EX-99.4 6 w15301exv99w4.txt ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED - MARCH 31, 2005) . . . EXHIBIT 99.4 ITEM 1. FINANCIAL STATEMENTS (MARCH 31, 2005) FULTON FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
MARCH 31 December 31 2005 2004 ----------- ----------- ASSETS Cash and due from banks .............................. $ 336,039 $ 278,065 Interest-bearing deposits with other banks ........... 9,123 4,688 Federal funds sold ................................... 75,000 32,000 Mortgage loans held for sale ......................... 163,004 158,872 Investment securities: Held to maturity (estimated fair value of $27,807 in 2005 and $25,413 in 2004) ........... 27,570 25,001 Available for sale ................................ 2,357,788 2,424,858 Loans, net of unearned income ........................ 7,747,301 7,584,547 Less: Allowance for loan losses ................... (90,127) (89,627) ----------- ----------- Net Loans ...................................... 7,657,174 7,494,920 ----------- ----------- Premises and equipment ............................... 149,492 146,911 Accrued interest receivable .......................... 42,214 40,633 Goodwill ............................................. 364,169 364,019 Intangible assets .................................... 24,091 25,303 Other assets ......................................... 214,366 164,878 ----------- ----------- Total Assets ................................... $11,420,030 $11,160,148 =========== =========== LIABILITIES Deposits: Non-interest bearing .............................. $ 1,579,400 $ 1,507,799 Interest-bearing .................................. 6,401,747 6,387,725 ----------- ----------- Total Deposits ................................. 7,981,147 7,895,524 ----------- ----------- Short-term borrowings: Federal funds purchased ........................... 760,557 676,922 Other short-term borrowings ....................... 504,803 517,602 ----------- ----------- Total Short-Term Borrowings .................... 1,265,360 1,194,524 ----------- ----------- Accrued interest payable ............................. 29,546 27,279 Other liabilities .................................... 133,577 114,498 Federal Home Loan Bank advances and long-term debt ... 773,129 684,236 ----------- ----------- Total Liabilities .............................. 10,182,759 9,916,061 ----------- ----------- SHAREHOLDERS' EQUITY Common stock, $2.50 par value, 400 million shares authorized, 168.0 million shares issued in 2005 and 167.8 million shares issued in 2004 ... 336,022 335,604 Additional paid-in capital ........................... 1,017,549 1,018,403 Retained earnings .................................... 81,563 60,924 Accumulated other comprehensive loss ................. (35,698) (10,133) Treasury stock, 10.7 million shares in 2005 and 2004, at cost ................................. (162,165) (160,711) ----------- ----------- Total Shareholders' Equity ..................... 1,237,271 1,244,087 ----------- ----------- Total Liabilities and Shareholders' Equity ..... $11,420,030 $11,160,148 =========== ===========
See Notes to Consolidated Financial Statements 74 FULTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
THREE MONTHS ENDED MARCH 31 ------------------- 2005 2004 -------- -------- INTEREST INCOME Loans, including fees ...................... $116,628 $ 88,466 Investment securities: Taxable ................................. 18,261 21,736 Tax-exempt .............................. 2,849 2,533 Dividends ............................... 1,084 952 Mortgage loans held for sale ............... 1,812 239 Other interest income ...................... 176 10 -------- -------- Total Interest Income ................ 140,810 113,936 INTEREST EXPENSE Deposits ................................... 27,808 20,350 Short-term borrowings ...................... 6,824 3,327 Long-term debt ............................. 7,930 7,292 -------- -------- Total Interest Expense ............... 42,562 30,969 -------- -------- Net Interest Income .................. 98,248 82,967 PROVISION FOR LOAN LOSSES .................. 800 1,740 -------- -------- Net Interest Income After Provision for Loan Losses ......... 97,448 81,227 -------- -------- OTHER INCOME Investment management and trust services ... 9,019 8,645 Service charges on deposit accounts ........ 9,332 9,505 Other service charges and fees ............. 5,556 5,026 Gain on sale of mortgage loans ............. 6,049 1,714 Investment securities gains ................ 3,315 5,828 Other ...................................... 2,582 1,320 -------- -------- Total Other Income ................... 35,853 32,038 -------- -------- OTHER EXPENSES Salaries and employee benefits ............. 44,297 36,830 Net occupancy expense ...................... 7,498 5,518 Equipment expense .......................... 3,070 2,641 Data processing ............................ 3,169 2,819 Advertising ................................ 1,973 1,528 Intangible amortization .................... 1,179 991 Other ...................................... 12,641 12,017 -------- -------- Total Other Expenses ................. 73,827 62,344 -------- -------- Income Before Income Taxes ........... 59,474 50,921 INCOME TAXES ............................... 18,037 15,147 -------- -------- Net Income ........................... $ 41,437 $ 35,774 ======== ======== PER-SHARE DATA: Net income (basic) ......................... $ 0.26 $ 0.25 Net income (diluted) ....................... 0.26 0.25 Cash dividends ............................. 0.132 0.122
See Notes to Consolidated Financial Statements 75 FULTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2005 AND 2004
ACCUMULATED NUMBER OF ADDITIONAL OTHER SHARES COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY OUTSTANDING STOCK CAPITAL EARNINGS LOSS (INCOME) STOCK TOTAL ----------- -------- ---------- -------- ------------- --------- ---------- (dollars in thousands) 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............................... 41,437 41,437 Unrealized loss on securities (net of $10.9 million tax effect).......... (20,170) (20,170) Unrealized loss on derivative financial instruments (net of $1.7 million tax effect)............................... (3,240) (3,240) Less - reclassification adjustment for gains included in net income (net of $1.2 million tax expense)............. (2,155) (2,155) ---------- Total comprehensive income............ 15,872 ---------- Stock issued, including related tax benefits (366,000 shares from treasury stock)..... 590,000 418 (950) 5,469 4,937 Stock-based compensation awards............. 96 96 Acquisition of treasury stock............... (400,000) (6,923) (6,923) Cash dividends - $0.132 per share........... (20,798) (20,798) ----------- -------- ---------- -------- -------- --------- ---------- Balance at March 31, 2005................... 157,340,000 $336,022 $1,017,549 $ 81,563 $(35,698) $(162,165) $1,237,271 =========== ======== ========== ======== ======== ========= ========== Balance at December 31, 2003................ 142,085,000 $284,480 $ 648,155 $104,187 $ 12,267 $(100,772) $ 948,317 Comprehensive Income: Net income............................... 35,774 35,774 Unrealized gain on securities (net of $4.3 million tax effect)...... 7,966 7,966 Less - reclassification adjustment for gains included in net income (net of $2.0 million tax expense)............. (3,788) (3,788) ---------- Total comprehensive income............ 39,952 ---------- Stock issued, including related tax benefits (all treasury stock)..................... 302,000 (2,083) 4,283 2,200 Stock-based compensation awards............. 72 72 Acquisition of treasury stock............... (214,000) (3,519) (3,519) Cash dividends - $0.122 per share........... (17,325) (17,325) ----------- -------- ---------- -------- -------- --------- ---------- Balance at March 31, 2004................... 142,173,000 $284,480 $ 646,144 $122,636 $ 16,445 $(100,008) $ 969,697 =========== ======== ========== ======== ======== ========= ==========
See Notes to Consolidated Financial Statements 76 FULTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31 --------------------- 2005 2004 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income ......................................................................... $ 41,437 $ 35,774 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ....................................................... 800 1,740 Depreciation and amortization of premises and equipment ......................... 3,263 3,014 Net amortization of investment security premiums ................................ 1,256 2,569 Investment security gains ....................................................... (3,315) (5,828) Net (increase) decrease in mortgage loans held for sale ......................... (4,132) 3,943 Amortization of intangible assets ............................................... 1,179 991 Stock-based compensation ........................................................ 96 72 (Increase) decrease in accrued interest receivable .............................. (1,581) 1,579 Increase in other assets ........................................................ (5,031) (9,961) Increase in accrued interest payable ............................................ 2,267 332 Increase in other liabilities ................................................... 3,627 11,848 --------- --------- Total adjustments ............................................................ (1,571) 10,299 --------- --------- Net cash provided by operating activities .................................... 39,866 46,073 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale ............................... 56,380 68,197 Proceeds from maturities of securities held to maturity ............................ 1,525 2,814 Proceeds from maturities of securities available for sale .......................... 153,488 225,787 Purchase of securities held to maturity ............................................ (4,383) (2,084) Purchase of securities available for sale .......................................... (196,144) (73,835) (Increase) decrease in short-term investments ...................................... (47,435) 610 Net increase in loans .............................................................. (163,054) (58,252) Net cash paid for acquisitions ..................................................... -- (2,130) Net purchase of premises and equipment ............................................. (5,844) (2,609) --------- --------- Net cash (used in) provided by investing activities .......................... (205,467) 158,498 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand and savings deposits ........................................ 48,989 65,810 Net increase (decrease) in time deposits ........................................... 36,634 (33,418) Increase in long-term debt ......................................................... 88,893 3,234 Increase (decrease) in short-term borrowings ....................................... 70,836 (214,238) Dividends paid ..................................................................... (19,795) (17,337) Net proceeds from issuance of common stock ......................................... 4,941 2,200 Acquisition of treasury stock ...................................................... (6,923) (3,519) --------- --------- Net cash provided by (used in) financing activities .......................... 223,575 (197,268) --------- --------- NET INCREASE IN CASH AND DUE FROM BANKS ............................................ 57,974 7,303 CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD ..................................... 278,065 300,966 --------- --------- CASH AND DUE FROM BANKS AT END OF PERIOD ........................................... $ 336,039 $ 308,269 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest ........................................................................ $ 40,295 $ 30,637 Income taxes .................................................................... 799 104
See Notes to Consolidated Financial Statements 77 FULTON FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. NOTE B - 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 solely of outstanding stock options. A reconciliation of the weighted average shares outstanding used to calculate basic net income per share and diluted net income per share follows:
THREE MONTHS ENDED MARCH 31 ------------------ 2005 2004 ------- ------- (in thousands) Weighted average shares outstanding (basic)..... 157,351 142,114 Impact of common stock equivalents.............. 2,037 1,312 ------- ------- Weighted average shares outstanding (diluted)... 159,388 143,426 ======= =======
NOTE C - SUBSEQUENT EVENTS 5-for-4 Stock Split - The Corporation declared a 5-for-4 stock split on April 13, 2005. The stock split was paid in the form of a 25% stock dividend on June 8, 2005 to shareholders of record as of May 17, 2005. Share and per-share information presented in this report have been restated to reflect the impact of this stock split. Authorized Shares - On April 13, 2005, the shareholders of the Corporation approved an amendment to the Articles of Incorporation to increase the number of authorized shares of common stock from 400 million to 600 million shares. Branch Sales - On April 22, 2005 the Corporation sold two branches in New Jersey, including deposits totaling approximately $23.3 million. As a result of this transaction, a total gain of approximately $1.1 million will be recognized in the second quarter of 2005. The Corporation has entered into a contract for the sale of a branch in Maryland, including deposits totaling approximately $19.2 million at March 31, 2005. Per the terms of the contract, the deposits will be sold at a premium of 8% and the real property will be sold at net book value. This sale is expected to be completed during the second or third quarter of 2005, pending the receipt of certain regulatory approvals. 78 Accelerated Share Repurchase Plan - On May 4, 2005, the Corporation purchased 4.4 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 repurchased immediately rather than over time. The investment bank, in turn, is repurchasing shares on the open market over a period that is determined by the average daily trading volume of our shares, among other factors. The Corporation expects to settle its position with the investment bank at the end of the ASR by paying or receiving cash in an amount representing the difference between the initial price and the actual price of the shares repurchased. The Corporation expects the ASR to be completed during 2005. NOTE D - 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 thirteen separate banks, each engages in similar activities and provides similar products and services. The Corporation's non-banking activities are immaterial and therefore, separate information has not been disclosed. NOTE E - STOCK-BASED COMPENSATION 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. The Corporation adopted Statement 123R using "modified retrospective application", electing to restate all prior periods. The Corporation's equity awards consist of stock options granted under its Stock Option and Compensation Plans (Option Plans) and shares purchased by employees under its Employee Stock Purchase Plan (ESPP). The following table summarizes the impact of modified retrospective application on the three months ended March 31, 2004 (in thousands, except per-share data):
MAR. 31, 2004 -------- Income before income taxes, originally reported .......... $50,993 Stock-based compensation expense under the fair value method (2) ............................................ (72) ------- Income before income taxes, restated ..................... $50,921 ======= Net income, originally reported .......................... $35,846 Stock-based compensation expense under the fair value method, net of tax (2) ................................ (72) ------- Net income, restated ..................................... $35,774 ======= Net income per share (basic), originally reported (1) .... $ 0.25 Net income per share (basic), restated ................... 0.25 Net income per share (diluted), originally reported (1) .. $ 0.25 Net income per share (diluted), restated ................. 0.25
(1) Originally reported amounts have been restated for the impact of the 5-for-4 stock split paid in June 2005. (2) Stock-based compensation expense, originally reported, was $0. The following table presents compensation expense and related tax benefits for equity awards recognized in the consolidated income statements: 79
THREE MONTHS ENDED MARCH 31 --------------------------- 2005 2004 ---- ---- (in thousands) Compensation expense .. $96 $72 Tax benefit ........... (2) -- --- --- Net income effect ..... $94 $72 === ===
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 as tax benefits are recognized upon grant only for equity awards that ordinarily will result in a tax deduction when exercised. As a result of the retrospective adoption of Statement 123R, as of December 31, 2003 retained earnings decreased $13.2 million, additional paid in capital increased $14.6 million and deferred tax assets increased $1.4 million. These changes reflect a combination of compensation expense for prior stock option grants to employees and related tax benefits. Under the Option Plan, options are granted to key personnel for terms of up to 10 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 are 100% vested immediately upon grant. As of March 31, 2005, the Option Plans had 16.0 million shares reserved for future grants through 2013. The following table provides information about options outstanding for the three months ended March 31, 2005:
WEIGHTED WEIGHTED AVERAGE AGGREGATE AVERAGE REMAINING INTRINSIC STOCK EXERCISE CONTRACTUAL VALUE OPTIONS PRICE TERM (IN MILLIONS) --------- -------- ----------- ------------- Outstanding at December 31, 2004... 6,591,053 $10.74 Granted......................... -- -- Exercised....................... (587,510) 6.18 Forfeited....................... (6,879) 15.54 --------- ------ Outstanding at March 31, 2005...... 5,996,664 $11.18 6.1 years $37.5 ========= ====== ========= ===== Exercisable at March 31, 2005...... 5,979,004 $11.20 6.1 years $37.3 ========= ====== ========= =====
The following table presents information about options exercised:
THREE MONTHS ENDED MARCH 31 --------------------------- 2005 2004 -------- -------- (dollars in thousands) Number of options exercised .................... 587,510 405,089 Total intrinsic value of options exercised ..... $ 6,770 $ 3,331 Cash received from options exercised ........... $ 3,012 $ 1,191 Tax deduction realized from options exercised .. $ 4,020 $ 2,049
Upon exercise, the Corporation issues shares from its authorized, but unissued, common stock to satisfy the options. 80 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.
THREE MONTHS ENDED MARCH 31 ------------------ 2005 2004 ------- ------- ESPP shares purchased............................ 36,558 27,490 Average purchase price (85% of market value)..... $ 14.93 $ 14.34 Compensation expense recognized (in thousands)... $ 96 $ 70
NOTE F - EMPLOYEE BENEFIT PLANS The Corporation maintains a defined benefit pension plan (Pension Plan) for certain employees. Contributions to the 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. The Corporation expects to contribute approximately $2.3 million to the Pension Plan in 2005. The Corporation currently provides medical and life insurance benefits under a post-retirement benefits plan (Post-Retirement Plan) to certain retired full-time employees who were employees of the Corporation prior to January 1, 1998. Other 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 net periodic benefit cost for the Corporation's Pension Plan and Post-Retirement Plan, as determined by consulting actuaries, consisted of the following components for the quarters ended March 31:
PENSION PLAN POST-RETIREMENT PLAN ------------- -------------------- 2005 2004 2005 2004 ----- ----- ---- ---- (in thousands) Service cost..................... $ 622 $ 577 $ 89 $ 91 Interest cost.................... 843 776 117 119 Expected return on plan assets... (818) (750) -- (1) Net amortization and deferral.... 222 166 (57) (58) ----- ----- ---- ---- Net periodic benefit cost........ $ 869 $ 769 $149 $151 ===== ===== ==== ====
NOTE G - NEW ACCOUNTING STANDARDS 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 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. 81 SOP 03-3 became effective for the Corporation on January 1, 2005. No loans or debt securities meeting the scope of SOP 03-3 were acquired during the quarter ended March 31, 2005. The Corporation does not expect SOP 03-3 to have a material effect on the Corporation's consolidated financial statements in the future. 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 September 2004, the FASB delayed the effective date of the measurement and recognition guidance of EITF 03-01 from the third calendar quarter of 2004 to a date to be determined upon the issuance of a final FASB Staff Position. The Corporation continues to apply the measurement and recognition criteria of existing authoritative literature in evaluating its investments for other than temporary impairment. Management does not expect EITF 03-01 to have a material impact on its financial condition or results of operations. NOTE H - ACQUISITIONS Completed Acquisitions On December 31, 2004, the Corporation acquired all of the outstanding common stock 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. This acquisition enabled the Corporation to expand and enhance its existing New Jersey franchise. The total purchase price was $125.8 million including $125.2 million in stock issued and options assumed and $610,000 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 acquired all of the outstanding common stock of Resource Bankshares Corporation (Resource), an $890 million financial holding company, and its primary subsidiary, Resource Bank. 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 1.93 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. 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. This acquisition allowed the Corporation to enter a new geographic market. The following table summarizes unaudited pro-forma information assuming the acquisitions of Resource and First Washington State Bank 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): 82
THREE MONTHS ENDED MARCH 31, 2004 ------------------ Net interest income....... $94,082 Other income.............. 37,490 Net income................ 37,956 Per Share: Net income (basic)..... $ 0.24 Net income (diluted)... 0.24
Pending Acquisition On January 11, 2005, the Corporation entered into a merger agreement to acquire SVB Financial Services, Inc. (SVB), of Somerville, New Jersey. SVB is a $475 million bank holding company whose primary subsidiary is Somerset Valley Bank, which operates eleven community-banking offices in Somerset, Hunterdon and Middlesex Counties in New Jersey. Under the terms of the merger agreement, each of the approximately 4.1 million shares of SVB's common stock will be acquired based on a "cash election merger" structure. Each SVB shareholder will have the ability to elect to receive 100% of the merger consideration in stock, 100% in cash, or a combination of FFC stock and cash. Their elections will be subject to prorating to achieve a result where a minimum of 20% and a maximum of 40% of SVB's outstanding shares will receive cash consideration. Those shares that will be converted into FFC stock would be exchanged based on a fixed exchange ratio of 1.1899 shares of FFC stock for each share of SVB stock. Those shares of SVB stock that will be converted into cash will be converted into a per share amount of cash based on a fixed price of $21.00 per share of SVB stock. In addition, each of the options to acquire SVB's stock will be converted to options to purchase the Corporation's stock. The acquisition is subject to approval by both the SVB shareholders and applicable bank regulatory authorities. The acquisition is expected to be completed during the third quarter of 2005. As a result of the acquisition, SVB will be merged into the Corporation and Somerset Valley Bank will become a wholly owned subsidiary. The acquisition will be accounted for as a purchase. Purchase accounting 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 results of SVB's operations will be included in the Corporation's financial statements prospectively from the date of the acquisition. The total purchase price is estimated to be approximately $87.7 million, which includes cash expected to be paid, the value of the Corporation's stock expected to be to be issued, SVB's options to be converted and certain acquisition related costs. The net assets of SVB as of March 31, 2005 were $30.5 million and, accordingly, the purchase price exceeds the carrying value of the net assets by $57.2 million as of this date. The total purchase price will be allocated to the net assets acquired as of the merger effective date, based on fair market values at that date. The Corporation expects to record a core deposit intangible asset and goodwill as a result of the acquisition accounting. NOTE I - DERIVATIVE FINANCIAL INSTRUMENTS - INTEREST RATE SWAPS As of March 31, 2005, interest rate swaps with a notional amount of $240 million were used to hedge certain long-term fixed rate certificate of deposit liabilities held at one of the Corporation's affiliate banks. 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 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 combination of the interest rate swaps and the issuance of the certificates of deposit generates long- 83 term floating rate funding for the Corporation. The interest rate swaps are classified as a cash flow hedge and the fair values of the derivatives are recorded as other assets or other liabilities. Changes in the fair values during the period are recorded in other comprehensive income to the extent the hedge is effective. Ineffectiveness resulting from differences between the changes in fair value or cash flows of the certificate of deposits and the interest rate swaps must be recorded in current period earnings. The Corporation's analysis of the effectiveness of the hedges indicated they were 98.2% effective as of March 31, 2005. As a result, a $63,000 charge to income for the three-month period ended March 31, 2005 was recognized. During the first quarter of 2005, the Corporation recorded a $3.2 million other comprehensive loss to recognize the effective fair value changes of derivatives resulting from the rising interest rate environment. NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK 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. Those financial instruments include commitments to extend credit and letters of credit, which involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Corporation's Consolidated Balance Sheets. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the outstanding amount of those instruments. The outstanding amounts of commitments to extend credit and letters of credit were as follows:
MARCH 31 --------------------- 2005 2004 --------- --------- (in thousands) Commitments to extend credit... 3,492,011 2,688,675 Standby letters of credit...... 532,287 478,064 Commercial letters of credit... 24,654 20,266
NOTE K - SUBORDINATED DEBT On March 28, 2005 the Corporation issued $100.0 million of ten-year subordinated notes at a fixed rate of 5.35%, with semi annual interest payments commencing in October 2005. The notes mature on April 1, 2015. NOTE L - RECLASSIFICATIONS Certain amounts in the 2004 consolidated financial statements and notes have been reclassified to conform to the 2005 presentation. 84