UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2001,2002, or
[ ][_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number: 0-10587
FULTON FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2195389
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Penn Square, P. O. Box 4887, Lancaster, Pennsylvania 17604
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(Address of principal executive offices) (Zip Code)
(717) 291-2411
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $2.50 Par Value
Indicate by check mark whether the registrantRegistrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ][_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ][_]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [_]
The aggregate market value of shares of commonthe voting stock held by non-affiliates calculated based on the average of the
bid and asked prices on March 19,Registrant at June 30, 2002, was approximately $1.9$1.8 billion. AsThe number of December 31, 2001 there were 82,612,000
shares of Fulton Financial
Corporation common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCEthe Registrant's Common Stock outstanding on February 28, 2003 was
100,723,000.
Portions of the following documents are incorporated by reference:
Part of Form 10-K into
Document which incorporated
-------- ---------------------- Definitive Proxy Statement of the Registrant for the Annual
Meeting of Shareholders to be held on April 15, 2003 are incorporated by
reference in Part III
Fulton Financial Corporation
dated March 4, 2002III.
TABLE OF CONTENTS
Description Page
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PART I
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Item 1. Description of Business ................................................................... 3
Item 2. Properties ................................................................................ 9
Item 3. Legal Proceedings ......................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders ....................................... 10
PART II
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Item 5. Market for Registrant's Common Equity and Related Shareholder Matters ..................... 11
Item 6. Selected Financial Data ................................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................ 28
Item 8. Financial Statements and Supplementary Data:
Consolidated Balance Sheets ....................................................... 34
Consolidated Statements of Income ................................................. 35
Consolidated Statement of Shareholders' Equity .................................... 36
Consolidated Statements of Cash Flows ............................................. 37
Notes to Consolidated Financial Statements ........................................ 38
Independent Auditors' Report ...................................................... 62
Quarterly Consolidated Results of Operations (unaudited) .......................... 65
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...... 66
PART III
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Item 10. Directors and Executive Officers of the Registrant ........................................ 67
Item 11. Executive Compensation .................................................................... 67
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................ 67
Item 13. Certain Relationships and Related Transactions ............................................ 67
PART IV
- -------
Item 14. Controls and Procedures ................................................................... 68
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................... 68
Signatures ................................................................................ 70
Certifications ............................................................................ 73
Exhibit Index ............................................................................. 75
2
PART I
Item 1. Description of Business
- -------------------------------
General
Fulton Financial Corporation (the Corporation) was incorporated under the
laws of Pennsylvania on February 8, 1982 and became a bank holding company
through the acquisition of all of the outstanding stock of Fulton Bank on June
30, 1982. In 2000, the Corporation became a financial holding company as defined
in the Gramm-Leach-BlileyGramm-Leach-Bailey Act (GLB Act), which allowed the Corporation to expand
its financial services activities under its holding company structure (See
"Competition" and "Regulation and Supervision"). At December 31, 2001, theThe Corporation owneddirectly owns
100% of the stock of eleventen community banks, three financial services companies and
fivesix non-bank entities.
The common stock of Fulton Financial Corporation is listed for quotation on
the National Market System of the National Association of Securities Dealers
Automated Quotation System under the symbol FULT. The Corporation's internet
address is www.fult.com. Electronic copies of the Corporation's 2002 Annual
Report on Form 10-K are available free of charge by visiting the "Investor
Information" section of www.fult.com. Electronic copies of quarterly reports on
Form 10-Q and current reports on Form 8-K are also available at this internet
address. These reports are posted as soon as reasonably practicable after they
are electronically filed with the Securities and Exchange Commission (SEC).
Bank and Financial Services Subsidiaries
The Corporation's eleventen subsidiary banks are located primarily in suburban or
semi-rural geographical markets throughout a four state region (Pennsylvania,
Maryland, New Jersey and Delaware). Pursuant to its "super-community" banking
strategy, the Corporation operates the banks independentlyautonomously to maximize the
advantage of community banking and service to its customers. Where appropriate,
operations are centralized through common platforms and back-office functions;
however, decision making generally remains with the local bank management.
The subsidiary banks are located in areas which are home to a wide range of
manufacturing, distribution, health care and other service companies. The
Corporation and its banks are not dependent upon one or a few customers or any
one industry and the loss of any single customer or a few customers would not
have a material adverse impact on any of the subsidiary banks.
Although the banks vary in terms of size, each offers a consistent variety
of commercial and retail banking services to its customers. Included in the
array of products are demand, savings and time deposits; commercial, consumer
and mortgage loans; vehicle and equipment leasing and financing; VISA and
MasterCard credit cards; VISA debit cards; cash management; international
services such as letters of credit and currency exchange; and PC and telephone
banking. Through its financial services subsidiaries, the Corporation offers
investment management, trust, brokerage, insurance and investment advisory
services.
The Corporation's subsidiary banks deliver their products and services
through traditional branch banking, with a network of full service branch
offices. Electronic delivery channels include a network of automated teller
machines, telephone banking and PC banking through the Internet. These
alternativeThe variety of
available delivery channels allowallows customers to access their account information
and perform certain transactions such as transferring funds and paying bills at
virtually any hour of the day.
The Corporation continued to supplement its internal growth with strategic
acquisitions during 2001. On July 1, 2001, the Corporation completed its merger
with Drovers Bancshares Corporation (Drovers), an $820 million bank holding
company located in York, Pennsylvania. Drovers was merged with and into Fulton
Financial Corporation, and its wholly owned bank subsidiary, The Drovers &
Mechanics Bank (Drovers Bank) was merged into Fulton Bank, the Corporation's
largest subsidiary bank. This merger allowed the Corporation to increase its
presence in the desirable York County, Pennsylvania market, which is adjacent to
its Lancaster County base.
In June 2001, the Corporation assumed $315 million of deposits and
purchased $53 million of loans in an acquisition of 18 branches located in New
Jersey, Delaware and Pennsylvania. These branches were allocated among four of
the Corporation's existing affiliate banks and strengthened its presence in
current regions while allowing for expansion into new geographical markets.
In January 2001, the Corporation completed its acquisition of investment
management and advisory company Dearden, Maguire, Weaver and Barrett, LLC
(Dearden Maguire). This acquisition complemented the Corporation's existing
investment management and trust services business which is offered through
Fulton Financial Advisors,3
N.A. Dearden Maguire, which is also a registered investment advisory firm,
increased the Corporation's assets under management by approximately $1.3
billion on the acquisition date.
The following table provides geographical and statistical information for
the Corporation's banking and financial services subsidiaries.
Full-Time
Main Office Total Total Equivalent
Subsidiary Location Assets Deposits Employees Branches*
- ---------------------------------------- --------------------- ------ --------Branches (1)
-------------------------------------------- ---------------------- --------- --------- ---------- ---------------------
(millions)
Fulton Bank ............................... Lancaster, PA $3,489 $2,499 746 70$ 3,635 $ 2,548 802 71
Lebanon Valley Farmers Bank ............... Lebanon, PA 682 542755 604 167 17
Swineford National Bank ................... Hummels Wharf, PA 277 221 93266 213 84 7
Lafayette Ambassador Bank ................. Easton, PA 892 717 3191,062 865 334 22
FNB Bank, N.A. ............................ Danville, PA 310 240 86307 221 75 8
Hagerstown Trust Company.......................... Hagerstown, MD 422 337 154467 366 152 15
Delaware National Bank .................... Georgetown, DE 238 202 110 11312 255 114 12
The Bank (2) .............................. Woodbury, NJ 401 337 199 12
Woodstown National Bank Woodstown, NJ 423 358 154 171,022 831 309 29
The Peoples Bank of Elkton ................ Elkton, MD 102 86 3397 84 35 2
Skylands Community Bank ................... Hackettstown, NJ 288 248 77359 302 78 8
Fulton Financial Advisors, N.A. and Fulton
Insurance Services Group, Inc. ........... Lancaster, PA -- -- 172 --- - 175 -
Dearden, Maguire, Weaver &Barrett, LLC .... West Conshohocken, PA -- -- 15 --- - 13 -
Fulton Financial (Parent Company) ......... Lancaster, PA -- -- 493 --
------ ---
2,818 189
====== ===- - 568 -
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2,906 191
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*See- -----------------------------------------------
(1) See additional information in "Item 2. Properties"
(2) In February, 2003, The Bank and Woodstown National Bank were merged.
Information presented throughout this report for The Bank is based on
the combined entity.
Non-Bank Subsidiaries
The Corporation also owns 100% of the stock of fivesix non-bank subsidiaries:
(i) Fulton Life InsuranceReinsurance Company, which engages in the business of reinsuring
credit life and accident and health insurance directly related to extensions of
credit by the banking subsidiaries of the Corporation; (ii) Fulton Financial
Realty Company, which holds title to or leases certain properties upon which
Corporation branch offices and other facilities are located; (iii) Central
Pennsylvania Financial Corp., which owns certain limited partnership interests
in partnerships invested in low and moderate income housing projects and two
non-bank companies in various stages of liquidation;projects; (iv) FFC
Management, Inc., which owns certain investment securities and other passive
investments; and (v) Drovers Capital Trust I (the "Trust"), a Delaware business
trust whose sole asset is $7,735,000$7.7 million of junior subordinated deferrable
interest debentures to the Trust from the Corporation.Corporation; and (vi) FFC Penn Square,
Inc. which owns $44 million of trust preferred securities issued by a subsidiary
of the Corporation's largest bank subsidiary. In addition, the Corporation owns
a 1/8th interest in Pennbanks Insurance Company, a joint venture with seven
other Pennsylvania banks, which formed an offshore reinsurance company. Each
bank in the venture owns a segregated cell through which it'sits respective premiums
and losses from credit life and accident and health insurance are funded and for
which each bank has sole responsibility.
Competition
The banking and financial services industries are highly competitive.
Within its geographical region, the Corporation's subsidiary bankssubsidiaries face direct
competition from other commercial banks, varying in size from local community
banks to larger regional and national banks, and credit unions. With the growth
in electronic commerce and distribution channels, the banks also face
competition from banks not physically located in the Corporation's geographical
markets.
The competition in the industry has also increased as a result of the
passage of the GLB Act. Under the GLB Act, banks, insurance companies or
securities firms may affiliate under a financial holding company structure,
allowing expansion into non-banking financial services activities that were
previously restricted. These include a full range of banking, securities and
insurance activities, including securities and insurance underwriting, issuing
and selling annuities and merchant banking activities. While the Corporation
does not currently engage in all of these activities, the ability to do so
without separate approval from the Federal Reserve
4
Board enhances the ability of the Corporation - and financial holding companies
in general - to compete more effectively in all areas of financial services.
A bank holding company wishing to become a financial holding company - such
as the Corporation, which did so in 2000 - must first satisfy several
conditions, including requirements that all of its Federal Deposit Insurance
Company (FDIC)-insured depository subsidiaries are well-capitalized,
well-managed and have at least as "satisfactory" rating under the Community
Reinvestment Act (CRA).
As a result of the GLB Act, there is more competition for customers that
were traditionally served by the banking industry. While the GLB Act increased
competition, it also provided opportunities for the Corporation to expand its
financial services offerings, such as insurance products through Fulton
Insurance Services Group, Inc. The Corporation also competes through the variety
of products that it offers and the quality of service that it provides to its
customers. However, there is no guarantee that these efforts will insulate the
Corporation from competitive pressure which could impact its pricing decisions
for loans, deposits and other services and ultimately impact financial results.
5
Market Share
Although there are many ways to assess the size and strength of banks,
deposit market share continues to be an important industry statistic. This
information is compiled annually by the FDICFederal Deposit Insurance Corporation
(FDIC) and is available to the public. The Corporation's banks maintain branch
offices in 30 counties across four mid-AtlanticMid-Atlantic states. In ten of these
counties, the Corporation ranks in the top three in deposit market share (based
on deposits as of June 30, 2001)2002). The following table summarizes information
about the counties in which the Corporation has branch offices and its market
position in each county.
No. of Financial Deposit Market
Institutions Share(6/Share (6/30/01)
---------------- --------------02)
-------------------- ----------------------
Population Banking Banks/ Credit
County State (2001 Est)(2002) Subsidiary Thrifts Unions Rank %
- ---------------------------------- ------ ------------ -------------------------------- --------- --------- --------- -----------
--------------------------- ------- ------ ---- ----
Lancaster PA 474,259475,000 Fulton Bank 20 12 1 20.1%
Dauphin PA 252,000 Fulton Bank 20 12 5 5.3%
Cumberland PA 215,000 Fulton Bank 17 8 13 1.6%
York PA 388,000 Fulton Bank 17 19 3 10.0%
Chester PA 442,000 Fulton Bank 34 8 22 0.8%
Montgomery PA 757,000 Fulton Bank 51 33 54 0.1%
Berks PA 377,000 Fulton Bank 19 12 1 21.9
Dauphin PA 252,873 Fulton Bank 20 14 6 5.2
Cumberland PA 215,061 Fulton Bank 1618 8 12 1.8
York PA 384,922 Fulton Bank 18 20 3 12.5
Chester PA 437,817 Fulton Bank 36 8 24 0.9
Montgomery PA 756,627 Fulton Bank 50 33 46 0.1
Berks PA 376,429 Fulton Bank 20 18 9 3.63.4%
Lebanon Valley Farmers Bank -- -- 22 0.421 0.4%
Lebanon PA 120,824121,000 Lebanon Valley Farmers Bank 9 2 1 32.432.8%
Schuylkill PA 150,198149,000 Lebanon Valley Farmers Bank 1817 8 7 3.48 3.5%
Snyder PA 37,61138,000 Swineford National Bank 7 0 2 32.533.5%
Union PA 42,03342,000 Swineford National Bank 7 1 6 7.46.2%
Northumberland PA 94,41094,000 Swineford National Bank 17 3 11 2.72.6%
FNB Bank, N.A. -- -- 5 6.66 6.2%
Montour PA 18,27418,000 FNB Bank, N.A. 5 3 1 37.734.4%
Columbia PA 64,22664,000 FNB Bank, N.A. 9 0 6 5.47 4.8%
Lycoming PA 120,151120,000 FNB Bank, N.A. 13 12 12 15 0.9
16 0.7%
Northampton PA 268,832269,000 Lafayette Ambassador Bank 16 1618 15 1 14.114.4%
Lehigh PA 313,671314,000 Lafayette Ambassador Bank 2220 14 5 4.14 4.7%
Washington MD 132,742135,000 Hagerstown Trust Company 9 3 1 22.322.9%
Frederick MD 198,662205,000 Hagerstown Trust Company 14 5 17 0.115 4 18 0.1%
Cecil MD 87,04790,000 Peoples Bank of Elkton 68 3 3 13.412.4%
Sussex DE 159,894164,000 Delaware National Bank 12 4 5 1.01.2%
New Castle DE 504,678509,000 Delaware National Bank 3332 31 24 0.20.1%
Camden NJ 509,594509,000 The Bank 19 12 20 13 20 0.10.2%
Gloucester NJ 256,538259,000 The Bank 2224 5 2 12.2
Woodstown National Bank -- -- 9 3.014.1%
Salem NJ 64,226 Woodstown National64,000 The Bank 8 4 1 35.631.0%
Cape May NJ 102,878 Woodstown National103,000 The Bank 14 1 13 0.614 0.5%
Atlantic NJ 254,698 Woodstown National257,000 The Bank 17 6 15 0.518 0.4%
Warren NJ 103,138105,000 Skylands Community Bank 1412 3 6 7.57.6%
Sussex NJ 145,156146,000 Skylands Community Bank 11 1 11 0.80.7%
Morris NJ 474,074479,000 Skylands Community Bank 3436 9 15 1.316 1.3%
6
Supervision and Regulation
The Corporation is a registered financial holding company and its
subsidiary banks are depository institutions whose deposits are insured by the
FDIC. The Corporation and its subsidiaries are subject to various regulations
and examinations by regulatory authorities. The following table summarizes the
charter types and primary regulators for each of the Corporation's subsidiary
banks.
State
(Name)
or National Primary
Subsidiary Charter Regulator(s)
- --------------------------------- ----------- ------------
Fulton Bank PA PA/FDIC
Lebanon Valley Farmers Bank PA PA/FRB
Swineford National Bank National OCC (1)
Lafayette Ambassador Bank PA PA/FRB
FNB Bank, N.A. National OCC
Hagerstown Trust Company
State (Name)
or National Primary
Subsidiary Charter Regulator(s)
-------------------------------------------- ------------ ------------
Fulton Bank ................................ PA PA/FDIC
Lebanon Valley Farmers Bank ................ PA PA/FRB
Swineford National Bank .................... National OCC (1)
Lafayette Ambassador Bank .................. PA PA/FRB
FNB Bank, N.A. ............................. National OCC
Hagerstown Trust ........................... MD MD/FDIC
Delaware National Bank ..................... National OCC
The Bank ................................... NJ NJ/FDIC
Woodstown National Bank National OCC
Peoples Bank of Elkton MD MD/FDIC
Skylands Community Bank NJ NJ/FDIC
Fulton Financial Advisors, N.A. National OCC (2)
Peoples Bank of Elkton ..................... MD MD/FDIC
Skylands Community Bank .................... NJ NJ/FDIC
Fulton Financial Advisors, N.A. ............ National OCC (3)
Fulton Financial (Parent Company) .......... N/A FRB
-------------------------------------------------
(1) Office of the Comptroller of the Currency.
(2) Woodstown National Bank, which was merged with The Bank in
February, 2003, was regulated by the OCC.
(3) Fulton Financial Advisors, N.A. is chartered as an uninsured
national trust bank.
Federal statutes that apply to the Corporation and its subsidiaries include
the GLB Act, the Bank Holding Company Act (BHCA), the Federal Reserve Act and
the Federal Deposit Insurance Act. In general, these statutes defineestablish the
corporate governance and eligible business activities of the Corporation,
certain acquisition and merger restrictions, limitations on
intercompanyinter-company
transactions such as loans and dividends, and capital adequacy requirements,
among other regulations.
The Corporation is subject to regulation and examination by the Federal
Reserve Board (FRB), and is required to file periodic reports and to provide
additional information that the FRB may require. The Bank Holding Company ActBHCA imposes certain
restrictions upon the Corporation regarding the acquisition of substantially all
of the assets of or direct or indirect ownership or control of any bank of which
it is not already the majority owner. In addition, the FRB must approve certain
proposed changes in organizational structure or other business activities before
they occur.
There are a number of restrictions on financial and bank holding companies
and FDIC-insured depository subsidiaries that are designed to minimize potential
loss to depositors and the FDIC insurance funds. If an FDIC-insured depository
subsidiary is "undercapitalized", the bank holding company is required to guaranteeensure
(subject to certain limits) the subsidiary's compliance with the terms of any
capital restoration plan filed with its appropriate banking agency. Also, a bank
holding company is required to serve as a source of financial strength to its
depository institution subsidiaries and to commit resources to support such
institutions in circumstances where it might not do so absent such policy. Under
the BHCA, the FRB has the authority to require a bank holding company to
terminate any activity or to relinquish control of a nonbanknon-bank subsidiary upon
the FRB's determination that such activity or control constitutes a serious risk
to the financial soundness and stability of a depository institution subsidiary
of the bank holding company.
Bank holding companies are required to comply with the FRB's risk-based
capital guidelines which require a minimum ratio of total capital to
risk-weighted assets of 8%. At least half of the total capital is required to be
Tier 1 capital. In addition to the risk-based capital guidelines, the FRB has
adopted a minimum leverage capital ratio under which a bank holding company must
maintain a level
7
of Tier 1 capital to average total consolidated assets of at least 3% in the
case of a bank holding company which has the highest regulatory examination
rating and is not contemplating significant growth or expansion. All other bank
holding companies are expected to maintain a leverage capital ratio of at least
1% to 2% above the stated minimum.
There are also various restrictions on the extent to which the Corporation
and its nonbanknon-bank subsidiaries can receive loans from its banking subsidiaries.
In general, these restrictions require that such loans be secured by designated
amounts of specified collateral and are limited, as to any one of the
Corporation or its nonbanknon-bank subsidiaries, to 10% of the lending bank's capital
stock and surplus (20% in the aggregate to all such entities).
The Corporation is also limited in the amount of dividends that it may
receive from its subsidiary banks. Dividend limitations vary, depending on the
subsidiary bank's charter and whether or not it is a member of the Federal
Reserve System. Generally, subsidiaries are prohibited from paying dividends
when doing so would cause them to fall below the regulatory minimum capital
levels. Additionally, limits exist on paying dividends in excess of net income
for specified periods.
Monetary and Fiscal Policy
The Corporation and its subsidiary banks are affected by fiscal and
monetary policies of the federal government, including those of the FRB, which
regulates the national money supply in order to manage recessionary and
inflationary pressures. Among the techniques available to the Federal Reserve
Board are engaging in open market transactions of U.S. Government securities,
changing the discount rate and changing reserve requirements against bank
deposits. These techniques are used in varying combinations to influence the
overall growth of bank loans, investments and deposits. Their use may also
affect interest rates charged on loans and paid on deposits. The effect of
monetary policies on the earnings of the Corporation cannot be predicted.
Statistical Information
Certain additional statistical information relatingSarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), which was signed into law
in July, 2002, impacts all companies with securities registered under the
Securities Exchange Act of 1934, including the Corporation. Sarbanes-Oxley
created new requirements in the areas of corporate governance and financial
disclosure including, among other things, (i) increased responsibility for Chief
Executive Officers and Chief Financial Officers with respect to the businesscontent of
Fultonfilings with the SEC; (ii) enhanced requirements for audit committees, including
independence and disclosure of expertise; (iii) enhanced requirements for
auditor independence and the types of non-audit services that auditors can
provide; (iv) accelerated filing requirements for SEC reports; (v) increased
disclosure and reporting obligations for companies, their directors and their
executive officers; and (vi) new and increased civil and criminal penalties for
violations of securities laws. While some of the provisions became effective
immediately; others will become effective from within 30 days to one year of
enactment, subject to rulemaking as delegated by Sarbanes-Oxley to the SEC.
Certifications of the Chief Executive Officer and the Chief Financial
Corporation is set forthOfficer as required by Sarbanes-Oxley and the resulting SEC rules can be found
in the following tables.
FULTON FINANCIAL CORPORATION
COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
Year Ended December 31
---------------------------------------------------------------
(Dollars in thousands) 2001 2000
- -----------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
ASSETS Balance Interest Rate Balance Interest Rate
- ----------------------------------------- ---------- -------- ----- ---------- -------- ------
Interest-earning assets:
Loans and leases (1)................... $5,341,497 $424,025 7.94% $5,131,651 $433,686 8.45%
Taxable investment securities (2)...... 1,300,169 77,701 5.98 1,101,946 68,629 6.23
Tax-exempt investment securities (2)... 216,783 9,465 4.37 231,375 10,187 4.40
Equity securities (2).................. 103,286 5,097 4.93 109,002 6,087 5.58
Short-term investments................. 44,405 1,890 4.26 14,456 1,038 7.18
---------- -------- ---- ---------- -------- ----
Total interest-earning assets............ 7,006,140 518,178 7.40 6,588,430 519,627 7.89
Noninterest-earning assets:
Cash and due from banks................ 241,660 246,694
Premises and equipment................. 124,003 106,020
Other assets (2)....................... 217,717 142,412
Less: Allowance for loan losses........ (69,449) (64,033)
---------- ----------
Total Assets................... $7,520,071 $7,019,523
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Demand deposits........................ $ 744,831 $ 8,795 1.18% $ 653,063 $ 9,878 1.51%
Savings deposits....................... 1,313,880 25,381 1.93 1,186,721 32,895 2.77
Time deposits.......................... 2,786,513 152,793 5.48 2,568,238 144,828 5.64
Short-term borrowings.................. 355,953 13,150 3.69 521,608 30,447 5.84
Long-term debt......................... 500,162 27,843 5.57 476,590 25,826 5.42
---------- -------- ---- ---------- -------- ----
Total interest-bearing liabilities....... 5,701,339 227,962 4.00 5,406,220 243,874 4.51
Noninterest-bearing liabilities:
Demand deposits........................ 925,865 836,997
Other.................................. 113,853 102,335
---------- ----------
Total Liabilities.............. 6,741,057 6,345,552
Shareholders' equity..................... 779,014 673,971
---------- ----------
Total Liabilities and
Shareholders' Equity......... $7,520,071 $7,019,523
========== ==========
Net interest income...................... 290,216 275,753
Net yield on interest-earning assets..... 4.14 4.19
Tax equivalent adjustment (3)............ 8,286 8,506
-------- ---- -------- ----
Net interest margin...................... $298,502 4.26% $284,259 4.31%
======== ==== ======== ====
Year Ended December 31
-----------------------------
(Dollars in thousands) 1999
- --------------------------------------------------------------------------
Average Yield/
ASSETS Balance Interest Rate
- ----------------------------------------- ---------- -------- -----
Interest-earning assets:
Loans and leases (1)................... $4,601,801 $378,705 8.23%
Taxable investment securities (2)...... 1,177,455 71,028 6.03
Tax-exempt investment securities (2)... 218,482 9,903 4.53
Equity securities (2).................. 102,163 5,365 5.25
Short-term investments................. 6,035 297 4.92
---------- -------- ----
Total interest-earning assets............ 6,105,936 465,298 7.62
Noninterest-earning assets:
Cash and due from banks................ 233,898
Premises and equipment................. 93,419
Other assets (2)....................... 163,556
Less: Allowance for loan losses........ (63,179)
----------
Total Assets................... $6,533,630
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------
Interest-bearing liabilities:
Demand deposits........................ $ 628,351 $ 8,162 1.30%
Savings deposits....................... 1,166,781 27,616 2.37
Time deposits.......................... 2,441,926 125,681 5.15
Short-term borrowings.................. 380,343 17,619 4.63
Long-term debt......................... 381,219 20,050 5.26
---------- -------- ----
Total interest-bearing liabilities....... 4,998,620 199,128 3.98
Noninterest-bearing liabilities:
Demand deposits........................ 769,693
Other.................................. 101,476
----------
Total Liabilities.............. 5,869,789
Shareholders' equity..................... 663,841
----------
Total Liabilities and
Shareholders' Equity......... $6,533,630
==========
Net interest income...................... 266,170
Net yield on interest-earning assets..... 4.36
Tax equivalent adjustment (3)............ 8,104
-------- ----
Net interest margin...................... $274,274 4.49%
======== ====
- -------------------------------------------------------------------------
(1) Includes nonperforming loans.
(2) Balances include amortized historical cost for available for sale
securities. The related unrealized holding gains (losses) on securities are
included in other assets.
(3) Based on marginal Federal income tax rate"Signatures" and statutory interest expense
disallowances.
FULTON FINANCIAL CORPORATION
RATE/VOLUME TABLE
The following table sets forth for the periods indicated a summary of
changes in interest income and interest expense resulting from corresponding
volume and rate changes:
2001 vs. 2000 2000 vs. 1999
Increase (decrease) due Increase (decrease) due
To change in to change in
----------------------------- ---------------------------
Volume Rate Net Volume Rate Net
------- -------- -------- ------- ------- -------
(in thousands)
Interest income on:
Loans and leases ................... $17,735 $(27,396) $ (9,661) $43,604 $11,377 $54,981
Taxable investment securities ...... 12,345 (3,273) 9,072 (4,555) 2,156 (2,399)
Tax-exempt investment securities ... (642) (80) (722) 584 (300) 284
Equity securities .................. (319) (671) (990) 359 363 722
Short-term investments ............. 2,150 (1,298) 852 414 327 741
------- -------- -------- ------- ------- -------
Total interest-earning assets .... $31,269 $(32,718) $ (1,449) $40,406 $13,923 $54,329
======= ======== ======== ======= ======= =======
Interest expense on:
Demand deposits .................... $ 1,388 $ (2,471) $ (1,083) $ 321 $ 1,395 $ 1,716
Savings deposits ................... 3,525 (11,039) (7,514) 472 4,807 5,279
Time deposits ...................... 12,309 (4,344) 7,965 6,501 12,646 19,147
Short-term borrowings .............. (9,670) (7,627) (17,297) 6,544 6,284 12,828
Long-term debt ..................... 1,277 740 2,017 5,016 760 5,776
------- -------- -------- ------- ------- -------
Total interest-bearing liabilities $ 8,829 $(24,741) $(15,912) $18,854 $25,892 $44,746
======= ======== ======== ======= ======= =======
Note: The rate/volume variances are allocated in the table above by applying the
changes in volume times the prior period rate and by applying the changes
in rate times the current period volume on a consistent basis throughout.
FULTON FINANCIAL CORPORATION
INVESTMENT PORTFOLIO
The following table sets forth the carrying amount of investment securities
held to maturity (HTM) and available for sale (AFS) as of the dates shown:
December 31
---------------------------------------------------------------------
2001 2000
--------------------------------- ---------------------------------
HTM AFS Total HTM AFS Total
------- ---------- ---------- ------- ---------- ----------
(in thousands)
United States Treasury and U.S.
Government agencies and
Corporations....................... $ 8,170 $ 99,682 $ 107,852 $ 8,992 $ 212,109 $ 221,101
State and municipal..................... 9,840 218,181 228,021 12,971 211,734 224,705
Other securities........................ 165 300 465 720 18,322 19,042
Equity securities....................... -- 151,333 151,333 -- 133,938 133,938
Mortgage-backed securities.............. 31,382 1,218,291 1,249,673 62,079 794,030 856,109
------- ---------- ---------- ------- ---------- ----------
Totals............................ $49,557 $1,687,787 $1,737,344 $84,762 $1,370,133 $1,454,895
December 31
----------------------------------
1999
----------------------------------
HTM AFS Total
------- ---------- -----------
(in thousands)
United States Treasury and U.S.
Government agencies and
Corporations....................... $ 11,879 $ 216,862 $ 228,741
State and municipal..................... 35,189 205,358 240,547
Other securities........................ 525 20,793 21,318
Equity securities....................... -- 135,957 135,957
Mortgage-backed securities.............. 59,237 748,418 807,655
-------- ---------- ----------
Totals............................ $106,830 $1,327,388 $1,434,218
======== ========== ==========
FULTON FINANCIAL CORPORATION
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
The following tables set forth the maturities of investment securities at
December 31, 2001 and the weighted average yields of such securities (calculated
based upon historical cost).
HELD TO MATURITY (at amortized cost)
----------------
MATURING
------------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- ------ -------- ------ ------- ------ ------
(dollars in thousands)
United States Treasury and
U.S. Government
Agencies and corporations........ $ 4,374 4.27% $2,707 5.45% $ 749 6.30% $340 7.55%
State and municipal (1)............. 4,174 6.14 4,606 7.60 1,060 8.21 -- --
Other securities.................... -- -- 165 6.64 -- -- -- --
------- ---- ------ ---- ------ ---- ---- ----
Totals........................... $ 8,548 5.18% $7,478 6.80% $1,809 7.42% $340 7.55%
======= ==== ====== ==== ====== ==== ==== ====
Mortgage-backed securities (2)...... $31,382 6.55%
======= ====
AVAILABLE FOR SALE (at estimated fair value)
------------------
MATURING
---------------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
---------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
---------- ----- -------- ------ ------- ------ ------- -----
(dollars in thousands)
United States Treasury and
U.S. Government
Agencies and corporations........ $ 34,986 5.37% $ 64,946 5.69% $ -- --% $ -- --%
State and municipal (1)............. 1,173 6.07 164,604 6.38% 22,734 7.51 29,670 8.28
Other............................... -- -- 50 -- -- -- -- --
---------- ---- -------- ---- ------- ---- ------- ----
Totals........................... $ 36,159 5.39% $229,600 6.18% $22,734 7.51% $29,670 8.28%
========== ==== ======== ==== ======= ==== ======= ====
Mortgage-backed securities (2)...... $1,218,291 5.79%
========== ====
(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"Exhibits" sections of this table, the entire balance and weighted average rate is shown in one
period.
FULTON FINANCIAL CORPORATION
LOAN PORTFOLIO BY TYPE
The following table sets forth the amount of loans outstanding (net of
unearned income) as of the dates shown:
December 31
--------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(in thousands)
Commercial, financial and agricultural... $1,495,380 $1,386,172 $1,212,807 $1,038,418 $ 939,689
Real-estate - construction .............. 267,627 247,382 171,351 138,798 166,056
Real-estate - mortgage .................. 2,896,865 2,929,351 2,633,270 2,410,025 2,332,583
Consumer ................................ 626,985 738,797 793,776 771,221 785,966
Leasing and other ....................... 86,163 72,957 71,402 62,019 51,023
--------------------------------------------------------------
$5,373,020 $5,374,659 $4,882,606 $4,420,481 $4,275,317
==============================================================
MATURITY & SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES
The following table summarizes the maturity and sensitivity of certain loan
types to changes in interest rates as of December 31, 2001:
One
One Year Through More Than
or Less Five Years Five Years Total
-------- ---------- ---------- ----------
(in thousands)
Commercial, financial and agricultural:
Floating rate .................... $303,109 $225,820 $380,655 $ 909,584
Fixed rate ....................... 173,247 330,224 82,325 585,796
-------- -------- -------- ----------
Total $476,356 $556,044 $462,980 $1,495,380
======== ======== ======== ==========
Real-estate - construction:
Floating rate .................... $ 54,660 $ 47,033 $ 45,823 $ 147,516
Fixed rate ....................... 50,443 40,913 28,755 120,111
-------- -------- -------- ----------
Total $105,103 $ 87,946 $ 74,578 $ 267,627
======== ======== ======== ==========
FULTON FINANCIAL CORPORATION
RISK ELEMENTS IN LOAN PORTFOLIO
The following table presents information concerning the aggregate amount of
nonaccrual, past due and restructured loans and other nonperforming assets (4):
December 31
-----------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(in thousands)
Nonaccrual loans (1) (2) (3) ............. $22,794 $21,790 $23,989 $20,716 $21,559
Accruing loans past due 90 days or more... 9,368 7,135 8,549 11,116 10,562
Other real estate ........................ 1,817 1,035 1,002 1,568 1,691
------- ------- ------- ------- -------
Totals .............................. $33,979 $29,960 $33,540 $33,400 $33,812
======= ======= ======= ======= =======
(1) Includes impaired loans as defined by Statement of Financial Accounting
Standards No. 114 of approximately $8.7 million at December 31, 2001.
(2) As of December 31, 2001, the gross interest income that would have been
recorded during 2001 if nonaccrual loans had been current in accordance
with their original terms was approximately $1.9 million. The amount of
interest income on those nonaccrual loans that was included in 2001 net
income was approximately $1.2 million.
(3) 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. Nonaccrual 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.
(4) Excluded from the amounts presented at December 31, 2001 are $15.7 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 subject to constant
management attention and their classification is reviewed monthly.
FULTON FINANCIAL CORPORATION
SUMMARY OF LOAN LOSS EXPERIENCE
An analysis of the Corporation's loss experience is as follows:
Year Ended December 31
--------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
Loans outstanding at end of year ............ $5,373,020 $5,374,659 $4,882,606 $4,420,481 $4,275,317
========== ========== ========== ========== ==========
Daily average balance of loans and leases ... $5,341,497 $5,131,651 $4,601,801 $4,323,585 $4,058,391
========== ========== ========== ========== ==========
Balance of allowance for loan losses
at beginning of year ................... $ 65,640 $ 61,538 $ 61,327 $ 60,861 $ 57,023
Loans charged-off:
Commercial, financial and agricultural 6,296 9,242 4,797 2,934 2,682
Real estate - construction .............. -- -- -- -- --
Real estate - mortgage .................. 767 1,922 1,604 1,403 1,636
Consumer ................................ 6,683 6,911 8,147 5,426 4,854
Leasing and other ....................... 529 282 124 134 397
---------- ---------- ---------- ---------- ----------
Total loans charged-off ................. 14,275 18,357 14,672 9,897 9,569
---------- ---------- ---------- ---------- ----------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural 703 1,518 2,027 1,223 2,182
Real estate - construction .............. -- -- -- -- --
Real estate - mortgage .................. 364 541 710 926 724
Consumer ................................ 2,683 2,724 2,202 1,364 1,357
Leasing and other ....................... 87 19 1 2 15
---------- ---------- ---------- ---------- ----------
Total recoveries ........................ 3,837 4,802 4,940 3,515 4,278
---------- ---------- ---------- ---------- ----------
Net loans charged-off ....................... 10,438 13,555 9,732 6,382 5,291
Provision for loan losses ................... 14,585 15,024 9,943 6,848 8,803
Allowance purchased ......................... 2,085 2,633 -- -- 326
---------- ---------- ---------- ---------- ----------
Balance at end of year ...................... $ 71,872 $ 65,640 $ 61,538 $ 61,327 $ 60,861
========== ========== ========== ========== ==========
Ratio of net charge-offs during period to
average loans .......................... 0.20% 0.26% 0.21% 0.15% 0.13%
Ratio of allowance for loan losses to loans ========== ========== ========== ========== ==========
outstanding at end of year ............. 1.34% 1.22% 1.26% 1.39% 1.42%
========== ========== ========== ========== ==========
FULTON FINANCIAL CORPORATION
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses has been allocated as follows to provide for
the possibility of losses being incurred within the following categories of
loans at the dates indicated:
December 31
------------------------------------------------------------------
2001 2000 1999
-------------------- -------------------- --------------------
(dollars in thousands)
% of % of % of
Loans in Loans in Loans in
each Each Each
Allowance Category Allowance Category Allowance Category
--------- -------- --------- -------- --------- --------
Commercial, financial
& agriculture ....... $22,531 27.8% $21,193 25.8% $15,516 24.8%
Real estate - construction
& mortgages ......... 19,018 58.9 14,940 59.1 17,425 57.4
Consumer, leasing
& other ............. 10,855 13.3 10,772 15.1 9,435 17.8
Unallocated .............. 19,468 -- 18,735 -- 19,162 --
------- ----- ------- ----- ------- -----
Totals .............. $71,872 100.0% $65,640 100.0% $61,538 100.0%
======= ===== ======= ===== ======= =====
December 31
-------------------------------------------
1998 1997
-------------------- --------------------
(dollars in thousands)
% of % of
loans in loans in
each each
Allowance category Allowance category
--------- -------- --------- --------
Commercial, financial
& agriculture ....... $16,077 23.5% $11,970 22.0%
Real estate - construction
& mortgages ......... 20,296 57.7 12,468 58.4
Consumer, leasing
& other ............. 6,868 18.8 7,393 19.6
Unallocated .............. 18,086 -- 29,030 --
------- ----- ------- -----
Totals .............. $61,327 100.0% $60,861 100.0%
======= ===== ======= =====
(1) Refer to the "Provision and Allowance for Loan Losses" section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations for management's methodology for assessing the adequacy of the
allowance for loan losses.
FULTON FINANCIAL CORPORATION
DEPOSITS
The average daily balances of deposits and rates paid on such deposits are
summarized for the periods indicated in the following table:
Year Ended December 31
-----------------------------------------------------------
2001 2000 1999
------------------ ------------------ -----------------
Amount Rate Amount Rate Amount Rate
---------- ----- ---------- ----- ---------- ----
(dollars in thousands)
Noninterest-bearing demand deposits .. $ 925,865 --% $ 836,997 --% $ 769,693 --%
Interest-bearing demand deposits ..... 744,831 1.18 653,063 1.51 628,351 1.30
Savings deposits ..................... 1,313,880 1.93 1,186,721 2.77 1,166,781 2.37
Time deposits ........................ 2,786,513 5.48 2,568,238 5.64 2,441,926 5.15
---------- ---- ---------- ---- ---------- ----
Totals ............................... $5,771,089 3.24% $5,245,019 3.58% $5,006,751 3.22%
========== ==== ========== ==== ========== ====
Maturities of time deposits of $100,000 or more outstanding at December 31,
2001 are summarized as follows:
Time Deposits
$100,000
or more
-----------------
(in thousands)
Three months or less ....................... $139,339
Over three through six months .............. 95,860
Over six through twelve months ............. 84,384
Over twelve months ......................... 91,879
--------
Totals .................................... $411,462
========
FULTON FINANCIAL CORPORATION
SHORT-TERM BORROWINGS
The following table presents information related to Federal funds purchased
and securities sold under agreements to repurchase. No other categories of
short-term borrowings exceeded 30% of shareholders' equity at December 31, 2001.
December 31
--------------------------------
2001 2000 1999
-------- -------- --------
(dollars in thousands)
Amount outstanding at December 31 ............... $394,659 $441,638 $507,278
Weighted average interest rate at year end ...... 1.75% 5.94% 5.03%
Maximum amount outstanding at any month end ..... $529,763 $573,094 $541,618
Average amount outstanding during the year ...... $352,757 $517,306 $376,029
Weighted average interest rate during the year... 3.68% 5.83% 4.63%
FULTON FINANCIAL CORPORATION
RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders' equity and to average
total assets and certain other ratios are as follows:
Year Ended December 31
-----------------------------------------
2001 2000 1999 1998 1997
----- ----- ----- ----- -----
Percentage of net income to:
Average shareholders' equity ............ 14.58% 15.85% 15.76% 15.01% 14.54%
Average total assets .................... 1.51 1.52 1.60 1.56 1.46
Percentage of dividends declared per common
share to basic net income per share ..... 48.0 44.9 41.9 41.4 41.1
Percentage of average shareholders' equity
to average total assets ................. 10.36 9.60 10.16 10.39 10.05
document.
8
Item 2. Properties
- ------------------
The following table summarizes the Corporation's branch network, by
subsidiary bank. Remote service facilities (mainly stand-alone ATM's) are
excluded.
Owned
------------------- Total
Bank Bank (1) FFRC (2) Leased Term (3) Branches
- ---- -------- -------- ------ -------- --------
Fulton Bank 24 2 44 2018 70
Lebanon Valley Farmers Bank 11 2 4 2018 17
Swineford National Bank 5 -- 2 2004 7
Lafayette Ambassador Bank 7 -- 15 2010 22
FNB Bank, N.A. 6 -- 2 2014 8
Hagerstown Trust Company 12 -- 3 2014 15
Delaware National Bank 8 -- 3 2006 11
The Bank 7 -- 5 2012 12
Woodstown National Bank 14 -- 3 2012 17
Peoples Bank of Elkton 1 -- 1 2016 2
Skylands Community Bank 3 -- 5 2013 8
-- -- -- ---
Total 98 4 87 189
== == == ===
Owned Total
----------------------
Bank Bank (1) FFRC (2) Leased Term (3) Branches
---- -------- -------- ------ -------- --------
Fulton Bank .......................... 21 2 48 2017 71
Lebanon Valley Farmers Bank .......... 11 2 4 2014 17
Swineford National Bank .............. 5 - 2 2007 7
Lafayette Ambassador Bank ............ 7 - 15 2010 22
FNB Bank, N.A. ....................... 6 - 2 2004 8
Hagerstown Trust ..................... 7 - 8 2014 15
Delaware National Bank ............... 8 - 4 2007 12
The Bank ............................. 21 - 8 2005 29
Peoples Bank of Elkton ............... 1 - 1 2016 2
Skylands Community Bank .............. 3 - 5 2012 8
---- -------- -------- ------ --------
Total ................................ 90 4 97 191
---- ======== ======== ====== ========
-------------------------------------
(1) Properties are owned by the bank, free and clear of encumbrances.
(2) Properties are owned by Fulton Financial Realty Company and are
leased to the banks.
(3) Latest lease term expiration date.date, excluding renewal options.
The following table summarizes the Corporation's other significant
properties:properties (administrative headquarters locations generally include a branch;
these are reflected in the table above):
Owned/
Bank Property Location Leased
- ---- ------------------- ------------------- ----------------- -------- ------
Fulton Bank/Fulton Financial Corp. ... Admin. Headquarters Lancaster, PA (1)
Fulton Bank/Fulton Financial Corp.Bank. ......................... Operations Center Mantua, NJ Owned
Fulton Bank/Fulton Financial Corp. ............... Operations Center East Petersburg, PA Owned
Fulton Bank, Drovers Division ........ Admin. Headquarters York, PA Owned (2)
Fulton Bank, Great Valley Division ... Admin. Headquarters Reading, PA Owned
Lebanon Valley Farmers Bank .......... Admin. Headquarters Lebanon, PA Owned
Swineford National Bank .............. Admin. Headquarters Hummels Wharf, PA Owned
Lafayette Ambassador Bank ............ Admin. Headquarters Easton, PA Owned
Operations Center Bethlehem, PA Owned
FNB Bank, N.A. ....................... Admin. Headquarters Danville, PA Owned
Great Valley Bank Admin. Headquarters Reading, PA Owned
Hagerstown Trust Company..................... Admin. Headquarters Hagerstown, MD Owned
Delaware National Bank ............... Admin. Headquarters Georgetown, DE Leased(2)Leased (3)
The Bank of Gloucester County............................. Admin. Headquarters Woodbury, NJ Owned
Woodstown National Bank Admin. Headquarters Woodstown, NJ Owned
Peoples Bank of Elkton ............... Admin. Headquarters Elkton, MD Owned
Skylands Community Bank .............. Admin. Headquarters Hackettstown, NJ Leased(3)Leased (4)
-------------------------------------
(1) Includes approximately 100,000 square feet which is owned by an
independent third party who financed the construction through a
loan from Fulton Bank. The Corporation is leasing this space from
the third party in an arrangement accounted for as a capital
lease. The lease term expires in 2027. The remainder of the
Administrative Headquarters location is owned by the Corporation.
(2) Fulton Bank occupies approximately 8,000 square feet and leases
the remaining 54,000 square feet to third party lessees.
(3) Lease expires in 2006.
(3)(4) Lease expires in 2004.
9
Item 3. Legal Proceedings
- -------------------------
There are no legal proceedings pending against Fulton Financial Corporation
or any of its subsidiaries which are expected to have a material impact upon the
financial position and/or the operating results of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
No matters were submitted to a vote of security holders of Fulton Financial
Corporation during the fourth quarter of 2001.2002.
10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------------------
The information appearing under the heading "Common Stock" in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference.
Item 6. Selected Financial Data
- -------------------------------
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
5-YEAR CONSOLIDATED SUMMARY OF OPERATIONSFINANCIAL RESULTS
(Dollars in thousands, except per-share data)
For the Year
--------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
1997
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per-share data)------------ ------------ ------------ ------------ ------------
SUMMARY OF INCOME
- -----------------
Interest income .......................................... $ 518,178469,288 $ 519,627518,680 $ 465,298519,661 $ 450,252465,221 $ 423,515450,195
Interest expense ........................................ 158,219 227,962 243,874 199,128 199,430
187,407
---------- ---------- ---------- ---------- ---------------------- ------------ ------------ ------------ ------------
Net interest income ......... 290,216 275,753 266,170 250,822 236,108......................... 311,069 290,718 275,787 266,093 250,765
Provision for loan losses....losses ................... 11,900 14,585 15,024 9,943 6,848
8,803
Other income ................ 100,994 74,998 66,668 63,534 52,666................................ 115,783 102,744 76,980 68,002 65,999
Other expenses .............. 216,669 184,456 175,769 170,866 162,814
---------- ---------- ---------- ---------- ----------.............................. 225,536 218,921 186,472 177,026 173,274
------------ ------------ ------------ ------------ ------------
Income before income taxes...taxes .................. 189,416 159,956 151,271 147,126 136,642
117,157
Income taxes ................................................ 56,468 46,367 44,437 42,499 41,635
35,163
---------- ---------- ---------- ---------- ---------------------- ------------ ------------ ------------ ------------
Net income .................................................... $ 132,948 $ 113,589 $ 106,834 $ 104,627 $ 95,007
$ 81,994
========== ========== ========== ========== ====================== ============ ============ ============ ============
PER-SHARE DATA (1)
-
------------------
Net income (basic) .................................... $ 1.381.30 $ 1.321.10 $ 1.271.05 $ 1.161.02 $ 1.000.92
Net income (diluted) ........ 1.37 1.31 1.26 1.15 0.99........................ 1.29 1.09 1.05 1.01 0.92
Cash dividends .............. 0.662 0.593 0.532 0.480 0.411.............................. 0.586 0.530 0.474 0.426 0.384
RATIOS
------
Return on average assets .................... 1.68% 1.51% 1.52% 1.60% 1.56%
Return on average assets (2) ................ 1.68 1.60 1.52 1.60 1.56
Return on average equity .................... 15.86 14.58 15.85 15.76 15.01
Return on average equity (2) ................ 15.86 15.40 15.85 15.76 15.01
Net interest margin ......................... 4.35 4.27 4.31 4.48 4.52
Efficiency ratio (2) ........................ 52.40 53.20 52.40 52.60 55.20
Average equity to average assets ............ 10.60 10.40 9.60 10.20 10.40
Dividend payout ratio ....................... 45.40 48.60 45.10 42.20 41.70
PERIOD-END BALANCES
-
-------------------
Total assets ................ $7,770,711 $7,364,804 $6,787,424 $6,433,612 $5,902,546
Net loans ................... 5,301,148 5,309,019 4,821,066 4,359,153 4,214,456................................ $ 8,387,778 $ 7,770,711 $ 7,364,804 $ 6,787,424 $ 6,433,612
Loans, net of unearned income ............... 5,317,068 5,373,020 5,374,659 4,882,606 4,420,481
Deposits ........................................................ 6,245,528 5,986,804 5,502,703 5,051,512 5,048,924
4,820,629
Long-term debt ............................................ 535,555 456,802 559,503 460,573 358,696
96,603
Shareholders' equity ................................ 863,742 811,454 731,171 662,749 654,070
607,961
AVERAGE BALANCES
- ----------------
Total assets ................................ $ 7,900,500 $ 7,520,071 $ 7,019,523 $ 6,533,632 $ 6,093,496
Loans, net of unearned income ............... 5,381,950 5,341,497 5,131,651 4,601,801 4,323,585
Deposits .................................... 6,052,667 5,771,089 5,245,019 5,006,751 4,904,347
Shareholders' equity ........ $........................ 838,213 779,014 $ 673,971 $ 663,841 $ 633,056 $ 563,808
Total assets ................ 7,520,071 7,019,523 6,533,630 6,093,496 5,608,602
--------------------------------------------------------
(1) Adjusted for stock dividends and stock splits.
(2) Excludes impact of merger-related expenses in 2001.
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
-------------
This 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
The Corporation has made, and may continue to make, certain forward-looking
statements with respect to acquisition and growth strategies, market risk,
expenses, 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, changes in organizational structure, balances of risk-sensitive assets to risk-sensitive
liabilities, employee benefits and other expenses, amortization of goodwill and
intangible assets 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 could cause
actual results to differ materially from such forward-looking statements:
pricing pressures on loan and deposit products, actions of bank and nonbanknon-bank
competitors, changes in local and national economic conditions, changes in
regulatory requirements, actions of the Federal Reserve Board (FRB),
creditworthiness of current borrowers and customers' acceptance of the
Corporation's products and services.
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.
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 large balance loans for individual review under Financial
Accounting Standards Board (FASB) 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.
- 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.
12
- 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 imprecision in estimating and measuring loss
exposure.
- Documenting the results of its review in accordance with the Securities and
Exchange Commission's Staff Accounting Bulletin No. 102, "Selected Loan
Loss Allowance Methodology and Documentation Issues" (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.
Goodwill - With the adoption of Statement of Financial Accounting Standards
Nos. 142, "Goodwill and Other Intangible Assets" (Statement 142) and 147,
"Acquisitions of Certain Financial Institutions" (Statement 147), effective on
January 1, 2002, the Corporation discontinued the amortization of goodwill
associated with qualifying acquisitions accounted for as purchases. As of
January 1, 2002, and at least annually thereafter, recorded goodwill is subject
to impairment testing to determine whether write-downs of the recorded balances
are necessary.
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. Assuming that the fair values
of the reporting units exceed their book values, no write-down of the recorded
goodwill is necessary. If the fair value is less than the book value, an
additional test is necessary to assess the proper carrying value of the
goodwill. The Corporation determined that no impairment write-offs were
necessary during 2002.
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.
See further discussion of the impact of adopting Statements 142 and 147 in
the Notes to Consolidated Financial Statements.
MERGER AND ACQUISITION ACTIVITY
- -------------------------------
The Corporation has historically supplemented its internal growth with
the
strategic acquisitionacquisitions of community banks, with similar operating philosophies.
More recently, the Corporation has also looked to non-bank entities to support
its noninterest income growth initiatives. In 2001, the Corporation continued
its external growth by acquiring a bank holding company, a non-bankbranches and other financial services
company and additional branches.
The accounting requirements for mergers and acquisitions were changed bycompanies. To allow the June 2001 issuance of Statement of Financial Accounting Standards Nos. 141,
"Business Combinations" (Statement 141) and 142 "Goodwill and Other Intangible
Assets" (Statement 142). Statement 141 requires thatreader to understand the purchase method of
accounting be used for all business combinations and eliminated the use of
pooling of interests for transactions initiated subsequent to June 30, 2001.
Statement 142 eliminates the amortization to expense of goodwill recorded as a
resultimpact of such combinations, but requires periodic evaluationacquisitions on
its financial results, summaries of the goodwill
for impairment. Write-downs of the balance, if necessary, are to be charged to
results of operations. Goodwill existing prior to the issuance of the statement
was required to be amortized through December 31, 2001.recent acquisitions follow.
Drovers Bancshares Corporation - On July 1, 2001, the Corporation completed
its merger with Drovers Bancshares Corporation (Drovers), an $820 milliona bank holding company
located in York, Pennsylvania.Pennsylvania, which had approximately $820 million in assets on
the acquisition date. Under the terms of the merger agreement, each of the 5.2
million shares of Drovers common stock was exchanged for 1.3021.628 shares of the
Corporation's common stock. In addition, each of the options to acquire Drovers
stock was exchanged for options to purchase the Corporation's common stock.
Drovers was merged with and into Fulton Financial Corporation, and its
wholly owned bank subsidiary, The Drovers & Mechanics Bank (Drovers Bank) was
merged into Fulton Bank, the Corporation's largest subsidiary bank. This
business combination was accounted for as a pooling of interests and, as such,
all financial information presented in this report has been restated to reflect
the impact of Drovers for all periods presented.
In connection with this transaction, the Corporation recorded
merger-related expenses of approximately $9.8 million ($6.4 million, net of
tax). These charges consisted of an additional provision for loan losses
resulting from the consistent application of the
13
Corporation's allowance evaluation procedures ($2.7 million) and one-time
expenses related to employee severance and related benefits, systems
conversions, real estate closures and sales, and professional fees ($7.1
million).
Branch Acquisition - On June 8, 2001, the Corporation assumed $315 million
of deposits and purchased $53 million of loans in an acquisition of 18 branches
located in New Jersey, Delaware and Pennsylvania.Pennsylvania (Branch Acquisition). This
transaction was accounted for as a purchase and the Corporation recorded a core
deposit intangible asset of $9.9 million and an unidentifiable intangible asset
of $21.7 million. The core deposit intangible asset is being amortized on a straight-line basis over 10
years. Since this was a branch acquisition,With the adoption of Statement 147 on January 1, 2002, the unidentifiable
intangible asset, does not qualify for the non-amortization provisions of Statement 142 and
will continue to bewhich was being amortized to expense on a straight-line basis over 25
years.years, was reclassified to goodwill and amortization was suspended. As with all
of the Corporation's goodwill, this is being tested at least annually for
impairment.
Dearden, Maguire, Weaver and Barrett, LLC - On January 2, 2001, the
Corporation completed its acquisition of investment management and advisory
company Dearden, Maguire, Weaver and Barrett, LLC (Dearden Maguire). The
acquisition was accounted for as a purchase and the accounts and results of
operations of Dearden Maguire are included in the financial statements of the
Corporation prospectively from the January 2, 2001 acquisition date.
In connection with the acquisition, goodwill of approximately $16.0 million
was recorded as the initial purchase price paid in excess of the fair value of
net assets acquired. Additional payments of up to $5.0 million may become
payable upon Dearden Maguire achieving certain revenue goals through December
31, 2005. The goals and the dates of such payments are specified in the purchase
agreement. Upon payment of any such amounts, goodwill will be increased. The
goodwill was being amortized to expense on a straight-line basis over 20 years
through December 31, 2001.years.
Effective January 1, 2002, as required by Statement 142, the goodwill is no
longer being amortized to expense, as required by Statement 142, but will be evaluated
periodicallyis being tested at least annually for
impairment.
Skylands Financial Corporation - On August 1, 2000, the Corporation
completed its acquisition of Skylands Financial Corporation (SFC) of
Hackettstown, New Jersey. SFC, with approximately $240 million in total assets
on the acquisition date, was a bank holding company whose sole banking
subsidiary, Skylands Community Bank (Skylands), operates eightoperated community banking
offices in Morris, Warren and Sussex counties.
Under the terms of the merger agreement, each of the 2.5 million
outstanding shares of SFC's common stock was exchanged for 0.861.075 shares of the
Corporation's common stock. In addition, options to acquire shares of SFC stock
were also exchanged for options to purchase the Corporation's common stock. As a
result of the acquisition, SFC was merged with and into the Corporation and
Skylands became the Corporation's third banking subsidiary located in New
Jersey.
The acquisition was accounted for as a purchase and the accounts and
results of operations of SkylandsSFC are included in the financial statements of the
Corporation prospectively from the August 1, 2000 acquisition date. In
connection with the acquisition, goodwill of approximately $17.5 million was
recorded as the purchase price paid in excess of the fair value of net assets
acquired. The goodwill was being amortized to expense on a straight line basis
over 15 years
through December 31, 2001.years. Effective January 1, 2002, as required by Statement 142, the
goodwill is no longer being amortized to expense, as required by Statement 142, but will be evaluated
periodicallyis being tested at least
annually for impairment.
In the discussion that follows, the acquisitions of Skylands,SFC, Dearden Maguire
and the Branch Acquisition are collectively referred to as the "Purchase
Acquisitions".
RESULTS OF OPERATIONS
- ---------------------
Overview
The Corporation's net income for 2002 increased $19.4 million, or 17.0%, in
comparison to net income for 2001. Diluted net income per share increased $0.20,
or 18.3%, compared to 2001. Net income for 2001 was reduced by $6.4 million of
merger-related expenses, net of tax. Excluding the impact of these
merger-related expenses, income per share increased $0.14, or 12.2%, and net
income increased $13.0 million, or 10.8%. Net income for 2002 of $132.9 million,
or $1.30 per share (basic), and $1.29 per share (diluted) represented a return
on average assets of 1.68% and a return on average equity of 15.86%.
The growth in 2002 resulted from increases in net interest income and other
income. In addition, the Corporation did not incur any merger-related expenses
in 2002 and experienced a reduction in intangible amortization expense as a
result of adopting
14
Statements 142 and 147. These positive factors were partially offset by
increases in operating expenses, primarily salaries and employee benefits, and
lower investment securities gains.
Net income for 2001was $113.6 million, or 1.37$1.09 per share (diluted), as
compared to $106.8 million, or $1.31$1.05 per share (diluted), in 2000. The increase
in net income for the year was $6.8 million, or 6.3%, and the increase in net
income per share was $0.06,$0.04, or 4.6%3.8%. Excluding non-recurringthe impact of the merger-related
expenses,
associated with the acquisition of Drovers, the Corporation earned $120.0 million, or $1.44$1.15 per share (diluted),
for increases of 12.3% and 9.9%9.5%, respectively, over 2000. The percentage increase in net income exceeded the percentage increase in
net income per share as there were more shares outstanding in 2001 as a result
of issuing stock to effect the Skylands acquisition in August, 2000.
The growth in 2001 resulted from net interest income increases driven by
the impact of the Purchase Acquisitions, augmenting minimal internal net
interest income growth due to the effect of changes in short term interest rates
enacted by the Federal Reserve Board (Federal Reserve). Growth was also evident
in non-interest income sources, particularly investment securities gains,
investment management and trust services income - due, in part, to the
acquisition of Dearden Maguire - and mortgage sales gains - due to significant
refinance activity resulting from lower mortgage interest rates. These increases
were offset by non-interest expense increases.
Net income for 2000 of $106.8 million increased $2.2 million, or 2.1% over
1999. Net income per share of $1.31 was an increase of $0.05, or 4.0%. The
restatement of financial information to reflect Drovers had a significant impact
on the earnings growth from 1999 to 2000. In 2000, Drovers experienced certain
loan credit issues which resulted in a $4.7 million increase to the provision
for loan losses.
The Corporation's return on average assets (ROA), excluding merger-related
charges, was 1.60% in 2001 as compared to 1.52% in 2000 and 1.60% in 1999.
Return on average shareholders' equity (ROE), excluding merger-related charges,
was 15.40% in 2001 as compared to 15.85% in 2000 and 15.76% in 1999. Including
merger-related charges, the Corporation's ROA and ROE were 1.51% and 14.58%,
respectively, in 2001.
Net Interest Income
Net interest income is the most significant component of the Corporation's
net income, accounting for 77%approximately 75% of total revenues in 2001.2002. The
ability to manage net interest income over a variety of interest rate and
economic environments is important to the success of a banking entity.financial institution.
Net interest income growth is generally dependent upon balance sheet growth and
maintaining or growing the net interest margin. See alsoThe "Market Risk" section
beginning on page 28 provides additional information on procedures used by the
discussion of "Interest Rate Risk" later in this
section.
Net interest income for 2001 was $290.2 million, a $14.5 million, or 5.2%,
increase over 2000. Excluding the estimated contribution from the Purchase
Acquisitions, internalCorporation to manage net interest income.
15
The following table summarizes the average balances and interest earned or
paid on the Corporation's interest-earning assets and interest-bearing
liabilities.
Year Ended December 31
---------------------------------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------- ----------- --------- ------ ----------- ---------- ------ ----------- ---------- ------
Interest-earning assets:
Loans and leases (1) .............. $5,381,950 $370,318 6.88% $5,341,497 $ 424,527 7.95% $5,131,651 $ 433,720 8.45%
Taxable inv. securities (2) ....... 1,605,077 84,139 5.24 1,300,169 77,701 5.98 1,101,946 68,629 6.23
Tax-exempt inv. securities (2) .... 229,938 9,835 4.28 216,783 9,465 4.37 231,375 10,187 4.40
Equity securities (2) ............. 113,422 4,066 3.58 103,286 5,097 4.93 109,002 6,087 5.58
Short-term investments ............ 27,741 930 3.35 44,405 1,890 4.26 14,456 1,038 7.18
---------- -------- ----- ---------- --------- ----- ---------- --------- -----
Total interest-earning assets ....... 7,358,128 469,288 6.38 7,006,140 518,680 7.40 6,588,430 519,661 7.89
Non-interest-earning assets:
Cash and due from banks ........... 253,503 241,660 246,694
Premises and equipment ............ 123,658 124,003 106,020
Other assets (2) .................. 238,441 217,717 142,412
Less: Allowance for loan losses ... (73,230) (69,449) (64,033)
---------- ---------- ----------
Total Assets .............. $7,900,500 $7,520,071 $7,019,523
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Demand deposits ................... $ 910,934 $ 6,671 0.73% $ 744,831 $ 8,795 1.18% $ 653,063 $ 9,878 1.51%
Savings deposits .................. 1,516,832 16,453 1.08 1,313,880 25,381 1.93 1,186,721 32,895 2.77
Time deposits ..................... 2,579,441 102,270 3.96 2,786,513 152,793 5.48 2,568,238 144,828 5.64
Short-term borrowings ............. 434,402 6,598 1.52 355,953 13,150 3.69 521,608 30,447 5.84
Long-term debt .................... 476,415 26,227 5.51 500,162 27,843 5.57 476,590 25,826 5.42
---------- -------- ----- ---------- --------- ----- ---------- --------- -----
Total interest-bearing liabilities .. 5,918,024 158,219 2.67 5,701,339 227,962 4.00 5,406,220 243,874 4.51
Noninterest-bearing liabilities:
Demand deposits ................... 1,045,460 925,865 836,997
Other ............................. 98,803 113,853 102,335
---------- ---------- ----------
Total Liabilities ......... 7,062,287 6,741,057 6,345,552
Shareholders' equity ................ 838,213 779,014 673,971
---------- ---------- ----------
Total Liabs. and Equity ... $7,900,500 $7,520,071 $7,019,523
========== ========== ==========
Net interest income ................. 311,069 290,718 275,787
Net yield on earning assets ......... 4.23 4.15 4.19
Tax equivalent adjustment (3) ....... 9,193 8,286 8,506
-------- ----- --------- ----- --------- -----
Net interest margin ................. $320,262 4.35% $ 299,004 4.27% $ 284,293 4.31%
======== ===== ========= ===== ========= =====
- -----------------------------------
(1) Includes non-performing loans.
(2) Balances include amortized historical cost for available for sale
securities. The related unrealized holding gains (losses) are included in
other assets.
(3) Based on marginal Federal income growth was $3.6 million, or 1.3%. Nettax rate and statutory interest income in 2000 was $275.8 million,expense
disallowances.
16
The following table sets forth a $9.6 million, or 3.6% increase
over 1999. The impact of Skylands was also evident in 2000 as internal growth
was only $4.4 million, or 1.6%. The "Comparative Average Balance Sheets and Net
Interest Income Analysis" on page 13 and the "Rate/Volume Table" on page 14
summarize the components of net interest income and illustrate variances as a
resultsummary of changes in interest income and
interest expense resulting from changes in volumes (average balances) and
changes in rates:
2002 vs. 2001 2001 vs. 2000
Increase (decrease) due Increase (decrease) due
to change in to change in
------------------------------------- -----------------------------------
Volume Rate Net Volume Rate Net
--------- --------- ---------- ---------- --------- ---------
(in thousands)
Interest income on:
Loans and leases ............................ $ 3,229 $ (57,438) $ (54,209) $ 17,301 $ (26,494) $ (9,193)
Taxable investment securities ............... 17,995 (11,557) 6,438 12,345 (3,273) 9,072)
Tax-exempt investment securities ............ 572 (202) 370 (642) (80) (722)
Equity securities ........................... 500 (1,531) (1,031) (319) (671) (990)
Short-term investments ...................... (711) (249) (960) 2,150 (1,298) 852)
--------- --------- ---------- ---------- --------- ---------
Total interest-earning assets ............. $ 21,585 $ (70,977) $ (49,392) $ 30,835 $ (31,816) $ (981)
========= ========= ========== ========== ========= =========
Interest expense on:
Demand deposits ............................. $ 1,974 $ (4,098) $ (2,124) $ 1,388 $ (2,471) $ (1,083)
Savings deposits ............................ 3,938 (12,866) (8,928) 3,525 (11,039) (7,514)
Time deposits ............................... (11,355) (39,168) (50,523) 12,309 (4,344) 7,965
Short-term borrowings ....................... 2,886 (9,438) (6,552) (9,670) (7,627) (17,297)
Long-term debt .............................. (1,317) (299) (1,616) 1,277 740 2,017
--------- --------- ---------- ---------- --------- ---------
Total interest-bearing liabilities ........ $ (3,874) $ (65,869) $ (69,743) $ 8,829 $ (24,741) $ (15,912)
========= ========= ========== ========== ========= =========
-----------------------------------------
Note: The rate/volume variances are allocated in the table above by
applying the changes in volume times the prior period rate and by
applying the changes in rate times the current period volume on a
consistent basis throughout.
The Corporation's net interest income has been impacted by a series of
reductions to short-term interest rates versus growth in assets and liabilities.
The interest rate environment, as evidencedenacted by the actions of the Federal
Reserve, had an obvious impact on the Corporation's ability to grow net interest
incomeFRB over the past two
years. In terms ofThese rate reductions resulted in significant decreases to the
Corporation's prime lending rate as well as a decline in the general interest
rate environment. The rate reductions initially had a negative impact on the
Corporation's net interest income and net interest margin as its assets,
particularly floating rate loans, repriced to lower rates more quickly than its
time deposits. During 2002, however, the Corporation's longer-term liabilities
repriced to lower rates resulting in an increase to the Corporation's net
interest margin. The positive impact of the time deposit repricing on the net
interest margin peaked in mid-2002. The most recent rate cut by the FRB in late
2002 contributed to a slight downward trend in the margin over the last quarter
of 2002. If rates remain low in the future, the net interest margin may continue
to trend lower.
2002 vs. 2001
In 2002, net interest income was positively impacted by the full year
impact of the Branch Acquisition, which provided approximately $300 million in
deposits and $50 million in loans. Net interest income for the year was $311.1
million, a $20.4 million, or 7.0%, increase over 2001. The net interest margin
for 2002 was 4.35%, an eight basis point increase from 4.27% in 2001.
Interest income decreased $49.4 million, or 9.5%, mainly as a result of
the 102 basis point decrease in average yields which accounted for a $71.0
million decline in interest income. As previously discussed, average yields
decreased during 2002 due to a general decrease in interest rates as a result of
the actions of the FRB. The Corporation's prime lending rate averaged 6.89% in
2001, dropping to an average of 4.68% during 2002. The decrease in interest
income as a result of rate changes was partially offset by a $21.6 million
increase due to average balance growth, primarily in investment securities.
Average loans of $5.4 billion were essentially flat for the period. This
was the result of several offsetting factors. Strong commercial loan and
commercial mortgage growth ($241.3 million, or 8.0%, increase in average
balances) was offset by decreases in
17
residential mortgages ($166.4 million, or 18.0%) and consumer loans ($39.4
million, or 3.0%). Residential mortgages decreased as a result of the low
interest rate environment generating strong refinance activity. Newly originated
fixed rate mortgages were sold in the secondary market to promote liquidity and
reduce interest rate risk. Consumer loans decreased mainly in direct and
indirect automobile loans ($109.0 million, or 20.7%) due to the Corporation
electing not to compete with manufacturer-sponsored loan rate incentives and
consumers paying off such consumer debt with cash from mortgage refinances.
These decreases were offset in part by an increase in home equity loans ($63.7
million, or 10.1%), as consumers took advantage of the lower rates available on
these loans.
The average yield on loans during 2002 was successful6.88%, a 107 basis point
decline from 2001. The reduction in minimizing the effectCorporation's average prime lending rate
resulted in lower overall yields as compared to 2001. The Corporation also
experienced a shift of approximately $450 million from fixed rate to adjustable
rate commercial loan and commercial mortgage balances.
Average investment securities increased $328.2 million, or 20.3%, during
2002. The increase was mainly the result of deposit growth exceeding net
increases in loans. Total average deposits increased $281.6 million, or 4.9%,
during 2002. The Corporation used the excess funds to purchase investment
securities, particularly mortgage-backed securities, which grew by $325.9
million, or 29.0%. The average yield on investment securities declined during
2002, although the reduction was not as pronounced as that realized on the loan
portfolio. The average yield on investments was 5.03% in 2002 and 5.69% in 2001.
Interest expense decreased $69.7 million, or 30.5%, to $158.2 million in
2002 from $228.0 million in 2001. This resulted from a combination of declining
interest rates and a shift in the composition of liabilities from higher-rate
time deposits to lower-rate demand and savings deposits. Interest-bearing demand
and savings deposits increased $369.1 million, or 17.9%, and noninterest-bearing
deposits increased $119.6 million, or 12.9%, while time deposits decreased by
$207.1 million, or 7.4%. The Branch Acquisition contributed $101.4 million to
the increase in average deposits. The net $216.7 million, or 3.8%, increase in
average interest-bearing liabilities actually resulted in a $3.9 million
decrease in interest expense, due to the change in the composition of these
liabilities. The 133 basis point decline in the average cost of interest-bearing
funds resulted in a $65.9 million decrease in interest expense.
Average short-term borrowings increased $78.4 million, or 22.0%. This
additional source of funds was partially used to reduce the Corporation's higher
rate long-term borrowings in the early part of 2002. Average long-term debt
decreased $23.7 million, or 4.7%, from $500.1 million in 2001 to $476.4 million
in 2002.
Average interest rates paid on interest-bearing liabilities decreased 133
basis points to 2.67% in 2002 as compared to 4.00% in 2001. This change was more
pronounced than the 102 basis point decrease in yields on average
interest-earning assets, resulting in an increase in the Corporation's net
interest margin of eight basis points to 4.35% in 2002 from 4.27% in 2001.
2001 vs. 2000
In 2001, net interest income was also positively impacted by the June,
2001 Branch Acquisition. Net interest income for the year was $290.7 million, a
$14.9 million, or 5.4%, increase over 2000. The net interest margin for 2001 was
4.26%4.27%, a fivefour basis point decrease from 4.31% in 2000.
In 1999, the Corporation's net interest margin was 4.49%. Management
believes that its asset/liability management practices will continue to minimize
the effects of interest rate fluctuations.
2001 v. 2000
Interest income decreased $1.4 million,$981,000, or 0.3%0.2%, to $518.2$518.7 million in 2001
from $519.6$519.7 million in 2000. Excluding the estimated impact of the Purchase
Acquisitions, the decrease was $13.7 million, or 2.7%. Interest income increased $31.3$30.8 million as a result
of a $417.7 million increase in average interest-earning assets. However,assets, however, this
was more than offset by the $32.7a $31.8 million reduction in interest income resulting from declining
rates. The average yield on earning assets for the year dropped 49 basis points
to 7.40% in 2001 from 7.89% in 2000.
Average loans increased $209.8 million, or 4.1%, to $5.3 billion.
Excluding the impact of the Purchase Acquisitions, the increase was $72.4
million, or 1.4%. This modest increase resulted from the same offsetting factorstrends
which continued into 2002 - strong commercial loan and commercial mortgage
growth ($201.4 million, or 7.5%) was
offset by a $78.7 million, or 8.0%, decrease in
residential mortgages and a $58.7 million, or 4.4%, decrease in consumer loans.
Residential mortgages decreased as a result of a relativelythe low interest rate environment
generating healthyincreased refinance activity and salesthe sale of the resulting fixed ratefixed-rate
mortgage loans. Consumer loans decreased mainly in indirect autoand direct
automobile loans.
The average yield on loans during 2001 was 7.94%7.95%, a 5150 basis point decline
from 2000, which mirrored the decline in average rates on total interest earninginterest-earning
assets. The interest rate reductions enacted by the Federal ReserveFRB had a direct impact on
the Corporation's prime
18
lending rate, which declined to an average of 6.89% during 2001 as compared to
9.25%9.24% in 2000. This index is used for pricing a
portion of the Corporation's adjustable rate loan portfolio, resultingresulted in lower overall yields as compared to 2000. In addition, new loans were originated at
lower rates than prior years as a result of the general interest rate
environment.
Average investment securities increased $177.9 million, or 12.3%, during
2001. This growth which was realized mainly in taxable investment securities,
resulted from the Branch Acquisition, aswhere the excess of
deposits assumed over loans acquired was approximately $250 million. A portion
of these excess funds was used to purchase investment securities as the
Corporation realized only modest loan growth. The average yield on investment
securities also declined during 2001 although the reduction was not as pronounced as that realized on
the loan portfolio -to 5.69% average yield in 2001 as compared to 5.89% in 2000.
Interest expense decreased $15.9 million, or 6.5%, to $228.0 million in
2001 from $243.9 million in 2000. Excluding the Purchase Acquisitions, the
decrease was $19.9 million, or 8.3%. Unlike interest income, which was equally
impacted by rates and volumes, the decrease in interest expense was mainly a
result of decreases in rates ($24.7 million), somewhat offset by increases in
balances ($8.8 million). This contrast resulted from short termshort-term borrowings and
demand and savings deposits repricing to lower rates more quickly than earning
assets.
However, the Corporation's time deposits were more influenced by volume
increases as these are generally longer term and have not yet completely
repriced to lower rates.
Average interest-bearing deposits increased $437.2 million, or 9.9%, to
$4.8 billion in 2001. This increase was largely driven by the Purchase
Acquisitions; excluding these acquisitions, the increase was $176.2 million, or
4.1%. All categories of deposits realized growth during 2001, despite the
industry trend in recent years toward minimal deposit growth for banks.2001. While uncertainty
in the equity markets contributed to inflowsthe inflow of funds to FDIC
insured organizations,FDIC-insured
institutions, the Corporation also benefited from aggressiveits marketing particularly free checking accounts.campaigns
promoting core deposit growth. Average demand deposits, excluding the impact of
the Purchase Acquisitions, increased $84.0 million, or 5.8%, and average savings
deposits increased $57.1 million, or 4.9%. Time deposits increased $81.5
million, or 3.2%.
Average short-term borrowings decreased $165.7 million, or 31.8%, as
excess funds from the Branch Acquisition were used to reduce short-term
borrowings as well as to purchase investment securities. Long-term debt
increased $23.6 million, or 4.9%, as the Corporation retained positions in
longer maturitieslonger-term debt for balance sheet management purposes. Borrowings and debt were not significantly
impacted by Skylands.
Average interest rates paid on interest-bearing liabilities decreased 51
basis points to 4.00% in 2001 as compared to 4.51% in 2000. This change was
comparable to the change in interest earninginterest-earning assets, thus minimizing the impact
of rates on the Corporation's net interest margin for the year, which decreased
only fivefour basis points to 4.26%4.27% in 2001 from 4.31% in 2000.
2000 v. 1999
Interest income increased $54.3 million, or 11.7%, to $519.6 million in
2000 from $465.3 million in 1999. Excluding Skylands, the increase was $45.6
million, or 9.8%. This growth was mainly volume driven, with $40.4 million of
the increase attributable to the growth in interest-earning assets ($482.5
million, or 7.9%) and the remaining $13.9 million the result of interest rate
increases. On average, the yield on earning assets increased 27 basis points to
7.89% in 2000 from 7.62% in 1999.
The growth in average interest-earning assets occurred mostly in loans,
which increased $529.9 million, or 11.5% ($457.9 million, or 10.0%, excluding
the impact of Skylands) to $5.1 billion. Commercial loans ($169.9
million, or 15.2% increase) and commercial mortgage loans ($228.9 million, or
18.8% increase) accounted for the majority of the growth. Consumer loans,
primarily as a result of an increase in home equity lines of credit and second
mortgage loans, grew $81.6 million, or 6.5%. Residential mortgage loans
increased only $38.2 million, or 4.0%, as the Corporation continued to sell
newly originated fixed rate mortgage loans.
Offsetting the increase in average loans was a decline in investment
securities balances, which decreased $55.8 million, or 3.7%, to $1.4 billion in
2000. In general, proceeds from maturities were used to support loan growth
rather than being reinvested in securities.
The 27 basis point increase in average yields on earning assets reflected
the changes in the interest rate environment in general. In contrast to 2001,
which saw interest rates declining throughout the year, 2000 was marked by
several rate increases enacted by the Federal Reserve. As market rates rose in
response, the Corporation's earning assets also gradually readjusted to higher
rates. However, the average loan yield increased only 22 basis points to 8.45%
despite a 125 basis point increase in the average prime lending rate to 9.25% in
2000 from 8.00% in 1999. This reflects competition from other lenders and the
loan portfolio mix, which included longer-term fixed rate loans originated when
rates were lower.
Interest expense increased $44.7 million, or 22.5%, to $243.9 million in
2000 from $199.1 million in 1999 ($41.3 million, or 20.7%, increase, excluding
Skylands). Unlike interest income, which was mainly volume driven, interest
expense was affected to a larger degree by interest rates. Increases in average
balances accounted for $18.9 million of the increase, while rate increases
accounted for $25.9 million of the increase.
Average interest-bearing deposits increased $171.0 million, or 4.0%, to
$4.4 billion in 2000. This modest increase, however, was impacted by the
Skylands acquisition, which added $76.7 million to the annual average balance.
Growing deposits during 2000 was a challenge for the Corporation - and banks in
general - as non-bank alternatives continued to be attractive to consumers.
While most of the deposit increase, $85.1 million (excluding the impact of
Skylands), was in more costly time deposits, the Corporation did have some
success in raising noninterest-bearing demand deposits, which grew $48.7
million, or 6.3%.
As deposit growth lagged the increase in earning assets, the Corporation
turned to alternative funding sources. Average short-term borrowings, consisting
of overnight repurchase agreements and Federal funds purchased, increased $141.3
million, or 37.1%, and long-term debt, consisting of advances from the Federal
Home Loan Bank (FHLB), increased $95.4 million, or 25.0%. The increases in
borrowings were not impacted by Skylands.
Average interest rates paid on interest-bearing liabilities increased 53
basis points to 4.51% as compared to 3.98% in 1999. This increase far outpaced
the increase in yields on earning assets and reflected the change in the funding
mix from lower cost deposits to higher cost borrowings. As a result, the net
interest margin declined to 4.31% in 2000 from 4.49% in 1999.
Provision and Allowance for Loan Losses
AdditionsThe credit risk associated with lending activities is accounted for by the
Corporation 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 SAB
102. See "Critical Accounting Policies" on page 12 for a discussion of the
Corporation's allowance for loan loss evaluation methodology.
19
A summary of the Corporation's loan loss experience follows:
Year Ended December 31
---------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(dollars in thousands)
Loans outstanding at end of year .................. $ 5,317,068 $ 5,373,020 $ 5,374,659 $ 4,882,606 $ 4,420,481
------------ ------------ ------------ ------------ ------------
Daily average balance of loans and leases ......... $ 5,381,950 $ 5,341,497 $ 5,131,651 $ 4,601,801 $ 4,323,585
------------ ------------ ------------ ------------ ------------
Balance of allowance for loan losses
at beginning of year ......................... $ 71,872 $ 65,640 $ 61,538 $ 61,327 $ 60,861
Loans charged-off:
Commercial, financial and agricultural ........ 7,203 6,296 9,242 4,797 2,934
Real estate - mortgage ........................ 2,204 767 1,922 1,604 1,403
Consumer ...................................... 5,587 6,683 6,911 8,147 5,426
Leasing and other ............................. 676 529 282 124 134
------------ ------------ ------------ ------------ ------------
Total loans charged-off ....................... 15,670 14,275 18,357 14,672 9,897
------------ ------------ ------------ ------------ ------------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural ........ 842 703 1,518 2,027 1,223
Real estate - mortgage ........................ 669 364 541 710 926
Consumer ...................................... 2,251 2,683 2,724 2,202 1,364
Leasing and other ............................. 56 87 19 1 2
------------ ------------ ------------ ------------ ------------
Total recoveries .............................. 3,818 3,837 4,802 4,940 3,515
------------ ------------ ------------ ------------ ------------
Net loans charged-off ............................. 11,852 10,438 13,555 9,732 6,382
Provision for loan losses ......................... 11,900 14,585 15,024 9,943 6,848
Allowance purchased ............................... - 2,085 2,633 - -
------------ ------------ ------------ ------------ ------------
Balance at end of year ............................ $ 71,920 $ 71,872 $ 65,640 $ 61,538 $ 61,327
============ ============ ============ ============ ============
Selected Asset Quality Ratios:
------------------------------
Net charge-offs to average loans .................. 0.22% 0.20% 0.26% 0.21% 0.15%
Allowance for loan losses to loans
outstanding at end of year ................... 1.35% 1.34% 1.22% 1.26% 1.39%
Non-performing assets (1) to total assets ......... 0.47% 0.44% 0.41% 0.49% 0.52%
Non-accrual loans to total loans .................. 0.45% 0.42% 0.41% 0.49% 0.47%
- ---------------------------------------------------
(1) Includes accruing loans past due 90 days or more.
20
The following table presents the aggregate amount of non-accrual and past due
loans and other real estate owned (3):
December 31
-----------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(in thousands)
Non-accrual loans (1) (2) ................. $ 24,090 $ 22,794 $ 21,790 $ 23,989 $ 20,716
Accruing loans past due 90 days or more ... 14,095 9,368 7,135 8,549 11,116
Other real estate ......................... 938 1,817 1,035 1,002 1,568
---------- ---------- ---------- ---------- ----------
Totals ............................... $ 39,123 $ 33,979 $ 29,960 $ 33,540 $ 33,400
========== ========== ========== ========== ==========
----------------------------------
(1) As of December 31, 2002, the gross interest income that would have
been recorded during 2002 if nonaccrual loans had been current in
accordance with their original terms was approximately $1.7 million.
The amount of interest income on those nonaccrual loans that was
included in 2002 income was approximately $625,000.
(2) Accrual of interest is generally discontinued when a loan becomes 90
days past due as to principal and interest. When interest accruals are
chargeddiscontinued, interest credited to income throughis reversed. Nonaccrual
loans are restored to accrual status when all delinquent principal and
interest becomes current or the provision for loan losses when,is considered secured and in the
judgementprocess 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, 2002 are $33.9
million in loans where possible credit problems of borrowers have
caused management and based on continuing analysesto have serious doubts as to the ability of such
borrowers to comply with the present loan portfolio, it is
believed thatrepayment terms.
The following table summarizes the allowance is not adequate. Management considers various
factors in assessing the adequacyallocation of the allowance for loan
losses and
determining the provision for the period. Among these are charge-off history and
trends, risk classification of significant credits, adequacy of collateral, the
mix and risk characteristics ofby loan types in the portfolio, and the balance of
the allowance relative to total and non-performing loans. Additional
consideration is given to regional and national economic conditions. The
Corporation's policies for evaluating the adequacy of the allowance for loan
losses conform to the provisions of the Securities and Exchange Commission's
Staff Accounting Bulletin No. 102, "Selected Loan Loss Allowance Methodology and
Documentation Issues."
The tables below summarize non-performing assets (including accruing loans
greater than 90 days past due) and net charge-offs by major loan category as of
or for the years ended December 31, 2001, 2000 and 1999 (dollars in thousands).
type:
Nonperforming Assets
------------------------------------------------------------December 31
-------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 ------------------ ------------------ ------------------
Amount1998
-------------------- -------------------- --------------------- ------------------- --------------------
(dollars in thousands)
% Change Amountof % Change Amountof % Change
-------of % of % of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Allowance Category Allowance Category Allowance Category Allowance Category Allowance Category
--------- -------- ---------------- -------- ---------------- -------- --------- -------- --------- --------
Real estate loans ......... $19,101 2.4% $18,646 (4.8)% $19,580 7.4%
Commercial &
industrial loans...... 9,255 48.6 6,229 (29.0) 8,779 14.4
Consumer loans ............ 3,806 (6.0) 4,050 (3.1) 4,179 (29.6)
Other real estate owned.... 1,817 75.6 1,035 3.3 1,002 (36.1)
------- ---- ------- ----- ------- -----
Total...................... $33,979 13.4% $29,960 (10.7)% $33,540 0.4%
======= ==== ======= ===== ======= =====
Non-performing
assets/Total assets... 0.44% 0.41% 0.49%
======= ======= =======
Non-performing
loans/Total loans..... 0.60% 0.54% 0.67%
======= ======= =======
Net Charge-Offs
------------------------------------------------------------
2001 2000 1999
------------------ ------------------ ------------------
Amount % Change Amount % Change Amount % Change
------- -------- ------- -------- ------ ---------
Comm'l, financial
& agriculture ... $ 33,130 31.6% $ 22,531 27.8% $ 21,193 25.8% $ 15,516 24.8% $ 16,077 23.5%
Real estate loansestate-
construction
& mortgages .... 13,099 56.8 19,018 58.9 14,940 59.1 17,425 57.4 20,296 57.7
Consumer, leasing
& other ........ 14,178 11.6 10,855 13.3 10,772 15.1 9,435 17.8 6,868 18.8
Unallocated ......... 11,513 - 19,468 - 18,735 - 19,162 - 18,086 -
--------- ----- --------- ----- ---------- ----- ---------- ----- ---------- -----
Totals ......... $ 403 (70.8)%71,920 100.0% $ 1,381 54.5%71,872 100.0% $ 894 87.4%
Commercial &
industrial loans...... 5,593 (27.6) 7,724 178.9 2,769 61.8
Consumer loans ............ 4,442 (0.2) 4,450 (26.7) 6,069 44.7
------- ----- ------- ----- ------ ----
Total ..................... $10,438 (23.0)% $13,555 39.3% $9,732 52.5%
=======65,640 100.0% $ 61,538 100.0% $ 61,327 100.0%
========= ===== ======= ==== ====== ====
Net charge-offs/
Average loans......... 0.20% 0.26% 0.21%
======= ======= =============== ===== ========== ===== ========== ===== ========== =====
The provision for loan losses for 20012002 totaled $14.6 million. Of this
amount,$11.9 million, a decrease of
$2.7 million, wasor 18.4%, from $14.6 million in 2001. In 2001 the Corporation
provided an additional $2.7 million related to the Drovers merger. Applying the
Corporation's consistent allowance evaluation procedures to the acquired Drovers
loan portfolio resulted in the need for an additional provision for loan losses.Bank acquisition.
Excluding this additional amount, the provision for loan losses decreasedwas unchanged
from year to year. The 2001 provision, as adjusted for the $2.7 million, was
$3.1 million, or 20.9%. In, lower than the 2000 Drovers experienced significant charge-offsamount of $15.0 million. The higher
2000 provision was primarily related to specific credits which have since been worked out, resulting in an increaseasset quality issues
experienced by Drovers prior to the provision. No comparable situations existedacquisition.
Over the past several years, the procedures used by the banking industry to
evaluate the allowance for loan losses have received increased attention from
the Securities and Exchange Commission, regulatory bodies and the accounting
industry. These groups have
21
attempted to reconcile the accounting theory of reserving for loan losses, which
requires that the allowance represent management's estimate of the losses
inherent in the loan portfolio as of the balance sheet date, with the regulatory
goals of safety and soundness.
While the resulting guidance provided by these groups has not changed the
accounting, it has focused on clarifying the application of Statements 5 and 114
and improving documentation. As with others in the industry, the Corporation has
used this guidance to improve its process and its documentation. The unallocated
allowance for loan losses, as shown in the above table, decreased from $19.5
million, or 27% of the total allowance, to $11.5 million, or 16% of the total
allowance, in the past year. This decrease is not necessarily indicative of
changes in the underlying credit quality, but is rather the result of
refinements in the Corporation's methodology that have not been retroactively
applied to prior years. Whereas in prior years, there was no effort to assign
the unallocated allowance to the components of the loan portfolio for which
these additional balances were maintained, this was done in 2002 as part of
these refinements. A significant portion of the unallocated allowance was
attributed to commercial, financial and agricultural loans in recognition of the
risk characteristics of this portfolio. These characteristics include, among
other things, larger loans which may be unsecured or partially secured and loans
where the borrower is experiencing financial difficulty but continues to meet
principal and interest obligations.
Non-performing assets increased $5.1 million, or 15.1%, as compared to
2001, thusrepresenting a three basis point increase as a percentage of total assets
(0.47% in 2002 and 0.44% in 2001). Despite recent economic uncertainties, this
moderate increase has resulted from specific, individual credits and is not
indicative of a general worsening trend in the Corporation's asset quality. The
balance includes a $5.3 million loan to a developer of commercial and
residential projects in a geographic area that had been impacted by drought
conditions. The original amount of this relationship that was placed on
non-accrual status in the third quarter of 2002 was approximately $14.5 million.
Subsequently, $5.5 million of this account was paid off, resulting in a lower provision. The 2000 provision of $15.0$3.7
million was $5.1 million, or 51.1%,
higher than the 1999 provision of $9.9 million.charge-off.
Net charge-offs as a percentage of average loans were 0.20%0.22%, a sixtwo basis
point improvementincrease from 2000. In addition, total2001. As with the non-performing ratios, this increase
resulted mainly from the specific credit noted in the preceding paragraph.
Excluding this credit, the Corporation realized positive trends in net
charge-offs as net consumer loan charge-offs, which historically have accounted
for the largest amount of losses, decreased 23.0%
comparedfrom $4.0 million, or 0.58% of
average consumer loans outstanding, in 2001 to 2000. Total non-performing assets to total assets increased three
basis points to 0.44% at December 31, 2001 as compared to 0.41% at the end$3.3 million, or 0.57% of 2000. This modest increase reflects the change in general economic conditions at
the end of 2001 as compared to the prior year. As a result of economic
uncertainty and the change in the mix of the portfolio to proportionately more
commercialaverage
consumer loans the Corporation providedoutstanding.
The provision for loan losses in an amount
exceeding its realized2002 resulted from the Corporation's
allowance allocation procedures. Trends that would indicate the need for a
higher provision include the general national and regional economies and the
continued growth in the Corporation's commercial loan and commercial mortgage
portfolios, which are inherently more risky. Offsetting these trends were the
improvements in quality of the Corporation's other loan types and consistency of
asset quality measures over the past several years. The net result of the
Corporation's allowance allocation procedures was a provision for loan losses
that was essentially unchanged from 2001 and was comparable to total net
charge-offs for the year ($11.9 million provision,
excluding $2.7 million related to Drovers, as compared to $10.4 million in net
charge-offs).
The Corporation's periodic loan portfolio review and allowance calculations
resulted in 73% of the total balance being allocated to specific loans and loan
types at December 31, 2001 as compared to 71% at December 31, 2000. The
allowance for loan losses as a percentage of total loans increased to 1.34% at
December 31, 2001 from 1.22% at December 31, 2000. This increase reflects the
impact of the additional provision recorded for the Drovers portfolio.year. Management believes that the allowance balance of
$71.9 million at December 31, 20012002 is sufficient to cover losses incurredinherent in the
loan portfolio on that date and is appropriate based on applicable accounting
standards.
Other Income
Other income - excludingfor 2002 was $115.8 million, an increase of $13.0 million, or
12.7%, over other income of $102.7 million in 2001. Excluding investment
securities gains, -which decreased $3.6 million to $9.0 million in 2002, other
income increased $22.0$16.6 million, or 33.3%18.4%. Increases were realized across all
categories of other income. Excluding investment securities gains, other income
increased $21.8 million, or 32.0%, in 2001.
In terms of total dollar increases, the most significant growth in each
year was realized in mortgage banking income, which increased $5.4 million, or
45.6%, to $88.4$17.2 million in 20012002, following an increase of $8.0 million, or
211.5%, in 2001. The declining interest rate environment over the past two years
fueled significant residential mortgage refinance activity, resulting in
increases in gains on sales. The Corporation's policy is to sell qualifying
originated fixed rate mortgage loans and retain the servicing in order to
minimize interest rate risk and improve liquidity.
Also contributing to the growth in other income was the increase in service
charges on deposit accounts, which increased $5.1 million, or 15.8%, in 2002 and
$6.2 million, or 23.5%, in 2001. The increase in each year was attributable to
the Branch Acquisition as compared to $66.4well as strong growth in transaction accounts. Service
charges on deposit accounts include overdraft fees, which increased $2.9
million, in
2000. This growth resulted mainly from investmentor 24.5%, and cash management fees, which increased $1.2 million, or
7.1%.
22
Investment management and trust services (IMTS) income grew $2.0 million, or 7.3%,
in 2002 and mortgage sale gains. Skylands did not contribute significantly
to the growth from 2000 to 2001.
IMTS income increased $6.5 million, or 31.7%, to $27.1in 2001. Trust commission income decreased
$301,000, or 1.6%, in 2002 as a result of poor equity market performance
impacting the market value of assets under management. This decrease was offset
by a $2.4 million, for 2001.
Thisor 37.5%, increase in brokerage revenue. In 2001, the
increase resulted mainly from the January, 2001 acquisition of Dearden Maguire, which accounted for $3.7 million of the increase. Internal growth of
$2.8 million, or 13.5% was also strong as Fulton Financial Advisors, N.A.
(Advisors) continued to grow its business throughout the Corporation's affiliate
network. IMTS income was negatively impacted by the performance of the equity
markets as many fees are based on the current values of accounts. IMTS income of
$20.6 million in 2000 was an increase of $3.1 million, or 17.7% over 1999,
driven mainly by the formation of Advisors in May, 2000.
Service charges on deposit accounts increased $6.2 million, or 23.5%, to
$32.4 million in 2001 primarily due to the increase in savings and demand
deposit accounts, which generate the majority of these fees. The average balance
of these accounts increased 11.5% from 2000 to 2001. Also contributing to the
increase were changes in fee structures and the Purchase Acquisitions, which
accounted for $1.8 million of the increase.Maguire.
Other service charges and fees increased $1.4$1.8 million, or 8.9%11.5%, in 2002
and $2.0 million, or 14.1%, in 2001. Increases in each year resulted mainly from
debit card revenues as usage of this product increased. Other income increased
$2.3 million to $5.3 million in 2002 as result of the reversal of $848,000 of
negative goodwill, $751,000 in gains on fixed assets and an increase in earnings
on the Corporation's life insurance contracts.
Investment securities gains decreased $3.6 million, or 28.4%, to $17.1$9.0
million in 2001,2002, following an increase of $3.0 million, or 23.2%, in 2000. The
Corporation continued to realize steady increases in merchant fees ($654,000, or
22.0%, increase in 2001 and $760,000, or 34.3%, increase in 2000), and debit
card income ($630,000, or 18.4%, increase in 2001 and $678,000, or 24.7%,
increase in 2000) over the past two years. Income from ATM fees has leveled off
in recent years as consumer habits have changed in response to such fees.
Mortgage banking income increased $8.0 million, or 211.5%, to $11.8 million
in 2001. This increase was entirely due to mortgage sales gains as servicing
income remained unchanged. The relatively low interest rate environment
generated significant levels of refinance activity as borrowers sought lower
fixed rate loans. To minimize interest rate risk, the Corporation sells all
eligible fixed rate mortgage loans in the secondary market. Servicing income
remained flat as a portion of the refinance activity came from the Corporation's
existing serviced loan portfolio. In 2000, mortgage banking income decreased
$1.3 million, or 24.9%, as rates were relatively higher compared to 1999 and
refinance activity, therefore, decreased.
Investment securities gains increased $3.9 million, or 45.3%, to $12.6
million in 2001 following an increase of $298,000, or 3.6%,2001. The
decrease in 2000. The
Corporation maintains an equity investment portfolio consisting of common stocks
of financial institutions, many of which are located in and around the
Corporation's general geographic market area. This portfolio has traditionally
been the source of investment securities gains. In 2001, gains from this
portfolio totaled $9.5 million, a $674,000, or 7.6% increase over 2000.
Additional investment security gains in 20012002 resulted from the restructuringgeneral performance of Drovers' investment portfolio to be consistent with the Corporation's investment
philosophy.equity markets.
Other Expenses
NoninterestTotal other expenses for 20012002 increased $32.2$6.6 million, or 17.5%3.0%, to $216.7$225.5
million. This followed a 20002001 increase of $8.7$32.4 million, or 4.9%17.4%, to $184.5$218.9
million. Other expenses in 2001 included $7.1 million in merger-related
expenses. Excluding the impact of the Purchase Acquisitions and merger-relatedthese one-time charges, other expenses the 2001 increase was $14.5increased $13.7
million, or 8.0%.6.5%, in 2002. The Corporation's efficiency ratio, which is the
ratio of noninterest expenses (excluding intangible amortization) to fully
taxable equivalent revenues (excluding securities gains) increased slightlyimproved to 52.9%52.4% in
2001,2002, as compared to 52.1%53.2% in 20002001 and 52.5%52.4% in 1999.2000.
Salaries and employee benefits increased $13.7$12.4 million, or 13.3%10.6%, in 20012002
to $116.9$129.4 million, as compared to a $5.5$13.7 million, or 5.6%13.3%, increase to $103.2$116.9
million in 2000. Excluding the impact of the Purchase Acquisitions, the 2001
increase was $8.9 million, or 8.7%.2001. The salary expense component increased $5.9$9.1 million, or 7.1% due to normal merit8.9%,
in 2002, driven by salary increases and additions to staff to build
infrastructurefor existing employees as well as an
increase in key linesthe total number of business.employees. Total average full-time equivalent
employees were 2,906 in 2002 as compared to 2,761 in 2001 as compared toand 2,649 in 2000 and 2,579
in 1999. Excluding the Purchase Acquisitions, employee2000.
Employee benefits increased $2.7$3.4 million, or 18.1%18.9%, driven mainly by continued
increases in health insurance costs which grew by $2.1($1.6 million, or 34.4%.
The smaller rate of increase in salaries19.8%) and benefits expenses in 2000
resulted from salary increases of $5.8 million, or 6.9%, being offset by
decreases in employee benefits expenses. This was realized primarily in retirement plan
expenses ($2.1 million, or 31.5%).
The Corporation maintains two primary retirement plans, a defined
contribution Profit Sharing Plan and a defined benefit plan, which decreased $93,000, or 1.4%, ashas been
closed to new participants. In general, the expense for the Profit Sharing Plan
is a function of salary expense, while the defined benefit plan was grandfathered and new employees were being enrolledexpense is
actuarially determined. Defined benefit plan expense increased 83.2% from
$989,000 in 2001 to $1.8 million in 2002. This trend is expected to continue
into 2003, with a projected increase of 56.4% to $2.8 million. This expense is
greatly impacted by the return realized on invested plan assets. With the recent
downturn in the profit sharingequity markets, these returns have lagged the growth in the
projected benefit obligation, resulting in an increase in expense. If this trend
continues, the Corporation's expense may continue to grow. For more details on
retirement plan (seeexpense, see "Note JM - Employee BenefitBenefits Plans" in the Notes to
Consolidated Financial Statements).Statements.
Net occupancy expense increased $634,000, or 3.6%, to $17.7 million in
2002, following a 2001 increase of $1.6 million, or 10.6%. While occupancy
expense increased in 2002 as a result of additional branches and new office
space, the rate of increase was less than 2001 due to $17.1 million,
following a 2000 increasethe divestiture of only $644,000, or 4.4%.certain
properties acquired in the Drovers acquisition and the consolidation of
overlapping branch locations. Equipment expense increaseddecreased $1.1 million, or 8.5%,
in 2002 following an increase of $891,000, or 7.8%, in 2001 following an increase of $509,000, or 4.7%, in 2000.
In 2001,2001. As with occupancy
expense, the Corporation completed constructionrealized a full year's impact in 2002 of its new office spaceefficiencies
related to Drovers. Furthermore, depreciation expense decreased as certain
equipment purchased in Lancaster, Pennsylvania as well as a new operations center in New Jersey. These
items contributedthe late 1990's to the increase in occupancy expense in 2001. Equipment
expense increased as the Corporation continued strategic investments in
technology to improve efficiency and customer service.address Year 2000 concerns became
fully depreciated.
Data processing expense increased $186,000, or 1.6%, in 2002, compared to
an increase of $550,000, or 4.9%, in 2001, compared to a
decrease of $190,000, or 1.7%, in 2000.2001. In 2000, the Corporation's contract
with its third party loan and deposit processor was renegotiated, resulting in
savings to the Corporation. As the Corporation grew during 2001 and 2002 through
the addition of new affiliates and branches, the resulting processing volume
increases have generated moderate increases in data processing costs. IntangibleThe 2001
expense also included redundant processing functions related to Drovers which
have since been merged.
Advertising expense increased $408,000, or 6.7% in 2002, following a
$275,000, or 4.7%, increase in 2001. Increases in both years resulted mainly
from an image campaign for the Corporation's lead bank.
23
Goodwill and intangible amortization consists primarily of the amortization of
purchase
accounting goodwill, and unidentifiable intangible assets related to branch acquisitions.acquisitions and
core deposit intangible assets. In 2001,2002, intangible amortization increaseddecreased $2.9
million, or 160.3%61.6%, due to the Purchase Acquisitions. It is expected that amortization expense will
decrease by approximately $3.1 millionnon-amortization of goodwill in 2002 as the goodwill related to
certain business combinations accounted for as purchases will no longer be
amortizedaccordance with
Statements 142 and 147 (see "Note AF - Summary of Significant Accounting Policies"Goodwill and Intangible Assets" in the
Notes to Consolidated Financial Statements).
Other noninterest expensesexpense increased $5.4$4.0 million, or 13.1%9.4%, in 2001,2002, to $46.7$46.9 million,
following an increase of $1.7$5.3 million, or 4.2%14.3%, in 2000. Excluding2001. In 2002, this was due
to a $962,000, or 43.3%, increase in operating risk losses related to overdrafts
and robberies, and a $530,000, or 10.7%, increase in Pennsylvania bank shares
taxes due to growth. In 2001, the impact of Purchase Acquisitions, the 2001 increase was $4.6 million, or
11.8%. The most significantdue to an increase was realized in statebank shares
taxes ($1.7 million, or 55.3%, increase) -- which consist mainly of Pennsylvania bank shares tax
expense -- due to fewer tax credits on qualified
contributions. The remaining increases of 7.2%7.0% in 2002 and 9.6% in 2001
and 4.2% in 2000 supportedreflected the continued growth of the Corporation.
Income Taxes
Income taxes increased $1.9$10.1 million, or 4.3%21.8%, in 20012002 to $46.4$56.5 million,
following an increase of $1.9 million, or 4.6%4.3%, in 2000.2001. The effective tax rates
(income taxes divided by income before income taxes) were 29.0%29.8%, 29.0% and 29.4%
in 2002, 2001 and 28.9% in 2001, 2000, and 1999, 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, which qualify for Federal tax
credits. Net credits of $4.0 million, $3.6 million $3.0 million
and $2.9$3.0 million were
recognized in 2002, 2001 and 2000, respectively.
The Corporation's state income tax expense increased $1.6 million, to $1.8
million in 2002, from $200,000 in 2001 as a result of legislative changes to the
tax code in the State of New Jersey. Excluding the impact of this change, income
tax expense increased $8.6 million, or 18.5%, and 1999, respectively. See alsothe effective tax rate would
have been 29.0%. For additional information regarding income taxes, see "Note IL
- - Income Taxes" in the Notes to Consolidated Financial Statements.
Financial condition
During 2002, a number of trends affected the composition of the balance
sheet. First, unsettled equity markets and low rates drove a $367.0 million, or
11.0%, increase in demand and savings deposits as FDIC-insured deposits became
more attractive and consumers avoided locking long-term rates on time deposits.
Second, low rates generated unprecedented mortgage refinance volumes, resulting
in a runoff of existing residential mortgage loans, which more than offset
increases in commercial loans and resulted in a net decrease to loans of
approximately $56.0 million. Third, an approximately $450 million change in the
mix of the loan portfolio from fixed rate to floating rate loans occurred, which
trended the Corporation toward greater asset sensitivity to interest-rate
changes.
To address these trends, the Corporation used funds generated to purchase
investment securities and reduce rate sensitivity for assets among both
short-term and longer-term instruments. In addition, to take advantage of the
low interest rate environment, the Corporation locked in longer term funding
rates through the use of advances from the Federal Home Loan Bank (FHLB), which
increased $79.1 million, or 17.5%. Finally, short-term borrowings through the
use of Federal funds purchased ($225 million, or 214.3%, increase) were used to
match the increasing short-term sensitivity of the loan portfolio. As a result
of these actions, the Corporation's six-month interest rate gap position, which
is defined as total assets to total liabilities subject to repricing during the
period and is one of the measures used to assess interest rate sensitivity, was
1.08 at December 31, 2002.
See the "Market Risk" section on page 28 for a further discussion of the
Corporation's asset/liability management practices.
24
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
AVERAGE CONSOLIDATED BALANCE SHEETSLoans
The following table sets forth the amount of loans outstanding (net of
unearned income) as of the dates shown:
December Monthly Averages
------------------------------------31
------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(in thousands)
ASSETS
Commercial, financial and agricultural .......... $1,679,100 $1,495,380 $1,386,172 $1,212,807 $1,038,418
Real-estate - ------
Cashconstruction ...................... 248,565 267,627 247,382 171,351 138,798
Real-estate - mortgage .......................... 2,771,926 2,896,865 2,929,351 2,633,270 2,410,025
Consumer ........................................ 543,040 626,985 738,797 793,776 771,221
Leasing and due from banks .............................. $ 263,627 $ 248,393 $ 276,285
Other interest-earning assets ........................ 15,682 23,288 3,663
Investment securities ................................ 1,788,840 1,434,058 1,454,412
Loans, including loans held for sale ................. 5,360,152 5,381,137 4,841,792
Less: Allowance for loan losses ...................... (72,207) (65,846) (63,297)other ............................... 84,063 98,823 87,944 83,576 74,955
---------- ---------- ---------- Net Loans ................................... 5,288,945 5,315,291 4,778,495---------- ----------
5,326,694 5,385,680 5,389,646 4,894,780 4,433,417
Unearned income ................................. (9,626) (12,660) (14,987) (12,174) (12,936)
---------- ---------- ---------- Premises and equipment ............................... 126,491 115,921 95,762
Other assets ......................................... 204,097 183,793 161,242
---------- ----------
----------
Total Assets ................................ $7,686,682 $7,320,744 $6,769,859Totals ........................................ $5,317,068 $5,373,020 $5,374,659 $4,882,606 $4,420,481
========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest-bearing ................................ $1,016,111 $ 881,370 $ 786,036
Interest-bearing ................................... 4,884,846 4,560,280 4,250,468
---------- ---------- ----------
Total Deposits .............................. 5,900,957 5,441,650 5,036,504
---------- ---------- ----------
Short-term borrowings ................................ 395,818 483,410 527,770
Long-term debt ....................................... 467,593 561,573 429,036
Other liabilities .................................... 109,491 119,998 105,063
---------- ---------- ----------
Total Liabilities ........................... 6,873,859 6,606,631 6,098,373
---------- ---------- ----------
Total Shareholders' Equity .................. 812,823 714,113 671,486
---------- ---------- ----------
Total Liabilities and Shareholders' Equity... $7,686,682 $7,320,744 $6,769,859
========== ========== ==========
FINANCIAL CONDITION
- -------------------
The Corporation functions as a financial intermediary and its financial
condition is analyzed in terms of its sources and uses of funds. The table above
highlights the trends in the balance sheet over the past two years. Because
annual averages may conceal trends and ending balances can be distorted by
one-day fluctuations, the average balances for the month of December in 2001,
2000 and 1999 are provided to give a better indication of trends in the balance
sheet. All references within the discussion that follows are to these December
average balances unless specifically noted otherwise.
The Corporation's balance sheet continued to grow in 2001, as assets
increased $365.9 million, or 5.0%, to $7.7 billion, as compared to $7.3 billion
in 2000. The growth during 2001 was influenced by the Branch Acquisition, which
added approximately $300 million of deposits to the Corporation. However, these
funds were used to pay down borrowings as well as to purchase new investments,
so the entire $300 million did not contribute to asset growth. Total assets
increased $550.9 million, or 8.1%, in 2000.
Loans
Loans outstanding (net of unearned income) decreased $21.0$56.0 million, or
0.4%0.1%, in 2001.2002. As noted in the "Net Interest Income" discussion, increases in
commercial loans ($66.7183.7 million, or 4.8%12.3%) and commercial mortgagesmortgage loans ($92.199.1
million, or 5.9%6.9%) were offset by decreases in construction loans (19.1 million,
or 7.1%), residential mortgage loans ($150.4224.1 million, or 14.7%15.3%) and consumer
loans ($38.483.9 million, or 2.8%13.4%). Residential mortgagesmortgage loans decreased due to
heavy refinance activity and consumer loans decreased due to less emphasis onincreased
competition in indirect auto lending.
In 2000,2001, loans increased $539.3decreased $1.6 million, or 11.1%, to reach a level of $5.4
billion. Excluding Skylands, loans increased $364.8 million, or 7.5%0.03%. Commercial loans and mortgages accounted for most of the growth. In 2000, commercialincreased
$109.2 million, or 7.9%, construction loans increased $193.5$20.3 million, or 16.3%8.2%, while
commercial mortgage loans increased $240.8$68.4 million, or 18.4%. Residential mortgages also showed moderate growth of
$54.45.0%, and leasing and
other loans increased $10.9 million, or 5.6%,12.4%. These increases were offset by
decreases in residential mortgage loans ($100.8 million, or 6.4%) and consumer
loans ($111.8 million, or 15.1%).
Investment Securities
The following table sets forth the carrying amount of investment securities
held to maturity (HTM) and available for sale (AFS) as interest rates were higher and refinance volumes were
lower.
Investment Securitiesof the dates shown:
December 31
--------------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------------- -------------------------------- --------------------------------
HTM AFS Total HTM AFS Total HTM AFS Total
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
U.S. Government and
agency securities ........... $ 8,568 $ 97,304 $ 105,872 $ 8,170 $ 99,682 $ 107,852 $ 8,992 $ 212,109 $ 221,101
State and municipal ........... 4,679 249,866 254,545 9,840 218,181 228,021 12,971 211,734 224,705
Other securities .............. 50 300 350 165 300 465 720 18,322 19,042
Equity securities ............. - 155,138 155,138 - 151,333 151,333 - 133,938 133,938
Mortgage-backed securities .... 19,387 1,880,999 1,900,386 31,382 1,218,291 1,249,673 62,079 794,030 856,109
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Totals ..................... $ 32,684 $2,383,607 $2,416,291 $ 49,557 $1,687,787 $1,737,344 $ 84,762 $1,370,133 $1,454,895
========== ========== ========== ========== ========== ========== ========== ========== ==========
Total investment securities increased $354.8$678.9 million, or 24.7%39.1%, to reach a
balance of $1.8$2.4 billion in 2001.at December 31, 2002. The fundsfunding for this growth werewas
provided mainly by the
deposits from the Branch Acquisition as well as internal deposit growth.deposits. Since net loan balances were essentially unchanged,
excess funds generated were used to purchase investment securities, particularly
mortgage-backed securities, which increased $456.6$650.7 million, or 55.2%52.1%.
In 2000,2001, investment securities decreased $20.4increased $282.4 million, or 1.4% ($77.919.4%, to reach
a balance of $1.7 billion. The funds for the growth were provided by the Branch
Acquisition as well as internal deposit growth. Like 2002, loan balances were
essentially unchanged, and funds generated were used primarily for purchases of
mortgage-backed securities, which increased $393.6 million, or 5.4%, excluding the impact of Skylands), to $1.4 billion. In 2000,
the Corporation experienced stronger net loan growth which limited the amount of
funds available for investment securities.46.0%.
25
The Corporation classified virtually its entire investment portfolio
(97%(98.6%, or $1.7$2.4 billion) as available for sale at December 31, 20012002 and, as
such, these investments were recorded at their estimated fair values. The
decrease in interest rates during 2001 resulted in2002 contributed to total net unrealized gains
of $15.0$51.4 million on non-equity investments at December 31, 2001, a shift2002, an increase of
$20.1$36.4 million from $5.1$15.0 million in net unrealized lossesgains at December 31, 2000.
The Corporation also maintains an2001.
At December 31, 2002, equity investment portfolio, consistinginvestments consisted of FHLB and other
government agency stock ($44.349.2 million), as well as stocks of other financial institutions
($61.383.2 million) and mutual funds ($22.7 million). This portfolio has
historically been a source of capital appreciation and realized gains ($9.57.4
million in 2002, $9.5 million in 2001 and $8.6 million in 2000 and $8.3 million in 1999)2000). Management
periodically sells bank stocks when, in its opinion, valuations and market
conditions warrant such sales.
Premises and Equipment
Premises and equipment increased $10.6decreased $2.2 million, or 9.1%1.7%, in 20012002 to $126.5$123.5
million, following a $20.2$9.2 million, or 21.1%7.9%, increase in 2000.2001. The increasesdecrease in
both years were2002 was mainly due to the constructionfull year of depreciation recognized on the new
office space and operations facilities which were placed in service in 2001, as
well as excess branch and other properties disposed of during 2001 and 2002. The
increase in 2001 was due to the addition of the new office space and operations
facilities and continued investments in technology.
Cash and Due from Banks
Cash and due from banks decreased $41.7 million, or 11.7%, to $314.9
million in 2002, following a $74.0 million, or 26.2%, increase in 2001. Because
of the daily fluctuations which 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 $11.8 million, or 4.9%, from $241.7
million in 2001 to $253.5 million in 2002 following a $15.2 million, or 6.1%, to $263.6 million
increase in 2001, following a $27.9 million, or 10.1%, decrease2001. The increases in 2000. The 2001
increaseboth years resulted from growth in the
Corporation's branch network.
The 2000
decrease resulted from the Year 2000 contingency planning precautions whereby
the Corporation maintained higher than normal balances of cash near the end of
1999.
Other Assets
Other assets, increased $20.3including accrued interest receivable and goodwill and
intangible assets, decreased $15.1 million, or 11.0%6.7%, in 20012002 to $204.1$209.7 million,
following a $22.6$36.5 million, or 14.0%19.4%, increase in 2000.2001. The net decrease in 2002
was mainly due to a $13.7 million, or 62.5%, decrease in the net deferred
Federal income tax asset as a result of an increase in the unrealized gains on
investment securities. The net increase in 2001 resulted from goodwill and
intangible assets recorded for Dearden Maguire ($16.0 million) and the Branch
Acquisition ($31.6 million). These increases were offset by a $12.0 million
decrease in the net deferred tax asset due to an increase in unrealized gains on
investment securities and an $8.0 million decrease in accumulated cash surrender
value as the Corporation reduced its position in certain insurance investments.
The 2000 increase resulted from $17.5 million of
goodwill recorded in connection with the Skylands acquisition.
The Corporation continued to increase its participation in affordable
housing and community development projects through investments in partnerships.
An equity commitmentEquity commitments of $2.8$4.6 million waswere made to onethree new projectprojects in 2001.2002. The
Corporation made its initial investment of this type during 1989 and is now
involved in 4551 projects, all located in the communities served by its subsidiary
banks. The carrying value of these investments was approximately $33.3$38.6 million
at December 31, 2001.2002. With these investments, the Corporation not only improves
the quantity and quality of available housing for low income individuals in
support of its banks' Community Reinvestment Act compliance effort, but also
becomes eligible for tax credits under Federal and, in some cases, state
programs.
Deposits and Borrowings
Deposits increased $459.3$258.7 million, or 8.4%4.3%, to $5.9$6.2 billion at December 31,
2002. This compares to an increase of $484.1 million, or 8.8%, in 2001 ($179.4
million, or 3.3%, increase, excluding the impact of the Branch Acquisition). This compares to an increase of $405.1 million, or 8.0%, in 2000 ($172.3
million, or 3.4%, excluding Skylands). The recent trend over the past two years has been
moderate internal growth in deposit funding, supplemented by acquisitions. The
difference between the two years has been the mix of the growth.
With respect to internal growth, during 2001, as interest rates continued
to trend downward,Demand and savings deposits increased $260.3 million and $106.7 million,
respectively, while time deposits decreased $141.3$108.2 million or 5.3%. Funds from
maturing certificates of deposit were moved to lower rate savings and demand
deposits. Although customers were earning less with these deposit types, they
wereduring 2002. This
reflects a general mood in the financial community whereby consumers are
reluctant to lock into longer-termreinvest maturing time deposits. Demanddeposits at the current low rates.
26
In 2001, demand deposits increased $177.1$306.5 million or 11.3%, particularly in non-interest bearing types which grew
by $105.7($217.5 million,
or 12.0%. Savings deposits increased $143.6 million, or
11.9%.
In 2000,excluding the increases were more evenly spread among the various deposit
types. Demand deposits increased $63.1 million, or 4.4%Branch Acquisition), savings deposits increased $56.9$209.9 million
or 2.2%($140.9 million, excluding the Branch Acquisition) and time deposits grew $115.4decreased
$32 million or 4.7%($153 million, excluding the Branch Acquisition). During 2000, time deposits were still attractive to customers due to relatively
higher interest rates.Many of the trends
experienced during 2002 began in 2001 when the FRB started its series of rate
cuts.
Short-term borrowings, which consist mainly of Federal funds purchased and
customer repurchase agreements, decreased $87.6cash management accounts, increased $231.9 million, or 18.1%57.9%, during
2002 after decreasing $46.1 million, or 10.3%, in 2001. The increase in 2002
resulted from the previously mentioned actions taken to manage the Corporation's
gap position due to the movement of loans from fixed to floating rates. The 2001
to
$395.8 million after decreasing $44.4 million, or 8.4%, in 2000. The decrease in
2001 resulted from the Branch Acquisition funds, which were used to reduce
short-term borrowings and to purchase investment securities since net loans were
unchanged. The 2000 decrease resulted from a change in borrowing mix from
short-term borrowings to long-term debt as the Corporation managed its interest
rate risk. Long-term debt increased $132.5$78.8 million, or 30.9%17.2%, during 2000,
followed by a2002, after
decreasing $94.0 million, or 16.7% decrease in 2001 as, during 2001. While maturing FHLB advances
were not replaced.replaced in 2001, the Corporation did take advantage of the lower rates
available in the fourth quarter of 2002 and increased its position in these
longer-term liabilities.
The Corporation repurchased $2.0 million of corporation-obligated
mandatorily redeemable capital securities of a subsidiary trust during the first
half of 2002. This reduced the balance of this 9.25% financing instrument to
$5.5 million.
Shareholders' Equity
Total shareholders' equity of $863.7 million, or 10.3% of ending total
assets, increased $52.3 million, or 6.4%, from December 31, 2001. Growth in
shareholders' equity generally results from net income during the period, offset
by dividends paid to shareholders, which have historically amounted to 40-50% of
current period net income. During 2002, the Corporation also purchased $46.1
million of treasury stock, which reduced total shareholders' equity. In 2001,
shareholders' equity increased $80.3 million, or 11.0%, to $811.5
million at December 31, 2001.. This compares to a $68.4 million, or 10.3%,
increase in 2000. Thehigher growth rate
in 2001 wasreflects fewer treasury stock purchases.
The Corporation periodically implements stock repurchase plans for various
corporate purposes. In addition to evaluating the resultfinancial benefits of
net incomeimplementing repurchase plans, management also considers liquidity needs, the
current market price per share and relevant accounting and regulatory issues.
Repurchase plans were significantly limited during periods when the Corporation
accounted for acquisitions using pooling of $113.6
million, $16.9 millioninterests accounting. With Statement
142 requiring the use of stock issuances and an $11.8 million improvement in
net unrealized gainspurchase accounting, the accounting constraints on
investment securities. These increases were offset by
$54.0 million in cash dividends paid to shareholders. The growth in 2000
resulted from net income of $106.8 million and a $16.7 million increase in net
unrealized gains on investment securities. These increases were offset by $46.9
million in cash dividends to shareholders. Although shareholders' equity also
increased $31.9 million as a result of the Skylands acquisition in 2000, this
was offset by $45.2 million in repurchases of stock during the period, the
majority of which was reissued to consummate the merger.repurchase plans no longer exist.
The Corporation accounted for the acquisition of Drovers under the pooling
of interests method of accounting, which would normally preclude it from
repurchasing its own stock for a period following the acquisition. In an effort
to stabilize equity markets following the terrorist attacks on September 11,
2001, the U.S. Securities and Exchange Commission temporarily suspended the
restrictions on treasury stock purchases. During the third and fourth quarters
of 2001, the Corporation acquired 366,000457,000 shares of its stock.
During 2000, the Corporation repurchased shares of its stock under two
separate plans approved by its Board of Directors. The first was an open market
repurchase program for up to 1.1 million shares through the end of 2000. The
second was an open market repurchase program of up to 2.2 million shares. The
second plan was adopted to
minimize the increase in the number of outstanding shares of the Corporation as
a result of its acquisition of Skylands.
Under the second plan, 2.1 million shares were repurchased during 2000 and
all were reissued in connection with the Skylands acquisition. This plan was
cancelled as of the August 1, 2000 acquisition date. Under the first plan,
450,000 shares were repurchased through the plan's termination date on December
27, 2000.
On January 15, 2002, the Board of Directors approved a plan to repurchase
up to 2.53.1 million shares of the Corporation's common stock through June 30, 2002. This amount equates2002
(the plan was subsequently extended to approximately 3% of the Corporation's total shares
outstanding. SharesDecember 31, 2002). Stock repurchased under this plan will bewas
added to the corporateCorporate treasury and willto be used for general corporate purposes.
During 2002, the Corporation repurchased 2.5 million shares under these plans.
On December 17, 2002, the Board of Directors approved a program to repurchase up
to 3.0 million shares through June 30, 2003.
The Corporation and its subsidiary banks are subject to various regulatory
capital requirements administered by banking regulators. Failure to meet minimum
capital requirements can initiate certain actions by regulators that could have
a material effect on the Corporation's financial statements. The regulations
require that banks maintain minimum amounts and ratios of total and Tier I
capital (as defined in the regulations) to risk weighted assets (as defined),
and Tier I capital to average assets (as defined). As of December 31, 2001,2002, 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.
27
Item 7a.7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
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 banking entitiesfinancial 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
primarily of common stocks of publicly traded financial institutions (cost basis
of approximately $61.3$80.1 million, fair value of $83.3 million at December 31,
2001), U.S. Government and agency
stock (cost basis of approximately $44.3 million) and money market mutual funds
(cost basis of approximately $40.7 million)2002). The Corporation's equity
investmentsfinancial institutions stock had a total estimated fair valuegross unrealized gains
of $151.3approximately $9.6 million at December 31, 2001. The $5.0 million net unrealized gain was primarily attributable to the
financial institutions stock.2002.
Although the carrying value of equity investments accounted for only 1.9%1.0%
of the Corporation's total assets, the unrealized gains on the portfolio
represent a potential source of revenue. The Corporation has a history of
periodically realizing gains from this portfolio and, if values were to decline
significantly, this revenue source could be lost.
The Corporation manages its equity market price risk by investing primarily
in regional financial institutions.
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 here since none of themin the table on page 31 as
such investments do not have maturity dates.
Certain of the Corporation's equity investments have shown negative returns
in tandem with the general performance of equity markets. The Corporation has
evaluated, based on current accounting guidance, whether the decreases in value
of any of these investments constitute "other than temporary" impairment which
would require a write-down through a charge to earnings. In 2002, the
Corporation recorded a write-down of $340,000 for specific equity securities
which were deemed to exhibit "other than temporary" impairment in value. If the
performance of certain equity securities does not improve over the next twelve
months, additional impairment charges may be necessary.
In addition to its equity portfolio, the Corporation's investment
management and trust services revenue could 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 upon the consumers'
level of confidence in the outlook for rising securities prices.
Interest Rate Risk and Asset/Liability Management
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 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 income risks noted above.
From a liquidity standpoint, the Corporation must maintain a sufficient
level of liquid assets to meet the ongoing cash flow requirements of customers,
who, as depositors, may want to withdraw funds or who, as borrowers, need credit
availability. Liquidity sources are found on both sides of the balance sheet.
Liquidity is provided on a continuous basis through scheduled and unscheduled
principal reductions and interest payments on outstanding loans and investments.
Liquidity is also provided through the availability of deposits and borrowings.
28
At December 31, 2001,2002, liquid assets (defined as cash and due from banks,
short-term investments, mortgages available for sale, securities available for
sale, and non-mortgage-backed securities held to maturity due in one year or
less) totaled $2.1$2.8 billion, or 26.5%,33.1% of total assets. This compares to $1.7$2.1
billion, or 22.6%,26.5% of total assets, at December 31, 2000.2001.
The following tables set forth the maturities of investment securities at
December 31, 2002 and the weighted average yields of such securities (calculated
based on historical cost).
HELD TO MATURITY (at amortized cost)
MATURING
------------------------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
---------- --------- --------- --------- --------- --------- --------- ---------
(dollars in thousands)
U.S. Government and
agency securities ................... $ 1,456 4.63% $ 5,891 4.73% $ 900 5.88% $ 321 7.61%
State and municipal (1) ................ 2,211 4.49 1,408 7.44 1,060 8.21 - -
Other securities ....................... - - 50 6.95 - - - -
---------- --------- --------- --------- --------- --------- --------- ---------
Totals ............................... $ 3,667 4.54% $ 7,349 5.26% $ 1,960 7.14% $ 321 7.61%
========== ========= ========= ========= ========= ========= ========= =========
Mortgage-backed securities (2) ......... $ 19,387 6.16%
========== =========
AVAILABLE FOR SALE (at estimated fair value)
MATURING
------------------------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
---------- --------- --------- --------- --------- --------- --------- ---------
(dollars in thousands)
U.S. Government and
agency securities ................... $ 51,850 3.01% $ 45,454 5.26% $ - -% $ - -%
State and municipal (1) ................ 1,034 8.34 174,516 6.44 48,587 6.26 25,729 8.22
Other securities ....................... 50 1.49 250 6.82 - - - -
---------- --------- --------- --------- --------- --------- --------- ---------
Totals ............................... $ 52,934 3.11% $ 220,220 6.20% $ 48,587 6.26% $ 25,729 8.22%
========== ========= ========= ========= ========= ========= ========= =========
Mortgage-backed securities (2) ......... $1,880,999 4.74%
========== =========
- ------------------------------
(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 do not have stated maturities. Liquidity from such investments
is a function of interest rates; as rates increase, cash flows generally
decrease as prepayments on the underlying mortgage loans slow. As rates
decrease, cash flows generally increase as prepayments increase.
29
The following table summarizes the approximate contractual maturity and
sensitivity of certain loan portfolio provides an additional sourcetypes, excluding consumer loans and leases, to
changes in interest rates as of liquidity due to the
Corporation's ability to participate in the secondary mortgage market. Sales of
residential mortgages into the secondary market of $420.2 million and $152.7
million in 2001 and 2000, respectively, provided the necessary funding which
allowed the Corporation to meet the needs of its customers for new mortgage
financing.December 31, 2002:
One
One Year Through More Than
or Less Five Years Five Years Total
---------- ----------- ---------- -----------
(in thousands)
Commercial, financial and agricultural:
Floating rate ........................... $ 320,622 $ 285,609 $ 470,323 $ 1,076,554
Fixed rate .............................. 202,848 313,108 86,590 602,546
---------- ----------- ---------- -----------
Total ................................ $ 523,470 $ 598,717 $ 556,913 $ 1,679,100
========== =========== ========== ===========
Real-estate - mortgage:
Floating rate ........................... $ 449,431 $ 285,159 $ 132,109 $ 866,699
Fixed rate .............................. 537,490 1,031,436 336,301 1,905,227
---------- ----------- ---------- -----------
Total ................................ $ 986,921 $ 1,316,595 $ 468,410 $ 2,771,926
========== =========== ========== ===========
Real-estate - construction:
Floating rate ........................... $ 59,632 $ 51,967 $ 42,561 $ 154,160
Fixed rate .............................. 49,475 25,955 18,975 94,405
---------- ----------- ---------- -----------
Total ................................ $ 109,107 $ 77,922 $ 61,536 $ 248,565
========== =========== ========== ===========
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.
The Corporation also has access to sources of large denomination or jumbo
time deposits and repurchase agreements as potential sources of liquidity.
However, the Corporation has attempted to minimize its reliance upon these more
volatile short-term funding sources and to use them primarily to meet the
requirements of its existing customer base or when it is profitable to do so.
Maturities of time deposits of $100,000 or more outstanding at December 31,
2002 are summarized as follows:
Time Deposits
$100,000
or more
--------------
(in thousands)
Three months or less .................... $ 86,916
Over three through six months ........... 61,853
Over six through twelve months .......... 94,654
Over twelve months ...................... 176,787
-------------
Total ............................. $ 420,210
=============
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, 2001,2002, the
Corporation had $452.3$531.5 million in term advances from the FHLB with an additional
$845 million$1.4 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 commercial banks, provides the Corporation
with additional liquidity.
30
The following table provides information about the Corporation's interest rate
sensitive financial instruments. The table provides expected cash flows and
weighted average rates for each significant interest rate sensitive financial
instrument, by expected maturity period. None of the Corporation's financial
instruments are classified as trading.
FULTON FINANCIAL CORPORATION
INTEREST RATE SENSITIVITY
period (dollars in thousands).
Expected Maturity Period
--------------------------------------------------------------------------------------------------------------------------------------------- Estimated
2002
2003 2004 2005 2006 2007 Beyond Total Fair Value
---------- ---------- -------- -------- -------- ---------- ---------- ---------- ---------- ---------- -----------
Fixed rate loans (1) ............ $ 983,779972,907 $ 680,302 $517,738 $327,690 $247,186667,534 $ 677,316 $3,434,011 $3,572,995441,894 $ 288,007 $ 195,255 $ 394,359 $2,959,956 $ 3,255,900
Average rate (1) 7.21% 7.84% 7.81% 7.87% 7.71% 7.21% 7.52%.................. 7.16% 7.40% 7.41% 7.40% 7.44% 7.40% 7.33%
Floating rate loans (2) 614,415 241,346 178,465 151,118 125,758 627,907 1,939,009 1,902,943(1) ......... 915,545 268,395 205,376 165,174 124,051 678,571 2,357,112 2,226,848
Average rate 6.09% 6.51% 6.69% 6.76% 6.01%.................. 5.32% 5.56% 5.49% 6.05%5.51% 4.55% 4.48% 5.09%
Fixed rate investments (3) 489,362 441,004 219,592 121,336 73,773 205,285 1,550,352 1,565,955(2) ...... 906,277 396,623 174,867 115,446 111,537 495,013 2,199,763 2,252,580
Average rate 5.98% 5.97% 5.95% 5.87% 6.04% 4.98% 5.78%.................. 5.03% 4.96% 4.72% 5.10% 5.08% 4.36% 4.85%
Floating rate investments (3) --(2) ... 1,000 -- -- -- 19,706 20,706 20,991- - - - 9,024 10,024 10,024
Average rate -- 3.61% -- -- -- 5.18% 5.10%.................. 7.58% - - - - 3.78% 4.16%
Other interest-earning assets 25,342 -- -- -- -- -- 25,342 25,342... 78,374 - - - - - 78,374 78,374
Average rate 5.36% -- -- -- -- -- 5.36%
-----------------------------------------------------------------------------------------------.................. 4.86% - - - - - 4.86%
--------------------------------------------------------------------------------------------------
Total $2,112,898 $1,363,652 $915,795 $600,144 $446,717 $1,530,214 $6,969,420 $7,088,226........................... $2,874,103 $1,332,552 $ 822,137 $ 568,627 $ 430,843 $1,576,967 $7,605,229 $ 7,823,726
Average rate 6.58% 7.00% 7.15% 7.19% 6.96% 6.18% 6.70%
-----------------------------------------------------------------------------------------------.................. 5.84% 6.30% 6.36% 6.38% 6.00% 5.17% 5.89%
--------------------------------------------------------------------------------------------------
Fixed rate deposits (4) $1,821,366(3) ......... $1,392,229 $ 453,325 $167,770420,724 $ 73,955235,765 $ 53,10985,305 $ 21,565 $2,591,090 $2,635,783185,165 $ 65,658 $2,384,846 $ 2,460,856
Average rate 4.66% 4.77% 4.71% 5.77% 5.01% 5.22% 4.73%.................. 3.11% 3.71% 4.27% 4.68% 4.81% 4.96% 3.57%
Floating rate deposits (5) 804,739 166,784 166,784 166,784 166,784 1,923,839 3,395,714 3,395,714(4) ...... 1,512,010 148,716 148,716 148,716 148,716 1,753,808 3,860,682 3,860,682
Average rate 1.81% 0.63% 0.63% 0.63% 0.63% 0.42% 0.79%.................. 1.30% 0.18% 0.18% 0.18% 0.18% 0.17% 0.61%
Fixed rate borrowings (6) 11,273 39,003 1,018 84,103 253 306,155 441,805 448,836(5) ....... 47,771 236 83,250 10,265 50,414 348,256 540,192 572,183
Average rate 6.31% 5.37% 5.88%.................. 4.64% 5.69% 6.29% 5.59% 5.38% 5.58%3.44% 3.46% 5.18% 5.11%
Floating rate borrowings (7) 410,332 -- 5,000 -- -- -- 415,332 415,332(6) .... 627,557 - - - - - 627,557 627,557
Average rate 1.83% -- 2.23% -- -- -- 1.83%
-----------------------------------------------------------------------------------------------.................. 1.21% - - - - - 1.21%
--------------------------------------------------------------------------------------------------
Total $3,047,710........................... $3,579,567 $ 659,112 $340,572 $324,842 $220,146 $2,251,559 $6,843,941 $6,895,665569,676 $ 467,731 $ 244,286 $ 384,295 $2,167,722 $7,413,277 $ 7,521,278
Average rate 3.53% 3.76% 2.68% 3.27% 1.69% 1.14% 2.65%
-----------------------------------------------------------------------------------------------.................. 2.03% 2.79% 3.33% 1.89% 2.84% 1.12% 1.94%
--------------------------------------------------------------------------------------------------
Assumptions:
1) Amounts are based(1) Based on contractual maturities, adjusted for expected prepayments.
2) Average rates are shown on a fully taxable equivalent basis using an
effective tax rate of 35%.
3) Amounts are based(2) Based on contractual maturities, adjusted for expected prepayments on
mortgage-backed securities.
4) Amounts are based(3) Based on contractual maturities of time deposits.
5)(4) Money market and Super NOW deposits are shown in first year. NOW and
savings accounts are spread based on history of deposit flows.
6)(5) Amounts are based on expected payoffs and calls of Federal Home Loan Bank
advances.
7)(6) Amounts are Federal funds purchased and securities sold under agreements
to repurchase, which mature in less than 90 days.
The preceding table and discussion addressed the liquidity implications of
interest rate risk and focused on expected contractual cash flows from financial
instruments. Expected contractual maturities, however, do not necessarily estimate the net
income impact of interest rate changes. Certain financial instruments, such as
adjustable rate loans, have repricing periods that differ from contractualexpected cash
flows.
The Corporation uses three complementary methods to measure and manage
interest rate risk. They are static gap analysis, simulation of earnings, and
estimates of economic value of equity. Using these measurements in tandem
provides a reasonably comprehensive summary of the magnitude of interest rate
risk in the Corporation, level of risk as time evolves, and exposure to changes
in interest rate relationships.rates.
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 predetermined
repricing
periods. The assets and liabilities in each of these periods are
summed and compared for
mismatches within that maturity segment. Core deposits having noncontractual
maturities are placed
31
into repricing periods based upon historical balance performance. Repricing for
mortgage loans held 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 6-month gap to plus or minus 15% of total earning assets.
The cumulative 6-month gap as of December 31, 20012002 was 1.05.1.08. The following is a
summary of the interest sensitivity gaps for three different time intervals as
of December 31, 2001:2002:
0-90 91-180 181-365
Days Days Days
---- ------ --------------- --------- ----------
GAP ............................... 1.16 0.70 1.07.............. 1.04 1.27 1.36
CUMULATIVE GAP .................... 1.16 1.05 1.05... 1.04 1.08 1.14
Simulation of net interest income and of net income is performed for the
next twelve-month period. A variety of interest rate scenarios is 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
interest rates across the yield curve based upon changes in the prime rate. At
December 31, 2001,The
following table summarizes the Corporation had a larger exposure to downwardexpected impact of interest rate shocks withon net
interest income at risk of loss over(due to the next twelve months of
2%, 5% and 9% wherecurrent low rates, only the 100 basis shock in a
downward scenario is shown):
Annual change
in net interest
rates are shocked downward by 100, 200 and 300
basis points, respectively.Rate Shock income % Change
------------ ----------------- -----------
+300 bp +$26.7 million +8.8%
+200 bp +$18.7 million +6.1%
+100 bp +$11.6 million +3.8%
-100 bp -$16.0 million -5.3%
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 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 (due to the current low rates, only the 100 basis shock in a downward
scenario is shown):
Change in
economic value of
Rate Shock equity % Change
------------ ----------------- ----------
+300 bp - $12.9 million -1.1%
+200 bp + $13.2 million +1.1%
+100 bp + $33.4 million +2.7%
-100 bp - $40.1 million -3.3%
32
Common Stock
As of December 31, 2001,
downward shocks of 100, 200 and 300 basis points were estimated to have negative
effects upon economic value of equity of 2%, 4% and 7%, respectively.
Common Stock
- ------------
As of December 31, 2001,2002, the Corporation had 82.6101.1 million shares of $2.50
par value common stock outstanding held by 17,145 shareholders of record.29,860 shareholders. 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 20012002 and 2000.2001. Per-share amounts have been retroactively
adjusted to reflect the effect of stock dividends.
Price Range --------------- Per-Share
------------------------
High Low Dividend
------ ------ ---------
2001
------------ ---------- ------------
2002
----
First Quarter................. $21.96 $19.34 $0.152Quarter .......... $ 20.24 $ 17.00 $ 0.136
Second Quarter................ 22.44 18.27 0.170Quarter ......... 20.29 18.40 0.150
Third Quarter................. 23.00 20.80 0.170Quarter .......... 19.50 16.85 0.150
Fourth Quarter................ 22.40 20.86 0.170
2000
-Quarter ......... 19.12 16.92 0.150
2001
----
First Quarter................. $19.10 $14.46 $0.136Quarter .......... $ 17.57 $ 15.47 $ 0.122
Second Quarter................ 21.66 16.19 0.152Quarter ......... 17.95 14.62 0.136
Third Quarter................. 20.89 18.10 0.152Quarter .......... 18.40 16.64 0.136
Fourth Quarter................ 22.74 18.51 0.152Quarter ......... 17.92 16.69 0.136
33
Item 8. Financial Statements and Supplementary Data
- --------------------------------------------------------------------------------
FULTON FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Dollars in thousands, except per-share data)
December 31
--------------------------------------------------
2002 2001
2000
---------- --------------------- -----------
Assets
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks ........................................................................................................................................... $ 356,539314,857 $ 282,586356,539
Interest-bearing deposits with other banks ..................................................................................................... 7,899 6,968 8,417
Mortgage loans held for sale ................................................................................................................................. 70,475 18,374 5,241
Investment securities:
Held to maturity (estimated fair value-value of $34,135 in 2002 and $50,492 in 2001 and $83,836 in 2000) .....2001) ................... 32,684 49,557 84,762
Available for sale .............................................................................................................................................. 2,383,607 1,687,787 1,370,133
Loans, net of unearned income ............................................................................................................................... 5,317,068 5,373,020 5,374,659
Less: Allowance for loan losses ................................................................................................................... (71,920) (71,872)
(65,640)
---------- --------------------- -----------
Net Loans ................................................................................................................................. 5,245,148 5,301,148
5,309,019
---------- --------------------- -----------
Premises and equipment ............................................................................................................................................. 123,450 125,617 116,407
Accrued interest receivable ................................................................................................................................... 42,675 43,388
44,747
Intangible assets......................................................................Goodwill and intangible assets ..................................................................... 72,297 73,286 26,643
Other assets ................................................................................................................................................................. 94,686 108,047
116,849
---------- --------------------- -----------
Total Assets ................................................. $7,770,711 $7,364,804
========== ==========.......................................................................... $ 8,387,778 $ 7,770,711
=========== ===========
Liabilities
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing .............................................................. $1,094,158.............................................................................. $ 915,3081,118,227 $ 1,094,158
Interest-bearing .................................................................................................................................................. 5,127,301 4,892,646
4,587,395
---------- --------------------- -----------
Total Deposits ....................................................................................................................... 6,245,528 5,986,804
5,502,703
---------- --------------------- -----------
Short-term borrowings:
Securities sold under agreements to repurchase....................................repurchase ................................................... 297,556 289,659 281,538
Federal funds purchased...........................................................purchased .......................................................................... 330,000 105,000 160,100
Demand notes of U.S. Treasury ........................................................................................................................ 4,638 5,676
4,791
---------- --------------------- -----------
Total Short-Term Borrowings ............................................................................................. 632,194 400,335
446,429
---------- --------------------- -----------
Accrued interest payable ......................................................................................................................................... 27,608 35,926 47,713
Other liabilities ....................................................................................................................................................... 77,651 71,890 69,785
Federal Home Loan Bank advances and long-term debt ..................................................................................... 535,555 456,802 559,503
Corporation-obligated mandatorily redeemable capital securities of subsidiary trust....trust ................ 5,500 7,500
7,500
---------- --------------------- -----------
Total Liabilities ................................................................................................................. 7,524,036 6,959,257
6,633,633
---------- --------------------- -----------
Shareholders' Equity
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Common stock, ($2.50 par)
Shares: Authorized$2.50 par value, 400 million Issued 83.2 million; Outstanding 82.6shares authorized, 104 million in 2001 and 82.0
million in 2000.....................................................shares issued ............ 259,943 207,962 198,612
Capital surplus ........................................................................................................................................................... 481,028 536,235 472,829
Retained earnings ....................................................................................................................................................... 138,501 65,649 76,615
Accumulated other comprehensive income.................................................income ............................................................. 34,801 12,970 1,148
Less:
Treasury stock (572,000 shares in 2001 and 1.1(2.9 million shares in 2000)...........2002 and 716,000 shares in 2001) ............................. (50,531) (11,362)
(18,033)
---------- --------------------- -----------
Total Shareholders' Equity ............................................................................................... 863,742 811,454
731,171
---------- --------------------- -----------
Total Liabilities and Shareholders' Equity ................... $7,770,711 $7,364,804
========== ==========............................................ $ 8,387,778 $ 7,770,711
=========== ===========
- --------------------------------------------------------------------------------
See notesNotes to consolidated financial statements
- ----------------------------------------------Consolidated Financial Statements
34
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(Dollars in thousands, except per-share data)
Year Ended December 31
------------------------------
2001 2000 1999
-------- -------- --------
Interest Income
- -------------------------------------------------------------------------------------------------
Loans, including fees .......................................... $424,025 $433,686 $378,705
Investment securities:
Taxable ................................................... 77,701 68,629 71,028
Tax-exempt ................................................ 9,465 10,187 9,903
Dividends ................................................. 5,097 6,087 5,365
Other interest income .......................................... 1,890 1,038 297
-------- -------- --------
Total Interest Income ................ 518,178 519,627 465,298
Interest Expense
- -------------------------------------------------------------------------------------------------
Deposits ....................................................... 186,969 187,601 161,459
Short-term borrowings .......................................... 13,150 30,447 17,619
Long-term debt ................................................. 27,843 25,826 20,050
-------- -------- --------
Total Interest Expense ................ 227,962 243,874 199,128
-------- -------- --------
Net Interest Income ................... 290,216 275,753 266,170
Provision for Loan Losses ...................................... 14,585 15,024 9,943
-------- -------- --------
Net Interest Income After
Provision for Loan Losses ...... 275,631 260,729 256,227
-------- -------- --------
Other Income
- -------------------------------------------------------------------------------------------------
Investment management and trust services ....................... 27,138 20,609 17,508
Service charges on deposit accounts ............................ 32,388 26,233 23,013
Other service charges and fees ................................. 17,125 15,728 12,764
Mortgage banking income ........................................ 11,782 3,782 5,035
Investment securities gains .................................... 12,561 8,646 8,348
-------- -------- --------
100,994 74,998 66,668
Other Expenses
- -------------------------------------------------------------------------------------------------
Salaries and employee benefits ................................. 116,907 103,209 97,702
Net occupancy expense .......................................... 17,074 15,440 14,796
Equipment expense .............................................. 12,345 11,454 10,945
Data processing ................................................ 11,782 11,232 11,422
Merger-related expenses ........................................ 7,105 -- --
Intangible amortization ........................................ 4,786 1,839 1,297
Other .......................................................... 46,670 41,282 39,607
-------- -------- --------
216,669 184,456 175,769
-------- -------- --------
Income Before Income Taxes ............ 159,956 151,271 147,126
Income Taxes ................................................... 46,367 44,437 42,499
-------- -------- --------
Net Income ............................ $113,589 $106,834 $104,627
======== ======== ========
- -------------------------------------------------------------------------------------------------
Per-Share Data:
Net Income (Basic) ............................................. $ 1.38 $ 1.32 $ 1.27
Net Income (Diluted) ........................................... 1.37 1.31 1.26
Cash Dividends ................................................. 0.662 0.593 0.532
- -------------------------------------------------------------------------------------------------
Year Ended December 31
--------------------------------
2002 2001 2000
--------- --------- ---------
Interest Income
- --------------------------------------------------------------------------------
Loans, including fees ........................ $ 370,318 $ 424,527 $ 433,720
Investment securities:
Taxable ................................... 84,139 77,701 68,629
Tax-exempt ................................ 9,835 9,465 10,187
Dividends ................................. 4,066 5,097 6,087
Other interest income ........................ 930 1,890 1,038
--------- --------- ---------
Total Interest Income ............... 469,288 518,680 519,661
Interest Expense
- --------------------------------------------------------------------------------
Deposits ..................................... 125,394 186,969 187,601
Short-term borrowings ........................ 6,598 13,150 30,447
Long-term debt ............................... 26,227 27,843 25,826
--------- --------- ---------
Total Interest Expense .............. 158,219 227,962 243,874
--------- --------- ---------
Net Interest Income ................. 311,069 290,718 275,787
Provision for Loan Losses .................... 11,900 14,585 15,024
--------- --------- ---------
Net Interest Income After
Provision for Loan Losses ....... 299,169 276,133 260,763
--------- --------- ---------
Other Income
- --------------------------------------------------------------------------------
Investment management and trust services ..... 29,114 27,138 20,609
Service charges on deposit accounts .......... 37,502 32,388 26,233
Other service charges and fees ............... 17,743 15,916 13,951
Mortgage banking income ...................... 17,154 11,782 3,782
Investment securities gains .................. 8,992 12,561 8,646
Other ........................................ 5,278 2,959 3,759
--------- --------- ---------
115,783 102,744 76,980
Other Expenses
- --------------------------------------------------------------------------------
Salaries and employee benefits ............... 129,355 116,907 103,209
Net occupancy expense ........................ 17,705 17,074 15,440
Equipment expense ............................ 11,295 12,345 11,454
Data processing .............................. 11,968 11,782 11,232
Advertising .................................. 6,525 6,117 5,842
Merger-related expenses ...................... - 7,105 -
Goodwill and intangible amortization ......... 1,838 4,786 1,839
Other ........................................ 46,850 42,805 37,456
--------- --------- ---------
225,536 218,921 186,472
--------- --------- ---------
Income Before Income Taxes .......... 189,416 159,956 151,271
Income Taxes ................................. 56,468 46,367 44,437
--------- --------- ---------
Net Income .......................... $ 132,948 $ 113,589 $ 106,834
========= ========= =========
- --------------------------------------------------------------------------------
Per-Share Data:
Net Income (Basic) ........................... $ 1.30 $ 1.10 $ 1.05
Net Income (Diluted) ......................... 1.29 1.09 1.05
Cash Dividends ............................... 0.586 0.530 0.474
- --------------------------------------------------------------------------------
See notesNotes to consolidated financial statements
- ----------------------------------------------Consolidated Financial Statements
35
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Other
Comprehen-
Common Capital Retained sive Income- --------------------------------------------------------------------------------
(Dollars in thousands, except per-share data)
Accumulated
Other
Number of Comprehen-
Shares Common Capital Retained sive Income Treasury
Outstanding Stock Surplus Earnings (Loss) Stock Total
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1999........................................... $172,182 $313,1252000 ..................... 102,392,000 $ 149,038189,035 $ 24,151419,443 $ 87,957 $ 15,530) $(18,156) $ 662,749
Comprehensive Income:
Net income................................................. 104,627
Other - unrealized loss on securities (net of $21.4 million
tax benefit).......................................... (39,681)
Total comprehensive income............................
Stock dividend issued - 10% (7.3 million shares)................ 16,515 106,336 (122,925)
Stock issued (371,000 shares, including 214,000 shares of
treasury stock)............................................ 338 (18)
Acquisition of treasury stock (970,000 shares)..................
Cash dividends - $0.532 per share............................... (42,783)
--------------------------------------------
Balance at December 31, 1999......................................... 189,035 419,443 87,957 (15,530)
Comprehensive Income:
Net income.................................................income ................................. 106,834 106,834
Other - unrealized gain on securities
(net of $9.0$12.0 million tax expense) 16,678......... 22,298 22,298
Less - reclassification adjustment for
gains included in net income (net of
$3.0 million tax expense) ................. (5,620) (5,620)
---------
Total comprehensive income............................income ............ 123,512
---------
Stock dividend issued - 5% (4.0 million shares)........................................... 9,442 61,767 (71,287) Stock issued (380,000 shares, including 326,000 shares of
treasury stock)............................................ 135 (960)
Stock issued for acquisition of Skylands
Financial Corporation (2.2 million shares of treasury stock) (7,421)
Acquisition of treasury stock (2.5 million shares)..............
Cash dividends - $0.593 per share............................... (46,889)
--------------------------------------------
Balance at December 31, 2000......................................... 198,612 472,829 76,615 1,148
Comprehensive Income:
Net income................................................. 113,589
Other - unrealized gain on securities (net of $6.4 million
tax expense).......................................... 11,822
Total comprehensive income............................
Stock dividend issued - 5% (3.6 million shares)................. 9,103 61,377 (70,554)
Stock issued (1.0 million shares, including 906,000
shares of treasury stock).................................. 247 2,029
Acquisition of treasury stock (366,000 shares)..................
Cash dividends - $0.662 per share............................... (54,001)
--------------------------------------------
Balance at December 31, 2001......................................... $207,962 $536,235 $ 65,649 $ 12,970
============================================
Treasury
(Dollars in thousands, except per-share data) Stock Total
- -------------------------------------------------------------------------------------------
Balance at January 1, 1999........................................... $ (4,426) $654,070
Comprehensive Income:
Net income................................................. 104,627
Other - unrealized loss on securities (net of $21.4 million
tax benefit).......................................... (39,681)
--------
Total comprehensive income............................ 64,946
--------
Stock dividend issued - 10% (7.3 million shares)................ (74)
Stock issued (371,000 shares, including 214,000 shares of
treasury stock)............................................ 4,054 4,374
Acquisition of treasury stock (970,000 shares).................. (17,784) (17,784)
Cash dividends - $0.532 per share............................... (42,783)
-------------------
Balance at December 31, 1999......................................... (18,156) 662,749
Comprehensive Income:
Net income................................................. 106,834
Other - unrealized gain on securities (net of $9.0 million
tax expense) 16,678
--------
Total comprehensive income............................ 123,512
--------
Stock dividend issued - 5% (4.0 million shares)................. (78)
Stock issued (380,000 shares, including 326,000 shares of
treasury stock)............................................................................. 475,000 135 (960) 6,003 5,178
Stock issued for acquisition of Skylands
Financial Corporation (2.2 million shares of treasury stock)..................... 2,723,000 (7,421) 39,282 31,861
Acquisition of treasury stock (2.5 million shares).............................. (3,130,000) (45,162) (45,162)
Cash dividends - $0.593$0.474 per share...............................share ............ (46,889) -------------------(46,889)
--------------------------------------------------------------------------------
Balance at December 31, 2000.........................................2000 ................... 102,460,000 198,612 472,829 76,615 1,148 (18,033) 731,171
Comprehensive Income:
Net income.................................................income ................................. 113,589 113,589
Other - unrealized gain on securities
(net of $6.4$10.8 million tax expense).......................................... 11,822
-------- ......... 19,987 19,987
Less - reclassification adjustment for
gains included in net income (net of
$4.4 million tax expense) ................. (8,165) (8,165)
---------
Total comprehensive income............................income ............ 125,411
-----------------
Stock dividend issued - 5% (3.6 million shares)........................................... 9,103 61,377 (70,554) (74)
Stock issued (1.0 million shares, including 906,000
shares of treasury stock)................................................................... 1,262,000 247 2,029 14,593 16,869
Acquisition of treasury stock (366,000 shares).................................. (457,000) (7,922) (7,922)
Cash dividends - $0.662$0.530 per share...............................share ............ (54,001) -------------------(54,001)
--------------------------------------------------------------------------------
Balance at December 31, 2001......................................... $(11,362) $811,454
===================2001 ................... 103,265,000 207,962 536,235 65,649 12,970 (11,362) 811,454
Comprehensive Income:
Net income ................................. 132,948 132,948
Other - -------------------------------------------------------------------------------------------unrealized gain on securities
(net of $14.9 million tax expense) ......... 27,676 27,676
Less - reclassification adjustment for
gains included in net income (net of
$3.1 million tax expense) ................. (5,845) (5,845)
---------
Total comprehensive income ...... 154,779
---------
5 for 4 stock split paid in the form of a 25%
stock dividend .............................. 51,981 (52,050) (69)
Stock issued ................................. 336,000 (3,157) 6,964 3,807
Acquisition of treasury stock ................ (2,495,000) (46,133) (46,133
Cash dividends - $0.586 per share ............ (60,096) (60,096
--------------------------------------------------------------------------------
Balance at December 31, 2002 ................... 101,106,000 $ 259,943 $ 481,028 $ 138,501 $ 34,801 $(50,531) $ 863,742
=========== ========= ========= ========== ======== ======== =========
- --------------------------------------------------------------------------------
See notesNotes to consolidated financial statements
- ----------------------------------------------Consolidated Financial Statements
36
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(In Thousands)thousands)
Year Ended December 31
-----------------------------------------------------------------------------
2002 2001 2000
1999
--------- --------- --------------------- ------------ ------------
Cash Flows from Operating Activities:
Net income ............................................................................................................. $ 132,948 $ 113,589 $ 106,834 $ 104,627
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Provision for loan losses ...................................... 11,900 14,585 15,024 9,943
Depreciation and amortization of premises and equipment ........ 12,786 12,990 11,574 11,178
Net amortization of investment security premiums ............... 3,974 147 462 1,435
Deferred income tax expense (benefit) .......................... 1,096 1,520 (2,638) 1,237
Gain on sale of investment securities .......................... (8,992) (12,561) (8,646) (8,348)
Gain on sale of mortgage loans ................................. (15,712) (10,260) (9,299) (3,295)(2,254)
Proceeds from salesales of mortgage loans ...........................held for sale ............ 609,726 420,220 152,745 239,681
Originations of mortgage loans held for sale ................... (646,115) (423,093) (147,671) (228,533)(154,716)
Amortization of intangible assets .............................. 1,838 4,786 1,839 1,297
Decrease (increase) in accrued interest receivable ............. 713 1,359 (8,300)
5,466
(Increase) decreaseDecrease (increase) in other assets ............................ 512 (5,448) (4,238) 4,364
(Decrease) increase in accrued interest payable ................ (8,318) (11,787) 10,446 (926)
(Decrease) increase in other liabilities ....................... (1,580) (1,640) 3,558
(837)
--------- --------- --------------------- ------------ ------------
Total adjustments ................................................................................... (38,172) (9,182) 14,856
32,662
--------- --------- --------------------- ------------ ------------
Net cash provided by operating activities ............................ 94,776 104,407 121,690
137,289
--------- --------- --------------------- ------------ ------------
Cash Flows from Investing Activities:
Proceeds from sales of securities available for sale ........... 67,633 206,688 85,256 52,653
Proceeds from maturities of securities held to maturity ........ 21,247 42,342 46,542 105,538
Proceeds from maturities of securities available for sale ...... 807,980 478,310 163,842 297,949
Purchase of securities held to maturity ........................ (5,654) (7,200) (3,001) (1,500)
Purchase of securities available for sale ...................... (1,528,199) (970,779) (222,071)
(413,169)
Decrease (increase)(Increase) decrease in short-term investments .................. (931) 1,449 (5,544)
876
Net increasedecrease (increase) in loans ......................................................................... 44,098 (6,714) (335,854)
(472,737)
Cash acquired from Skylands Financial Corporation .............. -- 11,632 --
Net cash paid for Dearden Maguire .............................. (16,224) -- --
Net cash paid for Branch Acquisition ........................... (28,820) -- --(paid for) received from acquisitions ................. - (45,044) 11,632
Purchase of premises and equipment, net ........................ (10,619) (22,200) (28,198)
(15,568)
--------- --------- --------------------- ------------ ------------
Net cash used in investing activities .................................... (604,445) (323,148) (287,396)
(445,958)
--------- --------- --------------------- ------------ ------------
Cash Flows from Financing Activities:
Net increase (decrease) in demand and savings deposits ............................. 366,981 516,439 129,061 (31,325)
Net (decrease) increase in time deposits ....................... (108,257) (32,337) 106,191 33,913
Addition to long-term debt ..................................... --100,406 - 242,000 90,238
Repayment of long-term debt .................................... (21,653) (102,701) (135,571)
(10,860)
(Decrease)Increase (decrease) increase in short-term borrowings ............................. 231,859 (46,094) (73,755) 276,415
Dividends paid ................................................. (58,954) (51,486) (45,741) (41,856)
Net proceeds from issuance of common stock ..................... 3,738 16,795 5,100 4,300
Acquisition of treasury stock .................................. (46,133) (7,922) (45,162)
(17,784)
--------- --------- --------------------- ------------ ------------
Net cash provided by financing activities ............................ 467,987 292,694 182,123
303,041
--------- --------- --------------------- ------------ ------------
Net (Decrease) Increase (Decrease) in Cash and Due From Banks ............. (41,682) 73,953 16,417 (5,628)
Cash and Due From Banks at Beginning of Year ................... 356,539 282,586 266,169
271,797
--------- --------- --------------------- ------------ ------------
Cash and Due From Banks at End of Year ......................... $ 314,857 $ 356,539 $ 282,586
$ 266,169
========= ========= ===================== ============ ============
Cash paid during the year for:
Interest ...................................................................................................... $ 166,537 $ 239,749 $ 233,427
$ 200,054
Income taxes .............................................................................................. 49,621 46,633 40,624 32,916
- ------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See notesNotes to consolidated financial statements
- ----------------------------------------------Consolidated Financial Statements
37
FULTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Business: Fulton Financial Corporation (Parent Company) is a multi-bank
financial holding company which provides a full range of banking and financial
services to businesses and consumers through its wholly-owned banking
subsidiaries: Fulton Bank, Lebanon Valley Farmers Bank, Swineford National Bank,
Lafayette Ambassador Bank, FNB Bank, N.A., Hagerstown Trust, Delaware National
Bank, The Bank, (formerly The Bank of Gloucester County), Woodstown National
Bank, The Peoples Bank of Elkton and Skylands Community Bank; as well
as its financial services subsidiaries: Fulton Financial Advisors, N.A.,
Dearden, Maguire, Weaver and Barrett, LLC and Fulton Insurance Services Group,
Inc. In addition, the Parent Company owns six other non-banking subsidiaries:
Fulton Financial Realty Company, Fulton Life InsuranceReinsurance Company, LTD, Pennbanks
Insurance Company, Central Pennsylvania Financial Corp., FFC Management, Inc.
and Drovers Capital Trust I. Collectively, the Parent Company and its
subsidiaries are referred to as the Corporation.
The Corporation's primary source of revenue is 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 and other operating expenses. 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 electronic delivery systems have become more prominent.
The Corporation is subject to the regulations of certain federalFederal 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, western and northern Maryland, Delaware and western New Jersey. Approximately half of the
Corporation's business is conducted in the south central Pennsylvania region.
Industry diversity is the key to the economic well-being of this region 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 mortgage 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 installment loans is
recognized on a basis which approximates the effective yield method.
Accrual of interest income is generally discontinued when a loan becomes 90
days past due as to principal or interest.interest, except for adequately collateralized
residential mortgage loans. When interest accruals are discontinued, unpaid
interest credited to income is reversed. Nonaccrual 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.
38
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.
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 periodically
tested for impairment and, if necessary, additional write-offs are recorded.
During 2001, the Corporation recorded MSR's of approximately $3.6 million. At
December 31, 2001, the Corporation had $3.2 million of unamortized MSR's.
Allowance for Loan Losses: The allowance for loan losses is increased by
charges to incomeexpense 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 additionschanges to the allowance may be necessary based on changes in
any of these factors.
Impaired loans, as defined by Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" (Statement 114), 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. 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.
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 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.
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.
Interest costs incurred during the construction of major bank premises are
capitalized. During 2001 and 2000, the Corporation capitalized approximately
$390,000 and $780,000, respectively, in interest expense related to the
construction of new office space at its headquarters location.
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 tested quarterly
for impairment and, if necessary, additional amortization is recorded.
Investments in Low Income Housing Partnerships: Investments in low income
housing partnerships are amortized using the effective yield method over the
life of the related guaranteed Federal tax credits. Amortization, net of the tax
benefit and tax credits, is presented as a component of income tax expense. At
December 31, 2002 and 2001, the Corporation's investments totaled $38.6 million
and $33.2 million, respectively. The net income tax benefit associated with
these investments was $4.0 million, $3.6 million and $3.0 million in 2002, 2001
and 2000, respectively.
Income Taxes: The provision for income taxes is based upon the results of
operations, adjusted primarily for the effect of tax-exempt income and net
credits received as a result of investments in low and moderate 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 options in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25). As such, no compensation expense has been
recognized as
39
stock options are granted with an exercise price equal to the fair market value
of the Corporation's stock. Pro-forma disclosures of the impact of stock option
grants on the Corporation's net income and net income per share, had
compensation expense been recognized, are provided in Note N, "Stock-based
Compensation Plans and Shareholders' Equity", as required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (Statement 123).
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (Statement 148). Statement 148
clarifies the accounting for options issued in prior periods when a company
elects to transition from APB 25 accounting to Statement 123 accounting. It also
requires additional disclosures with respect to accounting for stock-based
compensation. Management does not expect the transition accounting to have an
impact on the Corporation's financial statements as stock-based compensation
will continue to be accounted for in accordance with APB 25.
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. Option grants which would not have
a dilutive impact on average shares are not includedExcluded from the calculation were
anti-dilutive options totaling 434,000 in the calculation.2002 and 2001 and 372,000 in 2000.
A reconciliation of the weighted average shares outstanding used to
calculate basic net income per share and diluted net income per share follows.
There iswere no adjustmentadjustments to net income to arrive at diluted net income per
share.
2001 2000 1999
------ ------ ------
(in thousands)
Weighted average shares outstanding (basic) ...... 82,597 81,213 82,296
Impact of common stock equivalents ............... 554 485 497
------ ------ ------
Weighted average shares outstanding (diluted) .... 83,151 81,698 82,793
====== ====== ======
Comprehensive Income: The following table summarizes the reclassification
adjustment for realized security gains (net of taxes) for each of the indicated
periods:
2002 2001 2000
1999
------- ------- ------------ ---- ----
(in thousands)
Unrealized holding gains (losses) arising during period ........ $19,987 $22,298 $(34,255)
Reclassification adjustment for gains included in net income ... 8,165 5,620 5,426
------- ------- --------
Net unrealized gains (losses) on securities .................... $11,822 $16,678 $(39,681)
======= ======= ========Weighted average shares outstanding (basic) ................ 102,636 103,246 101,516
Impact of common stock equivalents ......................... 673 693 607
---------- ---------- ----------
Weighted average shares outstanding (diluted) .............. 103,309 103,939 102,123
========== ========== ==========
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 eleventen 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.
Business Combinations and Intangible Assets - In June 2001, the Financial
Accounting Standards Board (FASB)FASB issued
Statements of Financial Accounting Standards Nos. 141, "Business Combinations"
(Statement 141) and 142 "Goodwill and Other Intangible Assets" (Statement 142).
Statement 141 requires that the purchase method of accounting be used for all
business combinations and eliminated the use of pooling of interests for
transactions initiated subsequent to June 30, 2001. Statement 142 eliminated the
amortization to expense of goodwill recorded as a result of such combinations,
but requires periodic
evaluation of the goodwill to be evaluated for impairment.impairment at least annually.
Write-downs of the balance, if necessary, are to be charged to the results of
operations.operations in the period in which the impairment is determined. Goodwill
existing prior to the issuance of the statement was required to be amortized
through December 31, 2001.
The Corporation evaluatedperformed its recordedinitial test of goodwill underimpairment upon
adoption of Statement 142 as ofon January 1, 2002 and its annual test of goodwill
impairment on October 31, 2002. Based on the results of these tests the
Corporation concluded that there was no impairment at that date.and no write-downs were
recorded. As a result no additional write-off during 2002 is expected. In addition, as a
result of eliminating amortizationadopting Statement 142, the Corporation was not required
to recognize $2.7 million of goodwill amortization in 2002, the Corporation expects
to realizefor a pre-taxnet benefit of
$3.1 million. The Corporation will also
recognize income$0.03 per share (basic and diluted).
When it was issued, Statement 142 was not applicable to acquisitions of
$848,000 frombranches, which were required to be accounted for under the reversalprovisions of negative goodwill balances as
of January 1, 2002. During 2001, the Corporation recognized $3.1 million in
amortization expense related to goodwill which will no longer be amortized in
2002.
Accounting for the Impairment or Disposal of Long-Lived Assets - In August,
2001, the FASB issued
Statement of Financial Accounting Standards No. 144,72, "Accounting for the ImpairmentCertain
Acquisitions of Banking or DisposalThrift Institutions" (Statement 72). The purchase
price in excess of Long-Lived Assets" (Statement
144). Statement 144 supersedes Statement 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assetsnet assets acquired in branch transactions continued to be
Disposed Of" and certain other
related accounting standards. In general,amortized to expense after the adoption of Statement 144 established a single
accounting model for a segment of a business to be accounted for as a
discontinued operation and resolved significant implementation issues related to
Statement 121. Statement 144 was effective for years beginning after December
15, 2001. The Corporation adopted Statement 144 on January142.
40
On October 1, 2002, and there was
no material impact on its balance sheet, comprehensive income or net income.
Accounting for Derivative Instruments and Hedging Activities: In June,
1998, the FASB issued Statement 147, "Acquisitions of Certain
Financial Accounting Standards No. 133,
"AccountingInstitutions", which allowed the excess purchase price recorded in
qualifying branch acquisitions to be treated in the same manner as Statement 142
goodwill. Upon adoption of Statement 147, its provisions were applied
retroactively to the adoption date for Derivative Instruments and Hedging Activities" (Statement 133).
This statement expandedStatement 142, which was January 1, 2002
for the previous definitionCorporation. As a result of derivatives to include
certain additional transactions. Entities areadopting Statement 147, the Corporation was
not required to record derivatives at
their fair valuesrecognize $1.0 million of goodwill amortization in 2002
($677,000, net of taxes), for a net benefit of $0.01 per share (basic and
recognize any changes in fair value in current period
earnings, unless specific hedge criteria are met. Statement 133, as amended by
Statement 138, was effectivediluted). See Note F, "Goodwill and Intangible Assets" for years beginning after June 15, 2000. The
Corporation adopted Statement 133 on January 1, 2001 and there was no material
impact on its balance sheet, comprehensive income or net income.
additional
disclosures.
Reclassifications and Restatements: Certain amounts in the 20002001 and 19992000
consolidated financial statements and notes have been reclassified to conform to
the 20012002 presentation. All information has been restated for the July, 2001
merger with Drovers Bancshares Corporation, which was accounted for as a pooling
of interests. All share and per-share data have been restated to
reflect the impact of the 5%5 for 4 stock dividendsplit paid onin May, 25, 2001.2002.
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 20012002 and 20002001
was approximately $56.0$64.8 million and $58.4$56.0 million, respectively.
NOTE C - INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
The following tables summarize the amortized cost and estimated fair values
of investment securities as of December 31 (in thousands):31:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
2002 Held to Maturity Cost Gains Losses Value
------------------------------------------------------ ----------- ----------- ----------- -----------
(in thousands)
U.S. Government and agency securities ................ $ 8,568 $ 259 $ - $ 8,827
State and municipal securities ....................... 4,679 123 - 4,802
Debt securities issued by foreign governments ........ 50 - - 50
Mortgage-backed securities ........................... 19,387 1,069 - 20,456
----------- ----------- ----------- -----------
$ 32,684 $ 1,451 $ - $ 34,135
=========== =========== =========== ===========
2002 Available for Sale
----------------------------------------------
Equity securities .................................... $ 152,985 $ 8,948 $ (6,795) $ 155,138
U.S. Government and agency securities ................ 96,112 1,196 (4) 97,304
State and municipal securities ....................... 241,451 8,422 (7) 249,866
Debt securities issued by foreign governments ........ 250 - - 250
Corporate debt securities ............................ 50 - - 50
Mortgage-backed securities ........................... 1,839,240 41,810 (51) 1,880,999
----------- ----------- ----------- -----------
$ 2,330,088 $ 60,376 $ (6,857) $ 2,383,607
=========== =========== =========== ===========
41
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
2001 Held to Maturity Cost Gains Losses Value
- ----------------------------------- ---------- ---------- ---------- -------------------------------------------------------- ------------ ------------ ------------ ------------
(in thousands)
U.S. Government and agency securities ...................... $ 8,170 $ 147 $ --- $ 8,317
State and municipal securities ..................... 9,840 163 --- 10,003
Debt securities issued by foreign governments ......... 150 -- --- - 150
Corporate debt securities ............................... 15 -- --- - 15
Mortgage-backed securities ............................. 31,382 628 (3) 32,007
---------- ------- ------- ---------------------- ------------ ------------ ------------
$ 49,557 $ 938 $ (3) $ 50,492
========== ======= ======= ====================== ============ ============ ============
2001 Available for Sale
- ---------------------------------------------------------------------------------
Equity securities ............................................... $ 146,349 $ 8,751 $(3,767)$ (3,767) $ 151,333
U.S. Government and agency securities ...................... 97,285 2,397 --- 99,682
State and municipal securities ..................... 214,843 3,511 (173) 218,181
Debt securities issued by foreign governments ......... 50 -- --- - 50
Corporate debt securities ............................... 250 -- --- - 250
Mortgage-backed securities ............................. 1,209,073 11,564 (2,346) 1,218,291
---------- ------- ------- ----------
$1,667,850 $26,223 $(6,286) $1,687,787
========== ======= ======= ==========
2000 Held to Maturity
- -----------------------------------
U.S. Government and
agency securities ............------------ ------------ ------------ ------------
$ 8,9921,667,850 $ 88 $(1,219)26,223 $ 7,861
State and municipal securities .... 12,971 152 (28) 13,095
Debt securities issued
by foreign governments ....... 205 4 -- 209
Corporate debt securities ......... 515 4 -- 519
Mortgage-backed securities ........ 62,079 289 (216) 62,152
---------- ------- ------- ----------(6,286) $ 84,762 $ 537 $(1,463) $ 83,836
========== ======= ======= ==========
2000 Available for Sale
- -----------------------------------
Equity securities.................. $ 124,559 $10,759 $ (3,923) $ 131,395
U.S. Government and
agency securities............. 212,142 622 (216) 212,548
State and municipal securities 212,480 1,196 (1,503) 212,173
Debt securities issued
By foreign governments........ 250 -- -- 250
Corporate debt securities.......... 19,028 -- (918) 18,110
Mortgage-backed securities......... 799,923 3,232 (7,498) 795,657
---------- ------- -------- ----------
$1,368,382 $15,809 $(14,058) $1,370,133
========== ======= ======== ==========1,687,787
============ ============ ============ ============
The amortized cost and estimated fair value of debt securities at December
31, 20012002 by contractual maturity are shown in the following table. Actual
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Held to Maturity Available for Sale
---------------------- -------------------------------------------------- --------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
----------- ---------- --------- ---------- ---------- ---------------------
(in thousands)
Due in one year or less...........less ................. $ 8,5483,667 $ 8,6043,709 $ 35,54152,569 $ 36,15952,934
Due from one year to five years... 7,478 7,605 225,324 229,600years ......... 7,349 7,492 213,905 220,220
Due from five years to ten years.. 1,809 1,880 22,571 22,734years ........ 1,960 2,064 47,054 48,587
Due after ten years............... 340 396 28,992 29,670
------- ------- ---------- ----------
18,175 18,485 312,428 318,163years ..................... 321 414 24,335 25,729
------------- ------------- ------------- -------------
13,297 13,679 337,863 347,470
Mortgage-backed securities........ 31,382 32,007 1,209,073 1,218,291
------- ------- ---------- ----------
$49,557 $50,492 $1,521,501 $1,536,454
======= ======= ========== ==========securities .............. 19,387 20,456 1,839,240 1,880,999
------------- ------------- ------------- -------------
$ 32,684 $ 34,135 $ 2,177,103 $ 2,228,469
============= ============= ============= =============
Pre-tax gainsGains totaling $7.8 million, $9.6 million $8.8 million and $7.9$8.8 million were realized on
the sale of equity securities during 2002, 2001 and 2000, and 1999,
respectively. Pre-tax gainsGains
totaling $1.6 million and $3.0 million and $393,000 were realized on the sale of available
for sale debt securities during 2002 and 2001, and 1999,
respectively. Pre-tax lossesLosses of $220,000
were realized on the sale of available for sale debt securities during 2000. In
2002, losses of $340,000 were recognized for equity investments exhibiting other
than temporary impairment.
Securities carried at $956.5$937.1 million and $828.0$956.5 million at December 31,
20012002 and 2000,2001, respectively, were pledged as collateral to secure public and
trust deposits, and for other purposes.
42
NOTE D - LOANS AND ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------================================================================================
Gross loans are summarized as follows as of December 31:
2001 2000
---------- ----------
(in thousands)
Commercial, financial and agricultural ......... $1,495,380 $1,386,172
Real estate-construction ....................... 267,627 247,382
Real estate-mortgage:
First and second-residential ................ 1,468,799 1,569,637
Commercial .................................. 1,428,066 1,359,714
Consumer ....................................... 626,985 738,797
Leasing and other .............................. 86,163 72,957
---------- ----------
$5,373,020 $5,374,659
========== ==========
2002 2001
------------- -------------
(in thousands)
Commercial, financial and agricultural ............................... $ 1,679,100 $ 1,495,380
Real estate-construction ............................................. 248,565 267,627
Real estate-mortgage:
First and second-residential ...................................... 1,244,783 1,468,799
Commercial ........................................................ 1,527,143 1,428,066
Consumer ............................................................. 543,040 626,985
Leasing and other .................................................... 84,063 98,823
------------- -------------
5,326,694 5,385,680
Unearned income ...................................................... (9,626) (12,660)
------------- -------------
$ 5,317,068 $ 5,373,020
============= =============
Changes in the allowance for loan losses were as follows for the years
ended December 31:
2001 2000 1999
-------- -------- --------
(in thousands)
Balance at January 1........................ $ 65,640 $ 61,538 $ 61,327
Loans charged off...........................
2002 2001 2000
------------- ------------- -------------
(in thousands)
Balance at January 1 ................................. $ 71,872 $ 65,640 $ 61,538
Loans charged off .................................... (15,670) (14,275) (18,357) (14,672)
Recoveries of loans previously charged off ........... 3,818 3,837 4,802
------------- ------------- -------------
Net loans charged off ........................... (11,852) (10,438) (13,555)
------------- ------------- -------------
Provision for loan losses ............................ 11,900 11,885 15,024
Provision for loan losses, merger-related ............ - 2,700 -
------------- ------------- -------------
Total provision for loan losses ................. 11,900 14,585 15,024
------------- ------------- -------------
Allowance purchased .................................. - 2,085 2,633
------------- ------------- -------------
Balance at December 31 ............................... $ 71,920 $ 71,872 $ 65,640
============= ============= =============
The following table summarizes non-performing assets as of loans previously charged off.. 3,837 4,802 4,940
-------- -------- --------
Net loans charged off.................. (10,438) (13,555) (9,732)
-------- -------- --------
Provision for loan losses................... 11,885 15,024 9,943
Provision for loan losses, merger-related 2,700 -- --
-------- -------- --------
Total provision for loan losses........ 14,585 15,024 9,943
-------- -------- --------
Allowance purchased......................... 2,085 2,633 --
-------- -------- --------
Balance at December 31...................... $ 71,872 $ 65,640 $ 61,538
======== ======== ========
Nonaccrual loans aggregated approximately $22.8 million at December 31,
2001, $21.8 million at December 31, 2000 and $24.0 million at December 31, 1999.31:
2002 2001
------------- -------------
(in thousands)
Nonaccrual loans ..................................................... $ 24,090 $ 22,794
Accruing loans greater than 90 days past due ......................... 14,095 9,368
Other real estate owned .............................................. 938 1,817
------------- -------------
$ 39,123 $ 33,979
============= =============
Interest of approximately $1.7 million, $1.9 million $1.8 million and $1.9$1.8 million was
not recognized as interest income due to the nonaccrualnon-accrual status of loans during
2002, 2001 2000 and 1999,2000, respectively.
The recorded investment in loans that were considered to be impaired as
defined by Statement 114 was $24.4$42.8 million and $25.6$24.4 million at December 31,
20012002 and 2000,2001, respectively. At December 31, 2002, $8.9 million of impaired
loans were included in non-accrual loans and at December 31, 2001, $8.7 million
of impaired loans were included in nonaccrual loans and at December 31, 2000, $15.0 million
of impaired loans were included in nonaccrualnon-accrual loans. At December 31, 20012002
43
and 2000,2001, impaired loans had related allowances for loan losses of $1.8$9.0 million
and $4.0$1.8 million, respectively. The average recorded investment in impaired
loans during the years ended December 31, 2002, 2001 2000 and 19992000 was approximately
$40.2 million, $21.1 million, $21.0 million, and $13.7$21.0 million, respectively.
The Corporation applies all payments received on nonaccruingnon-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 $980,000, $934,000 and $1.7 million, $980,000 and $934,000 on impaired
loans in 2002, 2001 2000, and 1999,2000, 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 $136.3$145.5 million and
$149.7$136.3 million at December 31, 20012002 and 2000,2001, respectively. During 2001, $36.02002, $19.2
million of new advances were made and repayments totaled $49.4$10.0 million.
The total portfolio of mortgage loans serviced by the Corporation for
unrelated third parties at December 31, 2002 and 2001 was $1.0 billion and
2000 was $871.6 million and
$699.6$870.2 million, respectively.
NOTE E - PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
The following is a summary of premises and equipment as of December 31:
2001 2000
--------- ---------
(in thousands)
Premises and leasehold improvements .............. $ 146,916 $ 116,801
Furniture and equipment .......................... 83,781 77,731
Construction in progress ......................... 4,313 26,450
--------- ---------
235,010 220,982
Less: Accumulated depreciation and amortization (109,393) (104,575)
--------- ---------
$ 125,617 $ 116,407
========= =========
2002 2001
---------- -----------
(in thousands)
Premises and leasehold improvements ................ $ 149,808 $ 146,916
Furniture and equipment ............................ 87,567 83,781
Other .............................................. 2,722 4,313
---------- -----------
240,097 235,010
Less: Accumulated depreciation and amortization .... (116,647) (109,393)
---------- -----------
$ 123,450 $ 125,617
========== ===========
NOTE F - FEDERAL HOME LOAN BANK ADVANCESGOODWILL AND INTANGIBLE ASSETS
The following table summarizes goodwill and intangible assets at December
31:
2002 2001
--------- -----------
(in thousands)
Core deposit intangible assets ..................... $ 11,146 $ 11,146
Unidentifiable intangible assets (Statement 72) .... 5,082 26,880
Accumulated amortization ........................... (4,979) (3,640)
--------- -----------
Total Intangible Assets ....................... 11,249 34,386
Goodwill ........................................... 61,048 38,900
--------- -----------
Total Goodwill and Intangible Assets .......... $ 72,297 $ 73,286
========= ===========
44
The following table summarizes the changes in goodwill:
2002 2001 2000
--------- ----------- ----------
(in thousands)
Balance at beginning of year ....... $ 38,900 $ 25,764 $ 9,572
Goodwill acquired .................. - 15,863 17,483
Reclassified goodwill .............. 21,300 - -
Reversal of negative goodwill ...... 848 - -
Amortization expense ............... - (2,727) (1,291)
--------- ----------- ----------
Balance at end of year ............. $ 61,048 $ 38,900 $ 25,764
========= =========== ==========
Reclassified goodwill consists of certain branch acquisition unidentifiable
intangible assets that were accounted for under Statement 72 prior to the
adoption of Statement 147. Upon adoption of Statement 147 retroactively to
January 1, 2002, these assets were reclassified to goodwill. Amortization
expense of $483,000, or $314,000, net of taxes, was recognized for these assets
in 2001. See Note R, "Mergers and Acquisitions" for information regarding
goodwill acquired.
The cumulative effect of adopting Statement 142 was $848,000, representing
the reversal of negative goodwill balances existing at January 1, 2002. This has
been presented as other income in the Consolidated Statements of Income. The
following table adjusts net income and net income per share for the amortization
expense related to Statements 142 and 147 goodwill that is no longer being
amortized in 2002 (in thousands, except per-share amounts):
2002 2001 2000
----------- ----------- ----------
Net income, as reported .......................... $ 132,948 $ 113,589 $ 106,834
Amortization of goodwill, net of taxes ........... - 3,041 1,291
Reversal of negative goodwill .................... (848) - -
----------- ----------- ----------
Net income, as adjusted .......................... $ 132,100 $ 116,630 $ 108,125
=========== =========== ==========
Basic net income per share, as reported .......... $ 1.30 $ 1.10 $ 1.05
Amortization of goodwill, net of taxes ........... - 0.03 0.01
Reversal of negative goodwill .................... (0.01) - -
----------- ----------- ----------
Basic net income per share, as adjusted .......... $ 1.29 $ 1.13 $ 1.07
=========== =========== ==========
Diluted net income per share, as reported ........ $ 1.29 $ 1.09 $ 1.05
Amortization of goodwill, net of taxes ........... - 0.03 0.01
Reversal of negative goodwill .................... (0.01) - -
----------- ----------- ----------
Diluted net income per share, as adjusted ........ $ 1.28 $ 1.12 $ 1.06
=========== =========== ==========
--------------------------------------------------
Note: Adjusted per share amounts do not sum in all cases due to rounding.
Amortization expense related to intangible assets totaled $1.8 million,
$2.1 million and $548,000 in 2002, 2001 and 2000, respectively. Amortization
expense for the next five years is expected to be as follows (in thousands):
Year Amortization
---------- ------------
2003 ...... $ 1,440
2004 ...... 1,440
2005 ...... 1,364
2006 ...... 1,326
2007 ...... 1,326
45
NOTE G - MORTGAGE SERVICING RIGHTS
The following table summarizes the changes in mortgage servicing rights,
which are included in other assets in the Consolidated Balance Sheets:
2002 2001 2000
---------- --------------- ------------
(in thousands)
Balance at beginning of year ...................... $ 3,271 $ 540 $ 735
Originations of mortgage servicing rights ......... 3,839 3,158 -
Amortization expense .............................. (877) (427) (195)
---------- --------------- ------------
Balance at end of year ............................ $ 6,233 $ 3,271 $ 540
========== =============== ============
NOTE H - DEPOSITS
Deposits consisted of the following as of December 31:
2002 2001
--------------- ------------
(in thousands)
Noninterest-bearing demand ................... $ 1,118,227 $ 1,094,158
Interest-bearing demand ...................... 1,061,277 825,045
Savings and money market accounts ............ 1,529,117 1,422,440
Time deposits ................................ 2,536,907 2,645,161
-------------- ------------
$ 6,245,528 $ 5,986,804
============== ============
Included in time deposits were certificates of deposit equal to or greater
than $100,000 of $420.2 million and $411.5 million at December 31, 2002 and
2001, respectively.
The scheduled maturities of time deposits as of December 31, 2002 were as
follows (in thousands):
Year Maturities
---------------- --------------
2003 ........... $ 1,544,297
2004 ........... 420,724
2005 ........... 235,765
2006 ........... 85,305
2007 ........... 185,165
Thereafter ..... 65,651
--------------
$ 2,536,907
==============
46
NOTE I - SHORT-TERM BORROWINGS AND LONG-TERM DEBT
- --------------------------------------------------------------------------------The following table presents information related to Federal funds
purchased and securities sold under agreements to repurchase.
December 31
------------------------------------------------
2002 2001 2000
------------ --------------- ------------
(dollars in thousands)
Amount outstanding at December 31 ............................. $ 627,556 $ 394,659 $ 441,638
Weighted average interest rate at year end .................... 1.16% 1.75% 5.94%
Maximum amount outstanding at any month end ................... $ 627,556 $ 529,763 $ 573,094
Average amount outstanding during the year .................... $ 430,495 $ 352,757 $ 517,306
Weighted average interest rate during the year ................ 1.52% 3.68% 5.83%
Federal Home Loan Bank Advances and long-term debt included the following
as of December 31:
2001 2000
-------- --------
(in thousands)
Federal Home Loan Bank Advances .................. $452,316 $554,573
Other long-term debt ............................. 4,486 4,931
-------- --------
$456,802 $559,504
======== ========
The Corporation had a series of collateralized
2002 2001
--------------- ------------
(in thousands)
Federal Home Loan Bank advances ............................................. $ 531,478 $ 452,316
Other long-term debt ........................................................ 4,077 4,486
--------------- ------------
$ 535,555 $ 456,802
=============== ============
Federal Home Loan Bank advances totaling $452.3 million at December 31, 2001 and $554.6 million at
December 31, 2000. These advances mature through January, 2027,May, 2014, and carry a
weighted average interest rate of 5.47%5.15%. As of December 31, 20012002, the
Corporation had an additional borrowing capacity of approximately $845 million$1.4 billion
with the Federal Home Loan Bank. Advances from the Federal Home Loan Bank are
secured by qualifying residential mortgages, investments and other assets. The
following table summarizes the scheduled maturity periods of Federal Home Loan
Bank advances as of December 31, 2001:
Amount2002 (in thousands):
Year Maturing
- ------------------------------ --------
(in thousands)
2002 .........................Maturities
---------- --------------
2003 ........... $ 83,000
2003 ......................... 167,90037,900
2004 ......................... 25,000........... 5,000
2005 ......................... 29,116........... 86,177
2006 ......................... --........... 10,000
2007 ........... 50,177
Thereafter ................... 147,300
--------
$452,316
========..... 342,224
--------------
$ 531,478
==============
NOTE GJ - CAPITAL SECURITIES OF SUBSIDIARY TRUST
- --------------------------------------------------------------------------------
The Parent Company owns all of the common stock of Drovers Capital Trust I
(Trust), a Delaware business trust. The Trust has issued $7.5 million of 9.25%
preferred securities to investors in conjunction with the Parent Company issuing
$7.7 million of junior subordinated deferrable interest debentures to the Trust.
The debentures are the sole asset of the Trust. The terms of the junior
subordinated deferrable interest debentures are the same as the terms on the
preferred securities. The Parent Company's obligations under the debentures and
related documents, taken together, constitute a full and unconditional guarantee
by the Parent Company of the Trust's obligations under the preferred securities.
The preferred securities are redeemable on or after September 30, 2004, or
earlier if the deduction of related interest for Federal income taxes is
prohibited, treatment as Tier 1I capital is no longer permitted, or certain other
contingencies arise. The preferred securities must be redeemed upon maturity of
the debentures on September 30, 2027.
In 2002, the Parent Company purchased $2.0 million of the issued
securities on the open market. For presentation purposes, this is shown in the
Consolidated Balance Sheet as a reduction in the balance of the redeemable
preferred securities.
47
NOTE HK - 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 $142$153 million at December 31, 2001.2002.
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 capital and surplus.
At December 31, 2001,2002, the maximum amount available for transfer from the
subsidiary banks to the Parent Company in the form of loans and dividends was
approximately $197$206 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--andmandatory - and possibly additional
discretionary--actionsdiscretionary - 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, 2001,2002,
that all of its bank subsidiaries meet the capital adequacy requirements to
which they are subject.
As of December 31, 20012002 and 2000,2001, the Corporation's three significant
subsidiaries, -- Fulton Bank, Lebanon Valley Farmers Bank and Lafayette Ambassador
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, 20012002 that management
believes have changed the institutions' categories.
48
The following tables present the total risk-based, Tier I risk-based and
Tier I leverage requirements for the Corporation and its significant
subsidiaries.
As of December 31, 2001
---------------------------------------------------------------2002
------------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ------------------ ------------------ -------- -----------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- -------- -------------- ------- --------- -------- ----- -------- -----
(Dollars in thousands)
Total Capital (to Risk Weighted Assets):
Corporation ........................ $800,952 13.5% $475,707............................... $ 837,645 13.8% $ 485,112 8.0% $594,634$ 606,390 10.0%
Fulton Bank ........................ 321,911 11.2 229,420............................... 353,258 11.6 243,538 8.0 286,775304,422 10.0
Lebanon Valley Farmers Bank ........ 67,806 14.0 38,714............... 64,582 12.5 41,398 8.0 48,39251,747 10.0
Lafayette Ambassador Bank .......... 80,208 11.9 54,137................. 84,129 12.0 56,107 8.0 67,67170,134 10.0
Tier I Capital (to Risk Weighted Assets):
Corporation ........................ $729,064 12.3% $237,854............................... $ 764,325 12.6% $ 242,556 4.0% $356,781$ 363,834 6.0%
Fulton Bank ........................ 288,758 10.1 114,710............................... 320,362 10.5 121,769 4.0 172,065182,653 6.0
Lebanon Valley Farmers Bank ........ 62,335 12.9 19,357............... 58,763 11.4 20,699 4.0 29,03531,048 6.0
Lafayette Ambassador Bank .......... 72,269 10.7 27,068................. 75,539 10.8 28,053 4.0 40,60342,080 6.0
Tier I Capital (to Average Assets):
Corporation ........................ $729,064 9.6% $227,938............................... $ 764,325 9.4% $ 243,068 3.0% $379,897$ 405,113 5.0%
Fulton Bank ........................ 288,758 8.5 101,659............................... 320,362 8.8 108,685 3.0 169,432181,142 5.0
Lebanon Valley Farmers Bank ........ 62,335 9.0 20,698............... 58,763 7.7 22,910 3.0 34,49738,183 5.0
Lafayette Ambassador Bank .......... 72,269 7.7 28,163................. 75,539 7.1 31,957 3.0 46,93853,262 5.0
As of December 31, 2000
---------------------------------------------------------------2001
-----------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------ -------- --------------------------- -------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ -------- ---------------- ------- ----------- -------- ----- -------- -----
(Dollars in thousands)
Total Capital (to Risk Weighted Assets):
Corporation ........................ $773,583 14.0% $440,634............................... $ 800,952 13.5% $ 475,707 8.0% $550,793$ 594,634 10.0%
Fulton Bank ........................ 334,416 11.3 237,626............................... 321,911 11.2 229,420 8.0 297,032286,775 10.0
Lebanon Valley Farmers Bank ........ 73,401............... 67,806 14.0 41,85538,714 8.0 52,31948,392 10.0
Lafayette Ambassador Bank .......... 79,404 12.3 51,836................. 80,208 11.9 54,137 8.0 64,79667,671 10.0
Tier I Capital (to Risk Weighted Assets):
Corporation ........................ $713,314 13.0% $220,317............................... $ 729,064 12.3% $ 237,854 4.0% $330,476$ 356,781 6.0%
Fulton Bank ........................ 310,677 10.5 118,813............................... 288,758 10.1 114,710 4.0 178,219172,065 6.0
Lebanon Valley Farmers Bank ........ 67,312............... 62,335 12.9 20,92819,357 4.0 31,39229,035 6.0
Lafayette Ambassador Bank .......... 71,996 11.1 25,918................. 72,269 10.7 27,068 4.0 38,87740,603 6.0
Tier I Capital (to Average Assets):
Corporation ........................ $713,314 9.8% $218,146............................... $ 729,064 9.6% $ 227,938 3.0% $363,576$ 379,897 5.0%
Fulton Bank ..................... 310,677 8.6 108,302............................... 288,758 8.5 101,659 3.0 180,503169,432 5.0
Lebanon Valley Farmers Bank ........ 67,312 9.7 20,843............... 62,335 9.0 20,698 3.0 34,73934,497 5.0
Lafayette Ambassador Bank .......... 71,996 8.3 25,899................. 72,269 7.7 28,163 3.0 43,16646,938 5.0
49
NOTE IL - INCOME TAXES
- --------------------------------------------------------------------------------
The components of the provision for income taxes are as follows:
Year ended December 31
----------------------------
2001 2000 1999
------- -------- -------
Current tax expense:
Federal ............................ $44,625 $ 46,765 $41,132
State .............................. 222 310 130
------- -------- -------
44,847 47,075 41,262
Deferred tax expense (benefit)........... 1,520 (2,638) 1,237
------- -------- -------
$46,367 $ 44,437 $42,499
======= ======== =======
Year ended December 31
-----------------------------------------
2002 2001 2000
--------- ---------- ---------
(in thousands)
Current tax expense:
Federal ................................ $ 52,749 $ 44,625 $ 46,765
State .................................. 1,764 222 310
--------- ---------- ---------
54,513 44,847 47,075
Deferred tax expense (benefit) .............. 1,955 1,520 (2,638)
--------- ---------- ---------
$ 56,468 $ 46,367 $ 44,437
========= ========== =========
The differences between the effective income tax rate and the Federal
statutory income tax rate are as follows:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Statutory tax rate .......................... 35.0% 35.0% 35.0%
Effect of tax-exempt income ................. (3.4) (3.6) (3.5)
Effect of low income housing investments..... (2.6) (2.5) (2.7)
Other, net .................................. -- 0.5 0.1
---- ---- ----
Effective income tax rate ................... 29.0% 29.4% 28.9%
==== ==== ====
Year ended December 31
-----------------------------------------
2002 2001 2000
------ ------ -------
Statutory tax rate .......................... 35.0% 35.0% 35.0%
Effect of tax-exempt income ................. (3.2) (3.4) (3.6)
Effect of low income housing investments .... (2.1) (2.6) (2.5)
Other, net .................................. 0.1 - 0.5
------ ----- ------
Effective income tax rate ................... 29.8% 29.0% 29.4%
====== ===== ======
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:
2002 2001
2000
------- --------------- ---------
(in thousands)
Deferred tax assets:
Allowance for loan losses .................................. $25,156 $22,859...................................... $ 25,172 $ 25,156
Deferred compensation ................................................................................ 3,638 3,853 2,449
Investments in low income housing ........................................................ 3,063 3,425 1,868
Post-retirement benefits .......................................................................... 3,266 3,220 3,224
Other accrued expenses .............................................................................. 1,671 1,573
894
Alternative minimum tax credit carryforward ................ 675 765
Other ................................................................................................................ 1,953 2,729
------- -------2,628
--------- ---------
Total gross deferred tax assets ..................................................... 38,763 39,855
34,788--------- ---------
Deferred tax liabilities:
Direct leasing ............................................. 8,962 8,440
Unrealized holding gains on securities available for sale... 6,981 1,192sale ...... 18,732 6,978
Direct leasing ................................................. 8,759 8,962
Mortgage servicing rights ........................................................................ 2,181 1,145
34
Fixed asset depreciation ................................... 414 673
Other ...................................................... 426 446
------- -------.......................................................... 876 843
--------- ---------
Total gross deferred tax liabilities ........................................... 30,548 17,928
10,785--------- ---------
Net deferred tax asset ................................ $21,927 $24,003
======= =======....................................... $ 8,215 $ 21,927
========= =========
As of December 31, 20012002 and 2000,2001, the Corporation had not established any
valuation allowance against deferred tax assets since these tax benefits are
realizable either through carrybackcarry-back availability against prior years' taxable
income or the reversal of existing deferred tax liabilities.
50
NOTE JM - 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 PlanPlans and 401(k) PlanPlans - The Corporation maintains
two defined benefit plans, the Fulton Financial Affiliates' Defined Benefit
Pension Plan (Fulton Pension Plan) and the Drovers & Mechanics Pension Plan.Plan (Pension Plans).
Contributions to the defined benefit plansPension Plans are actuarially determined and funded
annually. Plan assets are invested in certificates of deposit, corporate bonds,
U.S. Treasury securities, money market funds, common stocks and common stock
mutual funds. The Fulton Pension Plan wasPlans have been closed to new participants, effective
January 1, 1999. Employees participating in the plans as of that datebut
existing participants continue to accrue benefits according to the terms of the
plan.
Employees covered under the defined benefit plansPension Plans are also eligible to participate
in the Fulton Financial Affiliates 401(k) Savings Plan (Fulton Plan)
or the Drovers Salary
Deferral Plan (Drovers Plan)(401(k) Plans). The Fulton Plan allows401(k) Plans generally allow employees to
defer up to 15%$11,000 of their pre-tax salary on an annual basis. At its
discretion, the Corporation may also make a matching contribution up to 3%.
The Drovers Plan allows employees to defer up to 20% of their pre-tax salary on an
annual basis. The Corporation makes a matching contribution up to 3%.
The following summarizes the Corporation's expense under the above plans
for the years ended December 31:
2001 2000 1999
------ ------ ------
(in thousands)
Profit-sharing plan ............................. $5,050 $5,203 $4,920
Defined benefit plan ............................ 989 1,287 1,585
401(k) plan ..................................... 597 682 676
------ ------ ------
$6,636 $7,172 $7,181
====== ====== ======
Defined Benefit Pension
2002 2001 2000
---------- ----------- ----------
(in thousands)
Profit Sharing Plan ................................. $ 6,220 $ 5,050 $ 5,203
Pension Plans ....................................... 1,812 989 1,287
401(k) Plans ........................................ 667 597 682
---------- ----------- ----------
$ 8,699 $ 6,636 $ 7,172
========== =========== ==========
The net periodic pension cost for the Corporation's defined benefit plans,Pension Plans, as
determined by consulting actuaries, consisted of the following components for
the years ended December 31:
2001 2000 1999
------- ------- -------
(in thousands)
Service cost - benefits earned during period .. $ 1,873 $ 1,845 $ 1,923
Interest cost on projected benefit obligation.. 2,472 2,282 1,992
Actual return on assets ....................... 3,103 (4,655) (3,863)
Net amortization and deferral ................. (6,459) 1,815 1,533
------- ------- -------
Net periodic pension cost ..................... $ 989 $ 1,287 $ 1,585
======= ======= =======
2002 2001 2000
----------- ----------- ----------
(in thousands)
Service cost - benefits earned during period ........ $ 1,954 $ 1,873 $ 1,845
Interest cost on projected benefit obligation ....... 2,653 2,472 2,282
Actual return on assets ............................. 2,086 3,103 (4,655)
Net amortization and deferral ....................... (4,881) (6,459) 1,815
------------ ------------ ----------
Net periodic pension cost ........................... $ 1,812 $ 989 $ 1,287
============ ============ ==========
51
The valuation date of the defined benefit plansPension Plans is September 30. The following
table summarizes the changes in the projected benefit obligation (PBO)
and fair value
of plan assets for the indicated periods:
Oct. 1, 2000 Oct. 1, 1999
Through Through
Sept.Plan Year Ended
September 30
2002 2001
Sept. 30, 2000
--------------------------------------- --------
(in thousands)
Projected benefit obligation, beginning .......... $33,671 $31,067....................................................... $ 37,207 $ 33,671
Service cost ....................................................................................................................... 1,954 1,873 1,845
Interest cost ..................................................................................................................... 2,653 2,472
2,282
Distributions ....................................Benefit payments .............................................................................. (1,699) (1,861)
(1,237)
Change due to change in assumptions ..............Actuarial loss ................................................................................ 3,644 1,378
--Amendments .................................................................................... 93 -
Experience loss at September 30 ..................(gain) ........................................................................ 34 (326)
(286)
------- --------------- --------
Projected benefit obligation, ending ............. $37,207 $33,671
======= =======.......................................................... $ 43,886 $ 37,207
======== ========
Fair value of plan assets, beginning ............. $39,624 $35,062.......................................................... $ 35,433 $ 39,624
Employer contributions ................................................................................................... 1,640 773 1,144
Actual return on assets ................................................................................................. (2,086) (3,103)
4,655
Distributions ....................................Benefit payments .............................................................................. (1,699) (1,861)
(1,237)
------- --------------- --------
Fair value of plan assets, ending ................ $35,433 $39,624
======= =======............................................................. $ 33,288 $ 35,433
======== ========
The funded status of the plansPension Plans and the amounts included in other
liabilities as of December 31 follows:
2001 2000
-------- --------
(in thousands)
Projected benefit obligation ........................... $(37,207) $(33,671)
Fair value of plan assets ..............................
2002 2001
-------- --------
(in thousands)
Projected benefit obligation ................................................ $(43,886) $(37,207)
Fair value of plan assets ................................................... 33,288 35,433 39,624
-------- --------
Funded status ..................................... (1,774) 5,953
Unrecognized net transition asset ...................... (81) (6)
Unrecognized prior service cost ........................ 25 32
Unrecognized net loss (gain) ........................... 1,379 (6,214)
-------- --------
Pension liability recognized in the
consolidated balance sheets ....................... $ (451) $ (235)
======== ========
Funded status .......................................................... (10,598) (1,774)
Unrecognized net transition asset ........................................... (77) (81)
Unrecognized prior service cost ............................................. 109 25
Unrecognized net loss ....................................................... 9,942 1,379
-------- --------
Pension liability recognized in the
consolidated balance sheets ............................................ $ (624) $ (451)
======== ========
Accumulated benefit obligation .............................................. $ 31,868 $ 27,151
======== ========
The following rates were used to calculate net periodic pension cost and
the present value of benefit obligations:
2001 2000 1999
---- ---- ----
Discount rate-projected benefit obligation ............. 7.25% 7.50% 7.50%
Rate of increase in compensation level ................. 5.00 5.00 5.00
Expected long-term rate of return on plan assets .......
2002 2001 2000
---------- ---------- ----------
Discount rate-projected benefit obligation ....................................... 6.75% 7.25% 7.50%
Rate of increase in compensation level ........................................... 5.00 5.00 5.00
Expected long-term rate of return on plan assets ................................. 8.00 8.00 8.00
52
Post-retirement Benefits
The Corporation currently provides medical and life insurance benefits to
retired full-time employees who were employees of the Corporation prior to
January 1, 1998. Full-time employees may become eligible for these discretionary
benefits if they reach normal 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:
2001 2000 1999
----- ----- -----
(in thousands)
Service cost-benefits earned during the period ...... $ 240 $ 268 $ 250
Interest cost on accumulated benefit obligation ..... 393 422 364
Actual return on plan assets ........................ (7) (12) (9)
Net amortization and deferral ....................... (375) (304) (289)
----- ----- -----
Net nonpension post-retirement benefit cost ......... $ 251 $ 374 $ 316
===== ===== =====
2002 2001 2000
------------- ------------- ------------
(in thousands)
Service cost-benefits earned during the period ........ $ 260 $ 240 $ 268
Interest cost on accumulated
post-retirement benefit obligation ............... 444 393 422
Actual return on plan assets .......................... (3) (7) (12)
Net amortization and deferral ......................... (298) (375) (304)
------------- ------------- ------------
Net nonpension post-retirement benefit cost ........... $ 403 $ 251 $ 374
============= ============= ============
The following table summarizes the changes in the projectedaccumulated
post-retirement benefit obligation and fair value of plan assets for the years
ended December 31:
2001 2000
------ ------
(in thousands)
Projected benefit obligation, beginning .................... $5,540 $6,063
Service cost ............................................... 240 268
Interest cost .............................................. 393 422
Benefit payments ........................................... (411) (315)
Change due to change in experience ......................... (122) (257)
Change due to change in assumptions ........................ 158 (641)
------ ------
Projected benefit obligation, ending ....................... $5,798 $5,540
====== ======
Fair value of plan assets, beginning ....................... $ 192 $ 203
Employer contributions ..................................... 397 292
Actual return on assets .................................... 7 12
Benefit payments ........................................... (411) (315)
------ ------
Fair value of plan assets, ending .......................... $ 185 $ 192
====== ======
2002 2001
------------- -------------
(in thousands)
Accumulated post-retirement benefit obligation, beginning ........ $ 5,798 $ 5,540
Service cost ..................................................... 260 240
Interest cost .................................................... 444 393
Benefit payments ................................................. (263) (411)
Change due to change in experience ............................... 509 (122)
Change due to change in assumptions .............................. 356 158
------------- -------------
Accumulated post-retirement benefit obligation, ending ........... $ 7,104 $ 5,798
============= =============
Fair value of plan assets, beginning ............................. $ 185 $ 192
Employer contributions ........................................... 246 397
Actual return on assets .......................................... 3 7
Benefit payments ................................................. (263) (411)
------------- -------------
Fair value of plan assets, ending ................................ $ 171 $ 185
============= =============
The funded status of the plan and the amounts included in other liabilities
as of December 31 follows:
2001 2000
------- -------
(in thousands)
Projected benefit obligation ............................. $(5,798) $(5,540)
Fair value of plan assets ................................ 185 192
------- -------
Funded status ....................................... (5,613) (5,348)
Unrecognized prior service cost .......................... (1,358) (1,584)
Unrecognized net gain .................................... (1,892) (2,076)
------- -------
Post-retirement benefits liability recognized
in the consolidated balance sheets .................. $(8,863) $(9,008)
======= =======
2002 2001
------------- -------------
(in thousands)
Accumulated post-retirement benefit obligation ................... $ (7,104) $ (5,798)
Fair value of plan assets ........................................ 171 185
------------- -------------
Funded status ............................................... (6,933) (5,613)
Unrecognized prior service cost .................................. (1,132) (1,358)
Unrecognized net gain ............................................ (955) (1,892)
------------- -------------
Post-retirement benefits liability recognized
in the consolidated balance sheets .......................... $ (9,020) $ (8,863)
============= =============
For measuring the post-retirement benefit obligation, a 5.5%the annual increase
in the per capita cost of health care benefits was assumed.assumed to be 9.5% in year
one, declining to an ultimate rate of 4.5% by year eight. This health care cost
trend rate has a significant
53
impact on the amounts reported. Assuming a 1% increase in the health care cost
trend rate above the assumed annual increase, the accumulated post-retirement
benefit obligation would increase by approximately $685,000$798,000 and the current
period expense would increase by approximately $87,000.$92,000. Conversely, a 1%
decrease in the health care cost trend rate would decrease the accumulated
post-retirement benefit obligation by approximately $573,000$673,000 and the current
period expense by approximately $71,000.$76,000. The discount rate used in determining
the accumulated post-retirement benefit obligation was 6.75% at December 31,
2002 and 7.25% at December 31, 2001 and 7.50% at December 31, 2000.
2001.
NOTE KN - STOCK-BASED COMPENSATION PLANS AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Incentive Stock Option Plan and Employee Stock Purchase Plan
The Corporation has an Incentive Stock Option Plan (Option Plan) and an
Employee Stock Purchase Plan (ESPP). 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 100%
vested immediately upon grant. Options assumed from Skylands retained their
original vesting schedules. The Plan has reserved 1.0 million660,000 additional shares for
future grant through 2006. The number of options granted in any year is
dependent upon the Corporation's performance relative to that of a self-defined
peer group. A summary of stock option activity under the current and prior plan
follows:
Option Price Per Share
--------------------------
Stock Weighted
Options Range Average
--------- --------------- --------
Balance at January 1, 1999............ 1,732,291 $ 3.15 - $20.47 $11.73
Granted............................. 316,851 18.48 18.48
Exercised........................... (172,717) 3.15 - 17.90 7.54
Canceled............................ (13,966) 17.90 - 20.47 18.88
---------
Balance at December 31, 1999.......... 1,862,459 3.15 - 20.47 13.21
Granted............................. 386,327 16.88 16.88
Exercised........................... (231,292) 3.15 - 18.90 8.38
Assumed from Skylands............... 262,452 3.89 - 15.01 10.37
Canceled............................ (3,907) 12.10 12.10
---------
Balance at December 31, 2000.......... 2,276,039 3.15 - 20.47 13.98
Granted............................. 346,900 20.47 20.47
Exercised........................... (375,542) 3.15 - 20.47 10.65
Canceled............................ (20,018) 13.30 - 20.47 19.58
---------
Balance at December 31, 2001.......... 2,227,379 $ 3.15 - $20.47 $15.49
=========
Exercisable at December 31, 2001...... 2,164,656 $ 3.15 - $20.47 $15.63
=========
Option Price Per Share
--------------------------------------
Stock Weighted
Options Range Average
------------- ----------------- -------------------
Balance at January 1, 2000 .............. 2,328,074 $ 2.52 - $16.38 $10.57
Granted ............................... 482,909 18.48 18.48
Exercised ............................. (289,115) 2.52 - 15.12 6.70
Assumed from Skylands ................. 328,065 3.11 - 12.01 8.71
Canceled .............................. (4,884) 9.68 9.68
------------
Balance at December 31, 2000 ............ 2,845,049 2.52 - 16.38 13.21
Granted ............................... 433,625 16.38 16.38
Exercised ............................. (469,428) 2.52 - 16.38 8.52
Canceled .............................. (25,023) 10.64 - 16.38 15.66
------------
Balance at December 31, 2001 ............ 2,784,223 2.52 - 16.38 12.39
Granted ............................... 433,550 19.33 19.33
Exercised ............................. (357,590) 5.65 - 16.38 9.63
Canceled .............................. (6,147) 10.46 - 16.38 13.15
------------
Balance at December 31, 2002 ............ 2,854,036 $ 2.52 - $19.33 $13.79
============
Exercisable at December 31, 2002 ........ 2,802,780 $ 2.52 - $19.33 $13.90
============
54
The following table summarizes information concerning options outstanding at
December 31, 2001:
Total Weighted Weighted
Range of Unexercised Average Average Exercisable
Exercise Stock Remaining Exercise Stock
Prices Options Life (Years) Price Options
- --------------- ----------- ------------ -------- -----------
$ 0.00 - $ 5.00 52,428 2.22 $ 3.34 52,428
$ 5.00 - $10.00 497,021 3.40 8.97 445,766
$10.00 - $15.00 336,585 5.02 11.83 336,585
$15.00 - $20.00 731,995 7.39 18.33 720,527
$20.00 - $25.00 609,350 8.29 20.47 609,350
--------- ---- ------ ---------
2,227,379 6.27 $15.49 2,164,656
========= ==== ======2002:
Total Weighted Weighted
Range of Unexercised Average Average Exercisable
Exercise Stock Remaining Exercise Stock
Prices Options Life (Years) Price Options
--------------- ------------- ------------ ------------- -------------
$ 0.00 - $ 5.00 65,536 1.22 $ 2.67 65,536
$ 5.00 - $10.00 690,157 2.88 7.95 638,901
$10.00 - $15.00 350,095 5.46 13.02 350,095
$15.00 - $20.00 1,748,248 7.80 16.67 1,748,248
----------- ------- --------- ----------
2,854,036 6.17 $ 13.79 2,802,780
=========== ======= ========= ==========
The ESPP allowallows eligible employees to purchase stock in the Corporation at
85% of the fair market value of the stock on the date of exercise. Under the
terms of the ESPP, 71,00083,000 shares, 78,00089,000 shares and 88,00098,000 shares were issued in
2002, 2001 2000 and 1999,2000, respectively. A total of 994,0001.3 million shares have been
issued since the inception of the ESPP in 1986. As of December 31, 2001, 425,0002002, 443,000
shares have been reserved for future issuances under the ESPP.
The Corporation accounts for both the Option Plan and the ESPP under Accounting Principles Board Opinion No.APB
25, and, accordingly, no compensation expense has been recognized in the financial statements of the
Corporation.recognized. Had
compensation cost for these plans been recorded in the
financial statements of the Corporation consistent with the fair value
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" (Statement 123), the Corporation's net income and net income per
share would have been reduced to the following pro-forma amounts
(in thousands, except per-share data):amounts:
2002 2001 2000
1999
-------- -------- --------------------- ----------- ------------
Net income:income (in thousands): As reported.... $113,589 $106,834 $104,627
Pro-forma...... 111,959 105,274 103,290reported .......... $ 132,948 $ 113,589 $ 106,834
Pro-forma ............ 130,955 111,761 105,097
Net income per share (basic): As reported....reported .......... $ 1.381.30 $ 1.321.10 $ 1.27
Pro-forma...... 1.36 1.30 1.261.05
Pro-forma ............ 1.28 1.08 1.04
Net income per share (diluted): As reported....reported .......... $ 1.371.29 $ 1.311.09 $ 1.26
Pro-forma...... 1.35 1.29 1.251.05
Pro-forma ............ 1.27 1.08 1.03
Weighted average fair value of options granted...granted .......... $ 5.254.70 $ 5.074.20 $ 4.754.06
Because the Statement 123 method has not been applied to options granted
prior to January 1, 1995, the resulting pro-forma compensation cost may not be
representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants:
2001 2000 1999
------- ------- -------
Risk-free interest rate ....................... 5.32% 6.43% 5.84%
Volatility of Corporation's stock ............. 23.80 22.71 19.71
Expected dividend yield ....................... 3.13 3.25 2.88
Expected life of options ......................
2002 2001 2000
-------- -------- ----------
Risk-free interest rate ............................... 4.78% 5.32% 6.43%
Volatility of Corporation's stock ..................... 23.64 23.80 22.71
Expected dividend yield ............................... 3.10 3.13 3.25
Expected life of options .............................. 8 Years 8 Years 8 Years
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,
2001,2002, the purchase price had adjusted to $74.21$59.37 per share as a result of stock
dividends.
55
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.
NOTE LO - LEASES
- --------------------------------------------------------------------------------
Certain branch offices and equipment are leased under agreements which
expire at varying dates through 2018.2017. Most leases contain renewal provisions at
the Corporation's option. Total rental expense was approximately $5.9 million in
2002, $5.1 million in 2001 and $4.3 million in 2000 and $4.2 million in 1999.2000. Future minimum payments as
of December 31, 20012002 under noncancelable operating leases are as follows:
follows (in
thousands):
Minimum
Year Rent
- --------------------------------------- -------
(in thousands)
2002...................................---------------- -----------
2003 ........... $ 5,216
2003................................... 4,818
2004................................... 4,122
2005................................... 3,494
2006................................... 3,062
Thereafter............................. 13,984
-------
$34,696
=======4,863
2004 ........... 4,234
2005 ........... 3,592
2006 ........... 3,155
2007 ........... 2,625
Thereafter ..... 12,459
-----------
$ 30,928
===========
NOTE MP - 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, and guarantees which involve, to varying degrees, elements of credit
and interest rate risk that are not recognized in the consolidated
balance sheets.
Exposure to credit loss in the event of non-performance by the other party
to the financial instrument for commitments to extend credit is represented by
the contractual notional amount of those instruments. The Corporation uses the
same credit policies in making commitments as it does for on-balance-sheet
instruments. The Corporation had outstanding commitments to fund loans of $2.1
billion and $1.8 billion as of December 31, 2001 and 2000, respectively.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. The Corporation had outstanding commitments to fund loans of $2.1
billion at December 31, 2002 and 2001.
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. Commitments under
outstanding standby letters of credit were $449.3 million at December 31, 2002
and $317.4 million at December 31, 2001 and $261.3 million at December 31, 2000.2001.
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 of the Corporation would not be affected materially by the outcome of
such legal proceedings.
NOTE NQ - FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The following are the estimated fair values of the Corporation's financial
instruments as of December 31, 20012002 and 20002001, followed by a general description
of the methods and assumptions used to estimate such fair values. These fair
values are significantly
56
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 nonfinancialnon-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.
2002 2001
2000
----------------------- -------------------------------------------------- ---------------------------
Estimated Estimated
FINANCIAL ASSETS Book Value Fair Value Book Value Fair Value
- ----------------------------------- ---------- ---------- ---------- -------------------------- ------------ ------------- ------------ ------------
(in thousands)
Cash and due from banks ........................... $ 314,857 $ 314,857 $ 356,539 $ 356,539 $ 282,586 $ 282,586
Interest-bearing deposits
with other banks ............................... 7,899 7,899 6,968 6,968 8,417 8,417
Mortgage loans held for sale ................. 70,475 70,475 18,374 18,374 5,241 5,241
Securities held to maturity ................... 32,684 34,135 49,557 50,492 84,762 83,836
Securities available for sale ............... 2,383,607 2,383,607 1,687,787 1,687,787
1,370,133 1,370,133
Net loans ....................................................... 5,245,148 5,410,828 5,301,148 5,404,066 5,309,019 5,340,861
Accrued interest receivable ................... 42,675 42,675 43,388 43,388
44,747 44,747
2001 2000
----------------------- -----------------------
Estimated Estimated
FINANCIAL LIABILITIES
Book Value Fair Value Book Value Fair Value
- ----------------------------------- ---------- ---------- ---------- ----------
(in thousands)
---------------------
Demand and savings deposits ....... $3,341,641 $3,341,641 $2,825,201 $2,825,201............ $ 3,708,621 $ 3,708,621 $ 3,341,641 $ 3,341,641
Time deposits ............................................... 2,536,907 2,612,927 2,645,163 2,689,856
2,677,502 2,697,497
Short-term borrowings ............................... 632,194 632,194 400,335 400,335 446,429 446,429
Accrued interest payable ......................... 27,608 27,608 35,926 35,926 47,713 47,713
Other financial liabilities ................... 33,708 33,708 33,714 33,714 28,839 28,839
Federal Home Loan Bank advances
and long-term debt ............................. 535,555 567,546 456,802 463,833 559,503 557,413
Corporation-obligated mandatorily
redeemable capital securitessecurities of
subsidiary trust .................................... 5,500 5,638 7,500 7,238 7,500 7,443
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 Liabilities
------------------------------- ---------------------------- ---------------------------
Cash and due from banks Demand and savings deposits
Interest bearing deposits Short-term borrowings
Accrued interest receivable Accrued interest payable
Mortgage loans held for sale 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.
As indicated in Note A, securities available for sale are carried at their
estimated fair values. The estimated fair values of securities held to maturity
as of December 31, 20012002 and 20002001 were generally based on quoted market prices,
broker quotes or dealer quotes.
For short-term loans and variable rate loans which 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
57
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 is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counter-parties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of standby letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations.
NOTE OR - MERGERS AND ACQUISITIONS
- --------------------------------------------------------------------------------
Drovers Bancshares Corporation - On July 1, 2001, the Corporation completed
its merger with Drovers Bancshares Corporation (Drovers), aan $820 million bank
holding company located in York, Pennsylvania. Under the terms of the merger
agreement, each of the 5.2 million shares of Drovers common stock was exchanged
for 1.3021.628 shares of the Corporation's common stock. In addition, each of the
options to acquire Drovers stock was exchanged for options to purchase the
Corporation's common stock.
Drovers was merged with and into Fulton Financial Corporation, and its
wholly owned bank subsidiary, The Drovers & Mechanics Bank (Drovers Bank) was
merged into Fulton Bank, the Corporation's largest subsidiary bank. This
business combination was accounted for as a pooling of interests and, as such,
all financial information has been restated to reflect the impact of Drovers for
all periods presented.
The effect of the merger on the Corporation's previously
reported revenues, net income and net income per share for the years ended
December 31, 2000 and 1999 follows. The Fulton Financial per-share amounts have
been restated to reflect the impact of the 5% stock dividend paid on May 25,
2001.
Fulton Drovers
Year Ended December 31, 2000 Financial Bancshares Adjustments Restated
- ---------------------------- --------- ---------- ----------- --------
(in thousands, except per-share data)
Net interest income $252,100 $23,325 $ 328 $275,753
Other income 69,611 5,707 (320) 74,998
-------- ------- ----- --------
Total income $321,711 $29,032 $ 8 $350,751
-------- ------- ----- --------
Net income $103,804 $ 3,108 $ (78) $106,834
-------- ------- ----- --------
Net income per share (basic) $ 1.39 $ 0.61 -- $ 1.32
Net income per share (diluted) 1.38 0.61 -- 1.31
Year Ended December 31, 1999
- ----------------------------
Net interest income $243,903 $22,276 $ (9) $266,170
Other income 61,358 5,349 (39) 66,668
-------- ------- ----- --------
Total income $305,261 $27,625 $ (48) $332,838
-------- ------- ----- --------
Net income $ 97,226 $ 7,601 $(200) $104,627
-------- ------- ----- --------
Net income per share (basic) $ 1.28 $ 1.54 -- $ 1.27
Net income per share (diluted) 1.27 1.52 -- 1.26
Adjustments to effect the restatement include certain reclassifications to
conform Drovers' presentation to the Corporation's. The reduction in net income
reflects a prior period adjustment to conform the accounting for investments in
low income housing partnerships.
In connection with this transaction, the Corporation recorded
merger-related expenses of approximately $9.8 million ($6.4 million, net of
tax). These charges consisted of an additional provision for loan losses
resulting from the consistent application of the Corporation's allowance
evaluation procedures ($2.7 million) and one-time expenses related to employee
severance costs,and related benefits, systems conversions, real estate closures and
sales, and professional fees ($7.1 million).
Branch Acquisition - On June 8, 2001, the Corporation assumed $315 million
of deposits and purchased $53 million in loans in an acquisition of 18 branches
located in New Jersey, Delaware and Pennsylvania. This transaction was accounted
for as a purchase and the Corporation recorded a core deposit intangible asset
of $9.9 million and an unidentifiable intangible asset of $21.7 million. The
core deposit intangible is being amortized on a straight-line basis over 10
years. Since this was a branch acquisition,Upon adoption of Statement 147 effective January 1, 2002, the
unidentifiable intangible asset does not qualify for the non-amortization provisions of Statement 142was reclassified to goodwill and will
bewas no longer
amortized to expense on a straight-line basis over 25 years.expense.
Dearden, Maguire, Weaver and Barrett, LLC - On January 2, 2001, the
Corporation completed its acquisition of investment management and advisory
company Dearden, Maguire, Weaver and Barrett, LLC (Dearden Maguire). The
acquisition was accounted for as a purchase and the accounts and results of
operations of Dearden Maguire are included in the financial statements of the
Corporation prospectively from the January 2, 2001 acquisition date.
In connection with the acquisition, goodwill of approximately $16.0 million
was recorded as the initial purchase price paid in excess of the fair value of
net assets acquired. Additional payments of up to $5.0 million may become
payable upon Dearden Maguire achieving certain revenue goals through December
31, 2005. The goals and the dates of such payments are specified in the purchase
agreement. Upon payment of any such amounts, goodwill will be increased. The
goodwill was being amortized to expense on a straight-line basis over 20 years
through December 31, 2001.years.
Effective January 1, 2002, the goodwill iswas no longer being amortized to expense
as required by Statement 142, but will continue to be evaluated periodically for impairment.impairment
on an annual basis.
Skylands Financial Corporation - On August 1, 2000, the Corporation
completed its acquisition of Skylands Financial Corporation (SFC) of
Hackettstown, New Jersey. SFC, with approximately $240 million in total assets
on the acquisition date, was a bank holding company whose sole banking
subsidiary, Skylands Community Bank (Skylands), operatesoperated eight community banking
offices in Morris, Warren and Sussex counties.
Under the terms of the merger agreement, each of the 2.5 million
outstanding shares of SFC's common stock was exchanged for 0.86 shares of the
Corporation's common stock. In addition, the 308,000 options to acquire shares
of SFC stock were also exchanged for options to purchase the Corporation's
common stock. As a result of the acquisition, SFC was merged with and into the
Corporation and Skylands became the Corporation's third banking subsidiary
located in New Jersey.58
The acquisition was accounted for as a purchase and the accounts and
results of operations of SkylandsSFC are included in the financial statements of the
Corporation prospectively from the August 1, 2000 acquisition date. In
connection with the acquisition, goodwill of approximately $17.5 million was
recorded as the purchase price paid in excess of the net assets acquired. The
goodwill was being amortized to expense on a straight line basis over 15 years
through December 31, 2001. Effective January 1, 2002, the goodwill iswas no longer
being amortized to expense as required by Statement 142, but will continue to be
evaluated periodically for impairment.impairment on an annual basis.
Premier Bancorp, Inc. - On January 16, 2003, the Corporation entered into a
merger agreement to acquire Premier Bancorp, Inc. (Premier), of Doylestown,
Pennsylvania. Premier is a $600 million financial holding company whose primary
subsidiary is Premier Bank, which has seven community banking offices in Bucks,
Northampton and Montgomery Counties, Pennsylvania.
Under the terms of the merger agreement, each of the approximately 3.5
million shares of Premier's common stock will be exchanged for 1.34 shares of
the Corporation's common stock. In addition, each of the 304,000 options to
acquire Premier's stock will be converted to options to purchase the
Corporation's stock. The acquisition is subject to approval by bank regulatory
authorities and Premier's shareholders and is expected to be completed in the
third quarter of 2003. The acquisition will be accounted for as a purchase.
As a result of the acquisition, Premier will be merged into the Corporation
and Premier Bank will become a wholly-owned subsidiary.
59
NOTE PS - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
- --------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
-
------------------------
(in thousands)
December 31
---------------------------------------------
2002 2001
2000
-------- ------------------ ---------
ASSETS
-
------
Cash, securities,
and other assets ................................................. $ 3,010 $ 2,171
$ 3,053
Receivable from
banknonbank subsidiaries ............................................ 9 89
Investment in:
Bank subsidiaries ............................................... 709,217 696,416 649,038
Nonbank subsidiaries ......................................... 211,626 157,531
135,107
-------- ----------------- ----------
Total Assets .................................... $856,127 $787,206
======== ========..................... $ 923,862 $ 856,127
========= ==========
December 31
---------------------------------------------
2002 2001
2000
-------- ----------------- ----------
LIABILITIES AND EQUITY
- ----------------------
Short - term
borrowings ......................................Line of credit with
bank subsidiaries .............. $ 19,556 $ 10,500
$ 11,425
Long-term debt ............................................................. 7,735 7,735
Payable to
nonbank subsidiaries ....................................... 8,661 3,998 16,177
Other liabilities ....................................................... 24,168 22,440
20,698
-------- ----------------- ----------
Total Liabilities ............................................. 60,120 44,673 56,035
Shareholders' equity ................................................. 863,742 811,454
731,171
-------- ----------------- ----------
Total Liabilities and
Shareholders' Equity ............................ $856,127 $787,206
======== ========........... $ 923,862 $ 856,127
========= ==========
CONDENSED STATEMENTS OF INCOME
- ------------------------------
(in thousands)
Year ended December 31
---------------------------------------------------------------------
2002 2001 2000
1999
-------- -------- --------
(in thousands)---------- ------------- ----------
Income:
Dividends from bank subsidiaries ............ $126,897...................... $ 100,161 $ 126,897 $ 73,982
$ 68,580
Other ........................................................................................ 32,531 24,417 9,636
10,098
-------- -------- ----------------- --------- ---------
132,692 151,314 83,618
78,678
Expenses ............................................................................................ 43,883 38,772 18,760
16,214
-------- -------- ----------------- --------- ---------
Income before income taxes and equity in
undistributed net income of subsidiaries .................. 88,809 112,542 64,858 62,464
Income tax benefit ........................................................................ (4,171) (6,329) (3,020)
(2,437)
-------- -------- ----------------- --------- ---------
92,980 118,871 67,878 64,901
Equity in undistributed net income (loss) of:
Bank subsidiaries ................................................................ 29,694 (14,367) 28,908
31,041
Nonbank subsidiaries .......................................................... 10,274 9,085 10,048
8,685
-------- -------- ----------------- --------- ---------
Net Income ............................. $113,589 $106,834 $104,627
======== ======== ========....................................... $ 132,948 $ 113,589 $ 106,834
========= ========= =========
60
CONDENSED STATEMENTS OF CASH FLOWS
- ----------------------------------
(in thousands)
Year endedEnded December 31
--------------------------------------------------------------------------
2002 2001 2000
1999
-------- -------- --------
(in thousands)------------ ------------ ------------
Cash Flows From Operating Activities:
Net Income .................................................. $113,589 $106,834 $104,627...................................................... $ 132,948 $ 113,589 $ 106,834
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Decrease (increase)(Increase) decrease in other assets ................................................ (2,541) 706 1,571
(783)
Decrease (increase)(Increase) decrease in investment in subsidiaries .................... (39,968) 5,282 (39,034)
(39,926)
(Decrease) increaseIncrease (decrease) in other liabilities and
payable to non-banknonbank subsidiaries ............................................. 5,249 (12,951) 10,726
4,664
Gain on sale of investment securities .................... -- -- (140)
-------- -------- -------------------- ------------ ------------
Total adjustments ............................................................................ (37,260) (6,963) (26,737)
(36,185)
-------- -------- -------------------- ------------ ------------
Net cash provided by operating activities ............................ 95,688 106,626 80,097
68,442
-------- -------- -------------------- ------------ ------------
Cash Flows From Investing Activities:
Investment in subsidiaries .................................................................. (3,500) (47,039) (5,759) (14,529)
Net cash paid for Dearden Maguire ........................acquisitions ............................... - (16,224) -- ---
Purchase of securities available for sale ................ --.................... - - (227) (459)
Proceeds from sales of securities available for sale ..... --......... - - 14
309
-------- -------- -------------------- ------------ ------------
Net cash used in investing activities .................................... (3,500) (63,263) (5,972) (14,679)
Cash Flows From Financing Activities:
Net increase (decrease) increase in short-term borrowings ...................... 9,056 (925) 11,857
1,564
Dividends paid .......................................................................................... (58,954) (51,486) (45,740) (41,856)(45,741)
Net proceeds from issuance of common stock .................................. 3,733 16,795 5,099 4,3005,100
Acquisition of treasury stock ............................................................ (46,128) (7,922) (45,162)
(17,784)
-------- -------- -------------------- ------------ ------------
Net cash used in financing activities .................................... (92,293) (43,538) (73,946)
(53,776)
-------- -------- -------------------- ------------ ------------
Net (Decrease) Increase in Cash and Cash Equivalents ............................ (105) (175) 179 (13)
Cash and Cash Equivalents at Beginning of Year ........................................ 111 286 107
120
-------- -------- -------------------- ------------ ------------
Cash and Cash Equivalents at End of Year .................................................... $ 6 $ 111 $ 286
$ 107
======== ======== ==================== ============ ============
Cash paid during the year for:
Interest ........................................................................................................ $ 1,791 $ 3,319 $ 3,210
$ 1,556
Income taxes ................................................................................................ 49,621 46,633 40,624 32,916
61
Independent Auditors' Report
The Board of Directors
Fulton Financial Corporation:
We have audited the accompanying consolidated balance sheet of Fulton Financial
Corporation and subsidiaries as of December 31, 2002, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of the Company
for the years ended December 31, 2001 and 2000, were audited by other auditors
who have ceased operations. Those auditors' report, dated January 22, 2002, on
those financial statements was unqualified and included an explanatory note that
they did not audit the financial statements of Drovers Bancshares Corporation, a
company acquired during 2001 in a transaction accounted for as a pooling of
interests, as discussed in Note R.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 financial statements referred to above present fairly,
in all material respects, the financial position of Fulton Financial Corporation
and subsidiaries as of December 31, 2002, and the results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Lancaster, Pennsylvania
January 20, 2003
62
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Fulton Financial Corporation
We have audited the accompanying consolidated balance sheets of Fulton Financial
Corporation (a Pennsylvania corporation) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Drovers Bancshares Corporation, a company acquired during 2001 in a transaction
accounted for as a pooling of interests, as discussed in Note O. Such statements
are included in the consolidated financial statements of Fulton Financial
Corporation and reflect total assets of 10 percent in 2000 and interest income
of 11 percent and 10 percent in 2000 and 1999, respectively, of the consolidated
totals. These statements were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to amounts included for
Drovers Bancshares Corporation, is based solely upon the report of the other
auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the 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, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Fulton Financial Corporation and subsidiaries as of
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Lancaster, Pennsylvania
January 22, 2002
NOTE: This report represents a copy of the predecessor auditor's report included
in the Company's Form 10-K for the year ended December 31, 2001 and does not
represent a reissuance of the report.
63
FULTON FINANCIAL CORPORATIONIndependent Auditor's Report
Board of Directors and Shareholders
Drovers Bancshares Corporation
We have audited the consolidated statements of income, comprehensive income,
changes in shareholders' equity and cash flows of Drovers Bancshares Corporation
and subsidiaries for the year ended December 31, 2000. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based upon
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of Drovers Bancshares Corporation
and subsidiaries' operations and cash flows for the year ended December 31,
2000, in conformity with generally accepted accounting principles.
/s/ STAMBAUGH NESS, PC
York, Pennsylvania
January 12, 2001
64
QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per-share data)
Three Months Ended
-----------------------------------------
For the Year 2001 March 31 June 30 Sept. 30 Dec. 31
- ------------------------------ -------- -------- -------- --------
Interest income .............. $133,253 $130,472 $130,009 $124,444
Interest expense ............. 63,395 59,135 56,625 48,807
-------- -------- -------- --------
Net interest income .......... 69,858 71,337 73,384 75,637
Provision for loan losses .... 3,179 3,199 5,533 2,674
Other income ................. 22,363 25,992 27,043 25,596
Other expenses ............... 49,020 51,402 61,499 54,748
-------- -------- -------- --------
Income before income taxes ... 40,022 42,728 33,395 43,811
Income taxes ................. 11,771 12,401 9,233 12,962
-------- -------- -------- --------
Net income ................... $ 28,251 $ 30,327 $ 24,162 $ 30,849
======== ======== ======== ========
Per-share data:
Net income (basic) ...... $ 0.34 $ 0.37 $ 0.29 $ 0.37
Net income (diluted) .... 0.34 0.36 0.29 0.37
Cash dividends .......... 0.152 0.170 0.170 0.170
Three Months Ended
-----------------------------------------
For the Year 2001 March 31 June 30 Sept. 30 Dec. 31
- ------------------------------ -------- -------- -------- --------
Interest income .............. $122,483 $126,472 $133,437 $137,235
Interest expense ............. 55,507 58,762 63,182 66,423
-------- -------- -------- --------
Net interest income .......... 66,976 67,710 70,255 70,812
Provision for loan losses .... 3,026 5,226 2,746 4,026
Other income ................. 17,732 18,413 18,326 20,527
Other expenses ............... 44,108 44,291 46,186 49,871
-------- -------- -------- --------
Income before income taxes ... 37,574 36,606 39,649 37,442
Income taxes ................. 10,872 10,616 11,532 11,417
-------- -------- -------- --------
Net income ................... $ 26,702 $ 25,990 $ 28,117 $ 26,025
======== ======== ======== ========
Per-share data:
Net income (basic) ...... $ 0.33 $ 0.32 $ 0.35 $ 0.32
Net income (diluted) .... 0.33 0.32 0.34 0.32
Cash dividends ..........
Three Months Ended
------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
------------- ------------- ------------- -------------
FOR THE YEAR 2002
- --------------------------------------
Interest income ....................... $ 117,799 $ 118,887 $ 117,156 $ 115,446
Interest expense ...................... 41,469 39,329 39,318 38,103
------------- ------------- ------------- -------------
Net interest income ................... 76,330 79,558 77,838 77,343
Provision for loan losses ............. 2,780 2,680 4,370 2,070
Other income .......................... 26,683 26,719 31,400 30,981
Other expenses ........................ 54,928 56,504 56,573 57,531
------------- ------------- ------------- -------------
Income before income taxes ............ 45,305 47,093 48,295 48,723
Income taxes .......................... 13,075 14,103 14,474 14,816
------------- ------------- ------------- -------------
Net income ............................ $ 32,230 $ 32,990 $ 33,821 $ 33,907
============= ============= ============= =============
Per-share data:
Net income (basic) ............... $ 0.31 $ 0.32 $ 0.33 $ 0.33
Net income (diluted) ............. 0.31 0.32 0.33 0.33
Cash dividends ................... 0.136 0.150 0.150 0.150
FOR THE YEAR 2001
- --------------------------------------
Interest income ....................... $ 133,333 $ 130,590 $ 130,128 $ 124,629
Interest expense ...................... 63,395 59,135 56,625 48,807
------------- ------------- ------------- -------------
Net interest income ................... 69,938 71,455 73,503 75,822
Provision for loan losses ............. 3,179 3,199 5,533 2,674
Other income .......................... 23,130 26,359 27,322 25,933
Other expenses ........................ 49,867 51,887 61,897 55,270
------------- ------------- ------------- -------------
Income before income taxes ............ 40,022 42,728 33,395 43,811
Income taxes .......................... 11,771 12,401 9,233 12,962
------------- ------------- ------------- -------------
Net income ............................ $ 28,251 $ 30,327 $ 24,162 $ 30,849
============= ============= ============= =============
Per-share data:
Net income (basic) ............... $ 0.27 $ 0.29 $ 0.23 $ 0.30
Net income (diluted) ............. 0.27 0.29 0.23 0.30
Cash dividends ................... 0.122 0.136 0.136 0.136
0.152 0.152 0.152
65
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
--------------------
None.On June 18, 2002 Fulton Financial Corporation dismissed its independent
accountants, Arthur Andersen LLP ("Andersen") and appointed KPMG, LLP ("KPMG")
as its new independent accountants, each effective that day. On April 16, 2002,
the Corporation had announced that it had decided not to renew the engagement of
Andersen and would be seeking proposals from independent accountants to audit
the Corporation's financial statements for the fiscal year ending December 31,
2002. Andersen continued to provide services to the Corporation following the
announcement that its engagement would not be renewed. The decision to engage
KPMG was approved by the Board of Directors upon the recommendation of the
Corporation's Audit Committee. Andersen's report on the Corporation's 2001
financial statements was dated January 22, 2002, in conjunction with the filing
of its Annual Report on Form 10-K for the year ended December 31, 2001.
During the Corporation's two fiscal years ended December 31, 2001 and 2000,
and the subsequent interim period through June 18, 2002, there were no
disagreements between the Corporation and Andersen on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to Andersen's satisfaction,
would have caused it to make reference to the subject matter of the disagreement
in connection with its reports.
None of the reportable events described under Item 304(a)(1)(v) of
Regulation S-K occurred during the Corporation's two fiscal years ended December
31, 2001 and 2000 and the subsequent interim period through June 18, 2002.
The audit reports of Andersen on the consolidated financial statements of
the Corporation and subsidiaries as of and for the fiscal years ended December
31, 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.
On June 24, 2002, the Corporation filed a Form 8-K with the Securities and
Exchange Commission reporting these events. Attached as an exhibit to that Form
8-K was a letter from Andersen indicating that the Corporation had provided
Andersen with a copy of the foregoing disclosures, and stating that it had found
no basis for disagreement with such statements.
66
PART III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
Incorporated by reference herein is the information appearing under the
heading "Information about Nominees and Continuing Directors" on pages 5 through
11 of the 20022003 Proxy Statement and under the heading "Executive Officers and
Stock Ownership" on page 11 of the 20022003 Proxy Statement.
Item 11. Executive Compensation
- -------------------------------
Incorporated by reference herein is the information appearing under the
heading "Executive Compensation" on pages 1213 through 1316 of the 20022003 Proxy
Statement and under the heading "Compensation of Directors" on page 1719 of the
20022003 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
Incorporated by reference herein is the information appearing under the
heading "Voting of Shares and Principal Holders Thereof" on page 3 of the 20022003
Proxy Statement and under the heading "Information about Nominees and Continuing
Directors" on pages 5 through 11 of the 20022003 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
Incorporated by reference herein is the information appearing under the
heading "Transactions with Directors and Executive Officers" on page 1719 of the
20022003 Proxy Statement, and the information appearing in Note D - Loans and
Allowance for Loan Losses, of the Notes to Consolidated Financial Statements in
Item 8, "Financial Statements and Supplementary Data".
67
PART IV
Item 14. Controls and Procedures
Within the 90 days prior to the filing date of this report, the Corporation
carried out an evaluation, under the supervision and with the participation of
the Corporation's management, including the Corporation's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15. Based upon that evaluation, the Corporation's Chief Executive
Officer and Chief Financial Officer concluded that the Corporation's disclosure
controls and procedures are effective. Disclosure controls and procedures are
controls and procedures that are designed to ensure that information required to
be disclosed in Corporation reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
we carried out this evaluation.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. Financial Statements -- The following consolidated financial statements
of Fulton Financial Corporation and subsidiaries are incorporated
herein by reference in response to Item 8 above:
(i) Consolidated Balance Sheets - December 31, 20012002 and 2000.2001.
(ii) Consolidated Statements of Income - Years ended December 31,
2002, 2001 2000 and 1999.2000.
(iii) Consolidated Statements of Shareholders' Equity - Years ended
December 31, 2002, 2001 2000 and 1999.2000.
(iv) Consolidated Statements of Cash Flows - Years ended December
31, 2002, 2001 2000 and 1999.2000.
(v) Notes to Consolidated Financial Statements
(vi) Report of Independent Public Accountants.Auditors' Report.
2. Financial Statement Schedules -- All financial statement schedules for
which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission are not required under the related
instructions or are inapplicable and have therefore been omitted.
3. Exhibits -- The following is a list of the Exhibits required by Item
601 of Regulation S-K and filed as part of this report:
(i) Articles of Incorporation, as amended and restated, and Bylaws
of Fulton Financial Corporation, as amended - Incorporated by
reference from Exhibit 3 of the Fulton Financial Corporation
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.
(ii) Rights Amendment dated June 20, 1989, as amended and restated
on April 27, 1999, between Fulton Financial Corporation and
Fulton Bank - Incorporated by reference from Exhibit 1 of the
Fulton Financial Corporation Current Report on Form 8-K dated
April 27, 1999.
(iii) Material Contracts - Executive Compensation Agreements and
Plans:
68
(a) Severance Agreements entered into between Fulton Financial
and: Rufus A. Fulton, Jr., as of April 17, 1984; R. Scott
Smith, Jr., as of May 17, 1988; Richard J. Ashby, Jr., as
of May 17, 1988; and Charles J. Nugent, as of November 19,
1992 - Incorporated by reference from Exhibit 10(a) of the
Fulton Financial Corporation Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.
(b) Incentive Stock Option Plan adopted September 19, 1995 -
Incorporated by reference from Exhibit A of Fulton
Financial Corporation's 1996 Proxy Statement.
(iv) Subsidiaries of the Registrant.
(v) Consents of Independent Public Accountants.
(vi) RepresentationsCertification of Independent Public Accountants.
Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(vii) Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K - None.
(c) Exhibits - The exhibits required to be filed as part of this report are
submitted as a separate section of this report.
(d) Financial Statement Schedules - None required.
69
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FULTON FINANCIAL CORPORATION
(Registrant)
Dated: March 19, 200218, 2003 By: /s/ Rufus A. Fulton, Jr.
---------------------------
Rufus A. Fulton, Jr.,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been executed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
/s/ Jeffrey G. Albertson Director March 19, 200218, 2003
- ------------------------------------------------------------------------
Jeffrey G. Albertson, Esq.
Director
- ---------------------------------
James P. Argires, M.D.
/s/ Donald M. Bowman, Jr. Director March 19, 200218, 2003
- ------------------------------------------------------------------------
Donald M. Bowman, Jr.
/s/ Beth Ann L. Chivinski Senior Vice President March 19, 200218, 2003
- ------------------------------------------------------------------------ and Controller
Beth Ann L. Chivinski (Principal Accounting Officer)
/s/ Harold D. Chubb Director March 19, 200218, 2003
- ------------------------------------------------------------------------
Harold D. Chubb
/s/ William H. Clark, Jr. Director March 19, 200218, 2003
- ------------------------------------------------------------------------
William H. Clark, Jr., C.P.A.
/s/ Craig A. Dally Director March 18, 2003
- ---------------------------------------
Craig A. Dally, Esq.
/s/ Frederick B. Fichthorn Director March 18, 2003
- ---------------------------------------
Frederick B. Fichthorn
/s/ Patrick J. Freer Director March 18, 2003
- ---------------------------------------
70
Patrick J. Freer
Signature Capacity Date
- --------- -------- ----
/s/ Craig A. Dally Director March 19, 2002
- --------------------------------
Craig A. Dally, Esq.
/s/ Frederick B. Fichthorn Director March 19, 2002
- --------------------------------
Frederick B. Fichthorn
/s/ Patrick J. Freer Director March 19, 2002
- --------------------------------
Patrick J. Freer
/s/ Rufus A. Fulton, Jr. Chairman, Chief Executive March 19, 200218, 2003
- ----------------------------------------------------------------------- Officer and Director
Rufus A. Fulton, Jr. (Principal Executive Officer)
/s/ Eugene H. Gardner Director March 19, 200218, 2003
- -----------------------------------------------------------------------
Eugene H. Gardner
/s/ Robert D. Garner Director March 19, 200218, 2003
- -----------------------------------------------------------------------
Robert D. Garner
/s/_______________________________________ Director
Charles V. Henry III, Esq.
/s/ J. Robert Hess Director March 19, 200218, 2003
- --------------------------------
Charles V. Henry III, Esq.
Director
- -----------------------------------------------------------------------
J. Robert Hess
/s/ George W. Hodges Director March 19, 200218, 2003
- -----------------------------------------------------------------------
George W. Hodges
/s/ Carolyn R. Holleran Director March 19, 200218, 2003
- -----------------------------------------------------------------------
Carolyn R. Holleran
/s/ Clyde W. Horst Director March 19, 200218, 2003
- -----------------------------------------------------------------------
Clyde W. Horst
/s/ Samuel H. Jones, Jr. Director March 18, 2003
- -----------------------------------------------------------------------
Samuel H. Jones, Jr.
/s/ Donald W. Lesher, Jr. Director March 18, 2003
- ---------------------------------------
Donald W. Lesher, Jr.
/s/ Charles J. Nugent Senior Executive Vice President and March 18, 2003
- --------------------------------------- Chief Financial Officer
Charles J. Nugent (Principal Financial Officer)
/s/ Joseph J. Mowad Director March 18, 2003
- ---------------------------------------
Joseph J. Mowad, M.D.
71
_______________________________________ Director
Stuart H. Raub, Jr.
Signature Capacity Date
- --------- -------- ----
Director
- --------------------------------
Donald W. Lesher, Jr.
/s/ Charles J. Nugent Senior Executive Vice President March 19, 2002
- -------------------------------- and Chief Financial Officer
Charles J. Nugent (Principal Financial Officer)
Director
- --------------------------------
Joseph J. Mowad, M.D.
/s/ Stuart H. Raub, Jr. Director March 19, 2002
- --------------------------------
Stuart H. Raub, Jr.
/s/ Mary Ann Russell Director March 19, 200218, 2003
- -----------------------------------------------------------------------
Mary Ann Russell
/s/ John O. Shirk Director March 19, 200218, 2003
- -----------------------------------------------------------------------
John O. Shirk, Esq.
/s/ R. Scott Smith, Jr. President and Chief Operating March 19, 200218, 2003
- ----------------------------------------------------------------------- Officer and Director
R. Scott Smith, Jr.
Director
- --------------------------------/s/ James K. Sperry Director March 18, 2003
- -----------------------------------------------------------------------
James K. Sperry
_______________________________________ Director
Gary A. Stewart
/s/ Kenneth G. Stoudt Director March 18, 2003
- -----------------------------------------------------------------------
Kenneth G. Stoudt
72
CERTIFICATION
I, Rufus A. Fulton, Jr. certify that:
1. I have reviewed this annual report on Form 10-K of Fulton Financial
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 27, 2003 /s/ Rufus A. Fulton, Jr.
-------------------- -------------------------
Rufus A. Fulton, Jr.
Chairman and Chief Executive
Officer
73
CERTIFICATION
I, Charles J. Nugent, certify that:
1. I have reviewed this annual report on Form 10-K of Fulton Financial
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003 /s/ Charles J. Nugent
--------------------- -----------------------------
Charles J. Nugent
Chief Financial Officer
74
EXHIBIT INDEX
-------------
Exhibits Required Pursuant to Item 601 of Regulation S-K
- -----------------------------
3. Articles of Incorporation, as amended and restated, and Bylaws of
Fulton Financial Corporation, as amended - Incorporated by reference
from Exhibit 3 of the Fulton Financial Corporation Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999.
4. Rights Amendment dated June 20, 1989, as amended and restated on April
27, 1999, between Fulton Financial Corporation and Fulton Bank -
Incorporated by reference from Exhibit 1 of the Fulton Financial
Corporation Current Report on Form 8-K dated April 27, 1999.
10. Material Contracts - Executive Compensation Agreements and Plans:
(a) Severance Agreements entered into between Fulton Financial and:
Rufus A. Fulton, Jr., as of April 17, 1984; R. Scott Smith, Jr.,
as of May 17, 1988; Richard J. Ashby, Jr., as of May 17, 1988; and
Charles J. Nugent, as of November 19, 1992 - Incorporated by
reference from Exhibit 10(a) of the Fulton Financial Corporation
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.
(b) Incentive Stock Option Plan adopted September 19, 1995 -
Incorporated by reference from Exhibit A of Fulton Financial
Corporation's 1996 Proxy Statement.
21. Subsidiaries of the Registrant.
23. Consents of Independent Public Accountants.
99. Representations99.1 Certification of Independent Public Accountants.Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
75