...........................................................
3.76%
16.17
3.23
6 Years
4.22%
18.12
3.22
7 Years
3.55%
22.75
3.22
8 Years
2005
2004
2003
The expected life of the options was estimated based on historical employee behavior and represents the period of time that options
granted are expected to be outstanding. Volatility of the Corporation’s stock was based on historical volatility for the period
commensurate with the expected life of the options. The risk-free interest rate is the U.S. Treasury rate commensurate with the
expected life of the options on the date of the grant.
Based on the assumptions used in the model, the Corporation calculated an estimated fair value per option of $2.52, $2.78 and $3.07
for options granted in 2005, 2004 and 2003, respectively. Approximately 1.1 million, 1.3 million and 601,000 options were granted in
2005, 2004 and 2003, respectively. The fair value of restricted stock awards is equal to the fair market value of the Corporation's
stock on the date of grant.
Under the ESPP, eligible employees can purchase stock of the Corporation at 85% of the fair market value of the stock on the date of
purchase. The ESPP is considered to be a compensatory plan under Statement 123R and, as such, compensation expense is recognized
for the 15% discount on shares purchased. The following table summarizes activity under the ESPP for the indicated periods.
ESPP shares purchased ...........................................................
Average purchase price per share (85% of market value) ...... $
Compensation expense recognized (in thousands) ................. $
130,946
14.82
341
105,392
14.55
$
271
$
108,380
12.82
$
245
$
2005
2004
2003
Shareholder Rights
On June 20, 1989, the Board of Directors of the Corporation declared a dividend of one common share purchase right (Original
Rights) for each outstanding share of common stock, par value $2.50 per share, of the Corporation. The dividend was paid to the
shareholders of record as of the close of business on July 6, 1989. On April 27, 1999, the Board of Directors approved an amendment
to the Original Rights and the rights agreement. The significant terms of the amendment included extending the expiration date from
June 20, 1999 to April 27, 2009 and resetting the purchase price to $90.00 per share. As of December 31, 2005, the purchase price
had adjusted to $43.08 per share as a result of stock dividends.
The Rights are not exercisable or transferable apart from the common stock prior to distribution. Distribution of the Rights will occur
ten business days following (1) a public announcement that a person or group of persons (Acquiring Person) has acquired or obtained
the right to acquire beneficial ownership of 20% or more of the outstanding shares of common stock (the Stock Acquisition Date) or
(2) the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 25% or more of
such outstanding shares of common stock. The Rights are redeemable in full, but not in part, by the Corporation at any time until ten
business days following the Stock Acquisition Date, at a price of $0.01 per Right.
Treasury Stock
The Corporation periodically repurchases shares of its common stock under repurchase plans approved by the Board of Directors.
These repurchases have historically been through open market transactions and have complied with all regulatory restrictions on the
timing and amount of such repurchases. Shares repurchased have been added to treasury stock and are accounted for at cost. These
shares are periodically reissued for various corporate needs.
61
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2005, the Corporation purchased 4.3 million shares of its common stock from an investment bank at a total cost of $73.6 million
under an “Accelerated Share Repurchase” program (ASR), which allowed the shares to be purchased immediately rather than over
time. The investment bank, in turn, repurchased shares on the open market over a period that was determined by the average daily
trading volume of the Corporation’s shares, among other factors. The Corporation completed the ASR in February of 2006 and settled
its position with the investment bank by paying $3.4 million, representing the difference between the initial prices paid and the actual
price of the shares repurchased.
Total treasury stock purchases, including both open market purchases and ASR’s, were approximately 5.0 million shares in 2005, 4.7
million shares in 2004 and 4.0 million shares in 2003.
NOTE N – LEASES
Certain branch offices and equipment are leased under agreements that expire at varying dates through 2035. Most leases contain
renewal provisions at the Corporation's option. Total rental expense was approximately $12.1 million in 2005, $9.4 million in 2004
and $6.4 million in 2003. Future minimum payments as of December 31, 2005 under noncancelable operating leases are as follows
(in thousands):
Year
2006.................. $
2007..................
2008..................
2009..................
2010..................
Thereafter .........
$
10,437
9,593
7,763
6,222
5,107
33,186
72,308
NOTE O – COMMITMENTS AND CONTINGENCIES
The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which involve,
to varying degrees, elements of credit and interest rate risk that are not recognized in the consolidated balance sheets.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a
portion of the commitments is expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment and income producing commercial properties.
Standby letters of credit are conditional commitments issued to guarantee the financial or performance obligation of a customer to a
third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to
customers. The Corporation underwrites these obligations using the same criteria as its commercial lending underwriting. The
Corporation’s maximum exposure to loss for standby letters of credit is equal to the contractual (or notional) amount of the
instruments.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the Corporation’s commitments to extend credit and letters of credit:
Fulton Financial Corporation
2005
2004
(in thousands)
Commercial mortgage, construction and land development ......... $ 829,769
Home equity..................................................................................
494,872
Credit card.....................................................................................
382,415
Commercial and other ...................................................................
2,028,997
Total commitments to extend credit......................................... $ 3,736,053
$ 689,818
412,790
384,504
1,851,159
$ 3,338,271
Standby letters of credit ................................................................ $ 599,191
Commercial letters of credit..........................................................
23,037
Total letters of credit ................................................................ $ 622,228
$ 533,094
24,312
$ 557,406
From time to time, the Corporation and its subsidiary banks may be defendants in legal proceedings relating to the conduct of their
banking business. Most of such legal proceedings are a normal part of the banking business, and in management's opinion, the
financial position and results of operations and cash flows of the Corporation would not be affected materially by the outcome of such
legal proceedings.
During the first quarter of 2006, a legal settlement was reached in a lawsuit against Resource Bank, a wholly owned subsidiary of
Fulton Financial. The suit alleged Resource Bank violated the Telephone Consumer Protection Act (TCPA), prior to being acquired
by Fulton Financial in April 2004. The settlement resulted in a $2.2 million charge to other expense for the year ended December 31,
2005. The settlement is subject to court approval.
63
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P – FAIR VALUE OF FINANCIAL INSTRUMENTS
The following are the estimated fair values of the Corporation's financial instruments as of December 31, 2005 and 2004, followed by
a general description of the methods and assumptions used to estimate such fair values. These fair values are significantly affected by
assumptions used, principally the timing of future cash flows and the discount rate. Because assumptions are inherently subjective in
nature, the estimated fair values cannot be substantiated by comparison to independent market quotes and, in many cases, the
estimated fair values could not necessarily be realized in an immediate sale or settlement of the instrument. Further, certain financial
instruments and all non-financial instruments are excluded. Accordingly, the aggregate fair value amounts presented do not
necessarily represent management's estimation of the underlying value of the Corporation.
FINANCIAL ASSETS
Cash and due from banks .................... $
Interest-bearing deposits
with other banks .............................
Federal funds sold ...............................
Loans held for sale...............................
Securities held to maturity (1) .............
Securities available for sale (1) ...........
Net loans..............................................
Accrued interest receivable .................
2005
2004
Book
Value
Estimated
Fair Value Book Value
(in thousands)
Estimated
Fair Value
368,043 $
368,043 $
278,065 $
278,065
31,404
528
243,378
18,258
31,404
528
243,378
18,317
2,543,887 2,543,887
8,424,728 8,322,514
53,261
53,261
4,688
32,000
209,504
25,001
2,424,858
7,533,915
40,633
4,688
32,000
209,504
25,413
2,424,858
7,619,104
40,633
FINANCIAL LIABILITIES
Demand and savings deposits............. $ 5,435,119 $ 5,435,119 $ 4,926,478 $ 4,926,478
2,974,551
Time deposits......................................
1,194,524
Short-term borrowings........................
27,279
Accrued interest payable ....................
Other financial liabilities ....................
29,640
Federal Home Loan Bank advances
and long-term debt........................
3,346,911
1,298,962
38,604
41,643
3,369,720
1,298,962
38,604
41,643
2,969,046
1,194,524
27,279
29,640
710,215
684,236
860,345
871,429
(1) See Note C, “Investment Securities”, for detail by security type.
For short-term financial instruments, defined as those with remaining maturities of 90 days or less, the carrying amount was
considered to be a reasonable estimate of fair value. The following instruments are predominantly short-term:
Assets
Cash and due from banks
Interest bearing deposits
Federal funds sold
Accrued interest receivable
Loans held for sale
Liabilities
Demand and savings deposits
Short-term borrowings
Accrued interest payable
Other financial liabilities
For those components of the above-listed financial instruments with remaining maturities greater than 90 days, fair values were
determined by discounting contractual cash flows using rates which could be earned for assets with similar remaining maturities and,
in the case of liabilities, rates at which the liabilities with similar remaining maturities could be issued as of the balance sheet date.
64
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As indicated in Note A, “Summary of Significant Accounting Policies”, securities available for sale are carried at their estimated fair
values. The estimated fair values of securities held to maturity as of December 31, 2005 and 2004 were generally based on quoted
market prices, broker quotes or dealer quotes.
For short-term loans and variable rate loans that reprice within 90 days, the carrying value was considered to be a reasonable estimate
of fair value. For other types of loans, fair value was estimated by discounting future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. In addition, for loans
secured by real estate, appraisal values for the collateral were considered in the fair value determination.
The fair value of long-term debt was estimated by discounting the remaining contractual cash flows using a rate at which the
Corporation could issue debt with a similar remaining maturity as of the balance sheet date. The fair value of commitments to extend
credit and standby letters of credit is estimated to equal their carrying amounts.
NOTE Q – MERGERS AND ACQUISITIONS
Completed Acquisitions
On July 1, 2005, the Corporation completed its acquisition of SVB Financial Services, Inc. (SVB). SVB was a $530 million bank holding
company whose primary subsidiary was Somerset Valley Bank (Somerset Valley), which operates thirteen community-banking offices
in Somerset, Hunterdon and Middlesex Counties in New Jersey.
Under the terms of the merger agreement, each of the approximately 4.1 million shares of SVB’s common stock was acquired by the
Corporation based on a “cash election merger” structure. Each SVB shareholder elected to receive 100% of the merger consideration in
stock, 100% in cash, or a combination of stock and cash.
As a result of the SVB shareholder elections, approximately 3.2 million of the SVB shares outstanding on the acquisition date were
converted into shares of Corporation common stock, based on a fixed exchange ratio of 1.1899 shares of Corporation stock for each share of
SVB stock. The remaining 983,000 shares of SVB stock were purchased for $21.00 per share. In addition, each of the options to acquire
SVB’s stock was converted into options to purchase the Corporation’s stock or was settled in cash, based on the election of each option
holder and the terms of the merger agreement. The total purchase price was $90.4 million, including $66.6 million in stock issued and stock
options assumed, $22.4 million of SVB stock purchased and options settled for cash and $1.4 million for other direct acquisition costs. The
purchase price for shares issued was determined based on the value of the Corporation’s stock on the date when the number of shares was
fixed and determinable.
As a result of the acquisition, SVB was merged into the Corporation and Somerset Valley became a wholly owned subsidiary. The
acquisition was accounted for using purchase accounting, which required the Corporation to allocate the total purchase price of the
acquisition to the assets acquired and liabilities assumed, based on their respective fair values at the acquisition date, with any remaining
purchase price being recorded as goodwill. Resulting goodwill balances are then subject to an impairment test on at least an annual basis.
The results of Somerset Valley’s operations are included in the Corporation’s financial statements prospectively from the July 1, 2005
acquisition date.
65
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the purchase price allocation based on estimated fair values on the acquisition date (in thousands):
Cash and due from banks............................................................... $
Other earning assets ......................................................................
Investment securities available for sale .........................................
Loans, net of allowance .................................................................
Premises and equipment ...............................................................
Core deposit intangible asset .........................................................
Trade name intangible asset...........................................................
Goodwill ........................................................................................
Other assets....................................................................................
Total assets acquired..................................................................
Deposits .........................................................................................
Long-term debt ..............................................................................
Other liabilities ..............................................................................
Total liabilities assumed ............................................................
20,035
61,046
124,916
301,660
9,345
8,476
380
54,417
10,608
590,883
473,490
24,710
2,290
500,490
Net assets acquired .................................................................... $
90,393
On December 31, 2004, the Corporation completed its acquisition of First Washington FinancialCorp (First Washington), of Windsor,
New Jersey. First Washington was a $490 million bank holding company whose primary subsidiary was First Washington State Bank,
which operates sixteen community-banking offices in Mercer, Monmouth, and Ocean Counties in New Jersey.
The total purchase price was $126.0 million including $125.2 million in stock issued and options assumed and $729,000 in First
Washington stock purchased for cash and other direct acquisition costs. The Corporation issued 1.69 shares of its stock for each of the
4.3 million shares of First Washington outstanding on the acquisition date. The purchase price was determined based on the value of
the Corporation’s stock on the date when the final terms of the acquisition were agreed to and announced.
On April 1, 2004, the Corporation completed its acquisition of Resource Bankshares Corporation (Resource), an $890 million financial
holding company, and its primary subsidiary, Resource Bank. Resource Bank is located in Virginia Beach, Virginia, and operates six
community-banking offices in Newport News, Chesapeake, Herndon, Virginia Beach and Richmond, Virginia and fourteen loan
production and residential mortgage offices in Virginia, North Carolina, Maryland and Florida.
The total purchase price was $195.7 million, including $185.9 million in stock issued and options assumed, and $9.8 million in
Resource stock purchased for cash and other direct acquisition costs. The Corporation issued 1.925 shares of its stock for each of the
5.9 million shares of Resource outstanding on the acquisition date. The purchase price was determined based on the value of the
Corporation’s stock on the date when the final terms of the acquisition were agreed to and announced.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes unaudited pro-forma information assuming the acquisitions of SVB, First Washington and Resource
had occurred on January 1, 2004. This pro-forma information includes certain adjustments, including amortization related to fair value
adjustments recorded in purchase accounting (in thousands, except per-share information):
Fulton Financial Corporation
2005
2004
Net interest income .......... $
Other income....................
Net income .......................
420,644
145,128
167,178
Per Share:
Net income (basic) ........ $
Net income (diluted) .....
1.06
1.04
$
$
397,007
149,029
155,523
0.97
0.95
Subsequent Event - Acquisition
On February 1, 2006, the Corporation completed its acquisition of Columbia Bancorp (Columbia), of Columbia, Maryland. Columbia
was a $1.3 billion bank holding company whose primary subsidiary was The Columbia Bank, which operates 19 full-service
community banking offices and five retirement community offices in Howard, Montgomery, Prince George’s and Baltimore Counties
and Baltimore City.
Under the terms of the merger agreement, each of the approximately 6.9 million shares of Columbia’s common stock was acquired by
the Corporation based on a “cash election merger” structure. Each Columbia shareholder elected to receive 100% of the merger
consideration in stock, 100% in cash, or a combination of stock and cash.
As a result of Columbia shareholder elections, approximately 3.5 million of the Columbia shares outstanding on the acquisition date
were converted into shares of the Corporation common stock, based upon a fixed exchange ratio of 2.325 shares of Corporation stock
for each share of Columbia stock. The remaining 3.4 million shares of Columbia stock were purchased for $42.48 per share. In addition,
each of the options to acquire Columbia’s stock was converted into options to purchase the Corporation’s stock or was settled in cash, based
on the election of each option holder and the terms of the merger agreement. The total purchase price was approximately $302 million,
including $150.1 million in stock issued and stock options assumed, $150.4 million of Columbia stock purchased and options settled for
cash and $1.4 million for other direct acquisition costs. The purchase price for shares issued was determined based on the value of the
Corporation’s stock on the date when the number of shares was fixed and determinable.
As a result of the acquisition, Columbia was merged into the Corporation and The Columbia Bank became a wholly owned
subsidiary. The acquisition is being accounted for using purchase accounting, which requires the Corporation to allocate the total
purchase price of the acquisition to the assets acquired and liabilities assumed, based on their respective fair values at the acquisition
date, with any remaining acquisition cost being recorded as goodwill. Resulting goodwill balances are then subject to an impairment
review on at least an annual basis. The carrying value of Columbia’s net assets as of February 1, 2006 was approximately $98.4
million. The Corporation is in the process of determining the fair value of the net assets acquired and expects to have a preliminary
purchase price allocation completed by the end of the first quarter of 2006. The results of Columbia’s operations will be included in
the Corporation’s financial statements prospectively from the date of the acquisition.
67
Fulton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE R – CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS
(in thousands)
December 31
2005
2004
December 31
2005
2004
ASSETS
Cash, securities,
and other assets ........................ $
Receivable from subsidiaries.........
8,852 $
10
6,740
777
Investment in:
Bank subsidiaries .....................
Non-bank subsidiaries..............
1,203,927
355,343
1,183,856
250,901
Total Assets .............................. $ 1,568,132 $ 1,442,274
LIABILITIES AND EQUITY
Line of credit with
bank subsidiaries....................... $
61,388 $
Revolving line of credit .................
-
Long-term debt ..............................
140,121
Payable to non-bank subsidiaries...
43,674
Other liabilities ..............................
39,978
Total Liabilities.........................
285,161
Shareholders’ equity ...................... 1,282,971
Total Liabilities and
Shareholders’ Equity .............. $ 1,568,132 $ 1,442,274
70,500
11,930
34,955
48,117
32,685
198,187
1,244,087
CONDENSED STATEMENTS OF INCOME
2005
Year ended December 31
2004
(in thousands)
2003
Income:
Dividends from bank subsidiaries ................................................................................. $ 223,900
Other..............................................................................................................................
45,336
269,236
66,824
Expenses.............................................................................................................................
Income before income taxes and equity in
undistributed net income of subsidiaries.......................................................................
Income tax benefit..............................................................................................................
$ 62,131
40,227
102,358
58,563
$ 149,596
38,206
187,802
50,272
202,412
(8,445)
210,857
43,795
(6,420)
50,215
137,530
(4,177)
141,707
Equity in undistributed net income (loss) of:
Bank subsidiaries ..........................................................................................................
(53,640)
Non-bank subsidiaries...................................................................................................
8,857
Net Income ............................................................................................................... $ 166,074
84,525
14,868
$ 149,608
(20,879)
15,539
$ 136,367
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fulton Financial Corporation
CONDENSED STATEMENTS OF CASH FLOWS
Cash Flows From Operating Activities:
Net Income ....................................................................................................
$
166,074
$
149,608
$
136,367
2005
Year Ended December 31
2004
(in thousands)
2003
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Stock-based compensation..............................................................................
(Increase) decrease in other assets ................................................................
Equity in undistributed net loss (income) of subsidiaries...............................
(Decrease) increase in other liabilities and
payable to non-bank subsidiaries ................................................................
Total adjustments ......................................................................................
Net cash provided by operating activities .................................................
Cash Flows From Investing Activities:
Investment in bank subsidiaries .....................................................................
Investment in non-bank subsidiaries ..............................................................
Net cash paid for acquisitions ........................................................................
Net cash used in investing activities .........................................................
Cash Flows From Financing Activities:
Net (decrease) increase in borrowings ...........................................................
Dividends paid ..............................................................................................
Net proceeds from issuance of common stock ..............................................
Increase in long-term debt..............................................................................
Acquisition of treasury stock ........................................................................
Net cash used in financing activities ..........................................................
1,041
(1,381)
44,783
(2,653)
41,790
207,864
(3,700)
(100,000)
(21,724)
(125,424)
(21,042)
(85,495)
10,991
98,342
(85,168)
(82,372)
3,900
(13,004)
(99,393)
36,859
(71,638)
77,970
(6,000)
-
(5,283)
(11,283)
79,552
(74,802)
7,537
-
(78,966)
(66,679)
Net Increase (Decrease) in Cash and Cash Equivalents ...........................
Cash and Cash Equivalents at Beginning of Year ...................................
Cash and Cash Equivalents at End of Year ..............................................
Cash paid during the year for:
Interest .......................................................................................................
Income taxes ...............................................................................................
68
8
76
8
-
$
8
2,758
60,539
$
2,889
54,457
$
$
$
$
2,092
1,255
5,340
(4,098)
4,589
140,956
(3,500)
-
(1,544)
(5,044)
(16,678)
(64,628)
5,087
-
(59,699)
(135,918)
(6)
6
-
2,469
48,924
69
Fulton Financial Corporation
Management Report on Internal Control Over Financial Reporting
The management of Fulton Financial Corporation is responsible for establishing and maintaining adequate internal control over
financial reporting. Fulton Financial Corporation’s internal control system is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control –
Integrated Framework. Based on this assessment, management concluded that, as of December 31, 2005, the company’s internal
control over financial reporting is effective based on those criteria.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005
has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.
R. Scott Smith, Jr.
Chairman, Chief Executive Officer and President
Charles J. Nugent
Senior Executive Vice President and
Chief Financial Officer
70
Fulton Financial Corporation
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Fulton Financial Corporation:
We have audited management's assessment, included in the accompanying Management Report on Internal Control Over Financial
Reporting appearing on page 70, that Fulton Financial Corporation maintained effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Fulton Financial Corporation’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Fulton Financial Corporation maintained effective internal control over financial
reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, Fulton Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
71
Fulton Financial Corporation
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Fulton Financial Corporation and subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-
year period ended December 31, 2005, and our report dated March 9, 2006 expressed, an unqualified opinion on those consolidated
financial statements.
Harrisburg, Pennsylvania
March 9, 2006
72
Fulton Financial Corporation
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Fulton Financial Corporation:
We have audited the accompanying consolidated balance sheets of Fulton Financial Corporation and subsidiaries as of December 31,
2005 and 2004, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows
for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Fulton Financial Corporation and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of Fulton Financial Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 9, 2006 expressed an unqualified opinion on management’s assessment
of, and the effective operation of, internal control over financial reporting.
Harrisburg, Pennsylvania
March 9, 2006
73
Fulton Financial Corporation
QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
(in thousands, except per-share data)
FOR THE YEAR 2005
Interest income .........................
Interest expense ........................
Net interest income...................
Provision for loan losses...........
Other income ............................
Other expenses..........................
Income before income taxes.....
Income taxes .............................
Net income................................
Per-share data:
Net income (basic)...............
Net income (diluted)............
Cash dividends.....................
FOR THE YEAR 2004
Interest income .........................
Interest expense ........................
Net interest income...................
Provision for loan losses...........
Other income ............................
Other expenses..........................
Income before income taxes.....
Income taxes .............................
Net income................................
Per-share data:
Net income (basic)...............
Net income (diluted)............
Cash dividends.....................
Three Months Ended
March 31
June 30
Sept. 30
Dec. 31
$ 140,810
42,562
98,248
800
35,853
73,828
59,473
18,037
41,436
$
$ 148,611
48,686
99,925
725
38,315
78,189
59,326
17,722
41,604
$
$ 164,113
57,617
106,496
815
36,152
81,537
60,296
18,168
42,128
$
$ 172,263
64,354
107,909
780
33,948
82,737
58,340
17,434
40,906
$
$
$
0.26
0.26
0.132
0.27
0.27
0.145
$
0.27
0.27
0.145
$
0.26
0.26
0.145
$ 113,936
30,969
82,967
1,740
32,038
62,344
50,921
15,147
35,774
$
$ 122,024
33,318
88,706
800
36,663
70,598
53,971
16,167
37,804
$
$ 126,947
34,446
92,501
1,125
34,993
74,036
52,333
16,324
36,009
$
$ 130,736
37,261
93,475
1,052
35,170
70,537
57,056
17,035
40,021
$
$
$
0.25
0.25
0.122
0.25
0.24
0.132
$
0.24
0.23
0.132
$
0.27
0.26
0.132
74
Fulton Financial Corporation
(This page intentionally left blank)
75
Fulton Financial Corporation
(This page intentionally left blank)
76