UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D. C. 20459
                                   FORM 10-Q

(Mark One)

[ X ][X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

     For the quarterly period ended      March 31,June 30, 2000       , or
                                      ----------------------------------------------------------

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the transition period from               to
                                      ------------  ---------------------------



                           Commission File No. 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
          --------------------------------------------------------------------------------------------------------------------------------
          (Address of principal executive offices)              (Zip Code)

                                 (717) 291-2411
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              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]



                     APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:

  Common Stock, $2.50 Par Value - 67,419,91769,724,619 shares outstanding as of - -------------------------------------------------------------------
April 30,July 31,
  ---------------------------------------------------------------------------
2000.
- -------------------

                                       1


                 FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
                 FORM 10-Q FOR THE QUARTER ENDED MARCH 31,JUNE 30, 2000


                                     INDEX
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Description                                                                 Page
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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited):

(a) Consolidated Balance Sheets -
    March 31,June 30, 2000 and December 31, 1999.................................31999........................................3

(b) Consolidated Statements of Income -
    Three and six months ended March 31,June 30, 2000 and 1999...........................41999..........................4

(c) Consolidated Statements of Shareholders' Equity -
    ThreeSix months ended March 31,June 30, 2000 and 1999...........................51999....................................5

(d) Consolidated Statements of Cash Flows -
    ThreeSix months ended March 31,June 30, 2000 and 1999...........................61999....................................6

(e) Notes to Consolidated Financial Statements - March 31, 2000..........7June 30, 2000.................7


Item 2.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations...................9Operations.........................9

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.....15Risk...........18


PART II. OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K...............................19



     SIGNATURES..............................................................208-K.....................................22



SIGNATURES....................................................................23


                                       2
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per-share data) March 31June 30 December 31 2000 1999 -------------------------------------- ASSETS - ---------------------------------------------------------------------------------------------------------------------------- Cash and due from banks ........................................................................................................................... $ 258,415267,857 $ 245,572 Interest-bearing deposits with other banks .......................................... 2,309........................................... 3,888 1,798 Mortgage loans held for sale ........................................................ 1,419......................................................... 3,074 1,016 Investment securities: Held to maturity (Fair value: $75,776$66,183 in 2000 and $84,777 in 1999) ............. 76,543.............. 66,660 85,474 Available for sale ............................................................. 1,113,466.............................................................. 1,089,734 1,137,846 Loans ............................................................................... 4,513,407................................................................................ 4,582,659 4,432,030 Less: Allowance for loan losses ............................................... (58,034)................................................ (58,280) (57,631) Unearned income ...................................................... (9,838)....................................................... (10,828) (9,623) ----------------------------- --------------- Net Loans .................................................. 4,445,535................................................... 4,513,551 4,364,776 ----------------------------- --------------- Premises and equipment .............................................................. 81,452............................................................... 84,945 79,217 Accrued interest receivable ......................................................... 31,611.......................................................... 33,232 31,496 Other assets ........................................................................ 119,164......................................................................... 121,658 122,824 ----------------------------- --------------- Total Assets ............................................................................................... $ 6,129,9146,184,599 $ 6,070,019 ============================= =============== LIABILITIES - ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------ Deposits: Noninterest-bearing ......................................................................................................................... $ 793,563809,597 $ 724,778 Interest-bearing ............................................................... 3,853,965................................................................ 3,860,329 3,822,035 ----------------------------- --------------- Total Deposits ............................................. 4,647,528.............................................. 4,669,926 4,546,813 ----------------------------- --------------- Short-term borrowings: Securities sold under agreements to repurchase.................................. 303,899repurchase................................... 296,610 309,790 Federal funds purchased......................................................... 143,890purchased.......................................................... 211,450 172,250 Demand notes of U.S. Treasury .................................................. 3,607................................................... 5,683 5,506 ----------------------------- --------------- Total Short-Term Borrowings ................................ 451,396................................. 513,743 487,546 ----------------------------- --------------- Accrued interest payable ............................................................ 33,526............................................................. 36,194 32,313 Other liabilities ................................................................... 64,532.................................................................... 62,163 60,803 Long-term debt ...................................................................... 323,194....................................................................... 306,637 328,250 ----------------------------- --------------- Total Liabilities .......................................... 5,520,176........................................... 5,588,663 5,455,725 ----------------------------- --------------- SHAREHOLDERS' EQUITY - ---------------------------------------------------------------------------------------------------------------------------- Common stock ($2.50 par) Shares: Authorized 400,000,000 Issued 72,824,439; Outstanding 71,335,09269,893,119 (71,924,447 in 1999)........ 181,884..... 182,052 173,392 Capital surplus ..................................................................... 451,729...................................................................... 452,528 394,234 Retained earnings ................................................................... 24,154.................................................................... 38,305 75,482 Accumulated other comprehensive income............................................... (21,910)income................................................ (21,878) (11,846) Treasury stock, at cost (1,489,347(2,931,320 shares in 2000 and 899,992 shares in 1999)........ (26,119)......... (55,071) (16,968) ----------------------------- --------------- Total Shareholders' Equity ................................. 609,738.................................. 595,936 614,294 ----------------------------- --------------- Total Liabilities and Shareholders' Equity..................Equity................... $ 6,129,9146,184,599 $ 6,070,019 ============================= =============== - ----------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements 3
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands, except per-share data) Three Months Ended March 31Six Months Ended June 30 June 30 ---------------------------------- -------------------------------- 2000 1999 2000 1999 ---------------------------------- -------------------------------- INTEREST INCOME - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Loans, including fees ...................................... $ 91,36894,820 $ 82,23884,225 $ 186,188 $ 166,463 Investment securities: Taxable ............................................... 14,189 16,21914,130 15,990 28,319 32,209 Tax-exempt ............................................ 2,205 1,7922,152 2,056 4,357 3,848 Dividends ............................................. 1,105 993 Federal funds sold ......................................... 100 37 Interest-bearing deposits with other banks ................. 44 291,109 1,020 2,214 2,013 Other interest income....................................... 157 135 301 201 -------------- ------------- -------------- -------------- Total Interest Income ............ 109,011 101,308112,368 103,426 221,379 204,734 INTEREST EXPENSE - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Deposits ................................................... 37,226 36,03039,336 35,310 76,562 71,340 Short-term borrowings ...................................... 6,256 2,8707,008 3,229 13,264 6,099 Long-term debt ............................................. 4,409 3,7824,186 3,890 8,595 7,672 -------------- ------------- -------------- -------------- Total Interest Expense ............ 47,891 42,68250,530 42,429 98,421 85,111 -------------- ------------- -------------- -------------- Net Interest Income ............... 61,120 58,62661,838 60,997 122,958 119,623 PROVISION FOR LOAN LOSSES .................................. 2,025 1,9672,085 4,050 4,052 -------------- ------------- -------------- -------------- Net Interest Income After Provision for Loan Losses ...... 59,095 56,65959,813 58,912 118,908 115,571 -------------- ------------- -------------- -------------- OTHER INCOME - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Investment management and trust services.................... 4,921 3,4175,057 4,014 9,978 7,431 Service charges on deposit accounts ........................ 5,584 4,7705,890 5,177 11,474 9,947 Other service charges and fees ............................. 3,081 2,7863,239 2,963 6,320 5,749 Mortgage banking income..................................... 590 1,283781 1,218 1,371 2,501 Investment securities gains ................................ 2,476 3,0572,065 1,669 4,541 4,726 -------------- ------------- -------------- -------------- Total Other Income ................ 16,652 15,31317,032 15,041 33,684 30,354 OTHER EXPENSES - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Salaries and employee benefits ............................. 22,745 21,36222,601 22,105 45,346 43,467 Net occupancy expense ...................................... 3,591 3,2753,411 3,167 7,002 6,442 Equipment expense .......................................... 2,483 2,2932,241 2,385 4,724 4,678 Special services ........................................... 2,773 2,8802,554 2,774 5,327 5,654 Other ...................................................... 8,194 8,8889,116 9,407 17,310 18,295 -------------- ------------- -------------- -------------- Total Other Expenses .............. 39,786 38,69839,923 39,838 79,709 78,536 -------------- ------------- -------------- -------------- Income Before Income Taxes ........ 35,961 33,27436,922 34,115 72,883 67,389 INCOME TAXES................................................ 10,647 9,74711,015 10,072 21,662 19,819 -------------- ------------- -------------- -------------- Net Income ........................ $ 25,31425,907 $ 23,52724,043 $ 51,221 $ 47,570 ============== ============= ============== ============== - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ PER-SHARE DATA: Net income (basic).......................................... $ 0.350.37 $ 0.320.33 $ 0.72 $ 0.66 Net income (diluted)........................................ 0.35 0.320.37 0.33 0.72 0.65 Cash dividends ............................................. 0.160 0.143 0.1300.303 0.273 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements 4 FULTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) THREESIX MONTHS ENDED MARCH 31,JUNE 30, 2000 AND 1999
Accumulated Other Comprehen- Common Capital Retained siveSive Income Treasury (Dollars in thousands, except per-share data) Stock Surplus Earnings Income(Loss) Stock Total - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 .........................1999............................. $ 173,392 $ 394,234 $ 75,482 $ (11,846) $ (16,968) $ 614,294 Comprehensive income: Net income ...................................... 25,314income.......................................... 51,221 51,221 Other - net unrealized loss on securities (net of $5.4 million tax benefit) (10,064)....................... (10,032) (10,032) ------------ Total comprehensive income .................income..................... 41,189 ------------ Stock dividends declaredissued - 5% (3,396,909(3,464,213 shares) ..... 8,492 57,929 (66,421)........... 8,660 59,065 (67,796) (71) Stock issued (59,125(121,419 shares of treasury stock) ....... (434).......... (771) 2,331 1,560 Acquisition of treasury stock (648,480(2,152,747 shares) ................ (40,434) (40,434) Cash dividends - $0.143$0.303 per share .................... (10,221) ------------------------------------------------share........................ (20,602) (20,602) -------------------------------------------------------------------------- Balance at March 31, 2000 ............................June 30, 2000................................. $ 181,884182,052 $ 451,729452,528 $ 24,15438,305 $ (21,910) ================================================(21,878) $ (55,071) $ 595,936 ========================================================================== Balance at December 31, 1998 .........................1998............................. $ 157,638 $ 293,897 $ 136,668 $ 23,619 $ (3,488) $ 608,334 Comprehensive income: Net income ...................................... 23,527income.......................................... 47,570 47,570 Other - net unrealized gain on securities (net of $1.9$11.6 million tax benefit) ..................... (3,463)....................... (21,535) (21,535) ------------ Total comprehensive income .................income..................... 26,035 ------------ Stock dividends issued - 10% (6,605,367(6,617,424 shares) ...... 15,727 115,122 (130,849).......... 15,754 102,099 (117,917) (64) Stock issued (55,929 shares of treasury stock) ....... (558)(128,849 shares) (1,230) 2,733 1,503 Acquisition of treasury stock (41,685(228,795 shares) ................... (4,717) (4,717) Cash dividends - $0.130$0.273 per share .................... (9,421) ------------------------------------------------share........................ (19,783) (19,783) -------------------------------------------------------------------------- Balance at March 31, 1999 ............................June 30, 1999................................. $ 173,365173,392 $ 408,461394,766 $ 19,92546,538 $ 20,156 ================================================2,084 $ (5,472) $ 611,308 ========================================================================== - --------------------------------------------------------------------------------------------------------- Treasury (Dollars in thousands, except per-share data) Stock Total - ------------------------------------------------------------------------------- Balance at December 31, 1999 ......................... (16,968) $ 614,294 Comprehensive income: Net income ...................................... 25,314 Other - net unrealized loss on securities (net of 5.4 million tax benefit) (10,064) ---------- Total comprehensive income ................. 15,250 ---------- Stock dividends declared - 5% (3,396,909 shares) ..... -- Stock issued (59,125 shares of treasury stock) ....... 1,002 568 Acquisition of treasury stock (648,480 shares) ....... (10,153) (10,153) Cash dividends - $0.143 per share .................... (10,221) ---------------------- Balance at March 31, 2000 ............................ $ (26,119) $ 609,738 ====================== Balance at December 31, 1998 ......................... $ (3,488) $ 608,334 Comprehensive income: Net income ...................................... 23,527 Other - net unrealized gain on securities (net of $1.9 million taxbenefit ....................... (3,463) ---------------------- Total comprehensive income ................. 20,064 ---------------------- Stock dividends issued - 10% (6,605,367 shares) ...... -- Stock issued (55,929 shares of treasury stock) ....... 910 352 Acquisition of treasury stock (41,685 shares) ........ (780) (780) Cash dividends - $0.130 per share .................... (9,421) ---------------------- Balance at March 31, 1999 ............................ $ (3,358) $ 618,549 ====================== - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
5
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- (In thousands) ThreeSix Months Ended March 31 ----------------------------------June 30 --------------------------------- 2000 1999 ------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income........................................................................ $ 25,31451,221 $ 23,52747,570 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ................................................... 2,025 1,9674,050 4,052 Depreciation and amortization of premises and equipment ..................... 2,536 2,3835,033 4,794 Net amortization of investment security premiums ............................ 131 405262 726 Investment security gains ................................................... (2,476) (3,057)(4,541) (4,726) Net increase(increase) decrease in mortgage loans held for sale................................. (403) (1,341)sale...................... (2,058) 4,597 Amortization of intangible assets ........................................... 328 325652 649 (Increase) decrease in accrued interest receivable .......................... (115) 1,045(1,736) 1,817 Decrease in other assets .................................................... 8,718 12,7846,346 9,374 Increase (decrease) in accrued interest payable ............................. 1,213 (26)3,881 (2,897) Increase in other liabilities................................................ 3,796 7,273 -------------1,246 4,938 ------------ ------------- Total adjustments...................................................... 15,753 21,758 -------------13,135 23,324 ------------ ------------- Net cash provided by operating activities .............................. 41,067 45,285 -------------64,356 70,894 ------------ ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale ............................. 4,809 7,07019,814 11,138 Proceeds from maturities of securities held to maturity .......................... 9,285 38,52419,458 64,836 Proceeds from maturities of securities available for sale ........................ 40,422 73,01886,840 150,385 Purchase of securities held to maturity .......................................... (346) (121)(618) (357) Purchase of securities available for sale ........................................ (33,964) (85,307) Increase(70,153) (246,104) (Increase) decrease in short-term investments ............................................... (511) (2,115).................................... (2,090) 212 Net increase in loans ............................................................ (82,784) (20,560)(152,825) (144,694) Purchase of premises and equipment................................................ (4,771) (2,609) -------------(10,761) (6,040) ------------ ------------- Net cash provided by (used in) provided by investing activities .................... (67,860) 7,900 -------------(110,335) (170,624) ------------ ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand and savings deposits ........................... 88,673 (70,551)101,012 (59,746) Net increase (decrease) in time deposits ......................................... 12,042 (13,995) Decrease22,101 (38,095) (Decrease) increase in long-term debt........................................................ (5,056) (192) (Decrease) increasedebt............................................. (21,613) 52,051 Increase (decrease) in short-term borrowings ..................................... (36,150) 19,42226,197 149,442 Dividends paid ................................................................... (10,288) (9,413)(20,488) (19,783) Net proceeds from issuance of common stock ....................................... 568 3521,489 1,439 Acquisition of treasury stock .................................................... (10,153) (780) -------------(40,434) (4,717) ------------ ------------- Net cash provided by (used in) financing activities..................... 39,636 (75,157) -------------activities............................... 68,264 80,591 ------------ ------------- Net Increase (Decrease) in Cash and Due From Banks ............................... 12,843 (21,972)22,285 (19,139) Cash and Due From Banks at Beginning of Period ................................... 245,572 247,558 ------------------------- ------------- Cash and Due From Banks at End of Period ......................................... $ 258,415267,857 $ 225,586 =============228,419 ============ ============= Supplemental Disclosures of Cash Flow Information Cash paid during the period for: Interest .................................................................... $ 46,67894,540 $ 42,70888,008 Income taxes ................................................................ 50019,098 14,092 - - -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements 6 FULTON FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE A - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periodperiods ended March 31,June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. NOTE B - 5% Stock DividendsDividend The Corporation declaredissued a 5% stock dividend on April 18, 2000 which will be paid on May 31, 2000 to shareholders of record on May 8, 2000. All share and per-share information has been restated to reflect the effect of this stock dividend. In addition, shareholders' equity accounts have been adjusted to reflect the impact of the dividend, assuming 67,938,000 shares are outstanding on the payment date. NOTE C - Net Income Per Share The Corporation's basic net income per share is calculated as net income divided by the weighted average number of shares outstanding. For diluted net income per share, net income is divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation's common stock equivalents consist solely of outstanding stock options. A reconciliation of the weighted average shares outstanding used to calculate basic net income per share and diluted net income per share follows (in thousands):
Three months ended March 31,Six months ended June 30 June 30 ---------------------------- --------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Weighted average shares outstanding (basic)....... 71,648 72,628............. 70,415 72,602 71,032 72,615 Impact of common stock equivalents................ 307 427 -------- --------equivalents...................... 403 433 352 416 ------------- ------------ ------------ ------------ Weighted average shares outstanding (diluted)..... 71,955 73,055 ======== ========
........... 70,818 73,035 71,384 73,031 ============= ============ ============ ============ NOTE D - Comprehensive Income The following table summarizes the reclassification adjustment for realized security gains (net of taxes) for each of the indicated periods (in thousands):
2000 1999 ---- ---- Unrealized holding losses arising during period.......period...................... $ (8,455)(7,080) $ (1,476)(18,463) Less: reclassification adjustment for gains included in net income................................. 1,609 1,987income................................................ 2,952 3,072 ------------- ------------- Net unrealized losses on securities...................securities.................................. $ (10,064)(10,032) $ (3,463)(21,535) ============= =============
7 NOTE E - New Accounting Standards Accounting for Derivative Instruments and Hedging Activities: In June, 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement 133). This statement expanded the previous definition of derivatives to include certain additional transactions. Entities are required to record derivatives at their fair values and recognize any changes in fair value in current period earnings, unless specific hedge criteria are met. Statement 133, as amended by Statement 137, is effective for years beginning after June 15, 2000. The Corporation does not expect the adoption of Statement 133 to have a material effect on its balance sheet or net income. NOTE F - Subsequent Events On August 1, 2000, the Corporation completed its acquisition of Skylands Financial Corporation (SFC) of Hackettstown, New Jersey. SFC is a $240 million bank holding company whose sole banking subsidiary, Skylands Community Bank (Skylands), operates eight community banking offices in Morris, Warren and Sussex counties. Under the terms of the merger agreement, each of the 2.5 million shares of SFC's common stock was exchanged for 0.819 shares of the Corporation's common stock. In addition, the 308,000 options to acquire SFC stock were also be exchanged for options to purchase the Corporation's common stock. As a result of the acquisition, SFC was merged with and into Fulton Financial Corporation (parent company) and Skylands became the Corporation's twelfth banking subsidiary. The acquisition was accounted for as a purchase and, as such, the accounts and results of operations of Skylands are not included in the financial statements of the Corporation as presented in this report. Skylands will be included in the consolidated financial statements of the Corporation prospectively from the date of the merger. NOTE G - Reclassifications Certain amounts in the 1999 consolidated financial statements and notes have been reclassified to conform to the 2000 presentation. 8 FULTON FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- This discussion concerns Fulton Financial Corporation (the Corporation), a bank holding company incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly-owned subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and other financial information presented in this report. The Corporation has made, and may continue to make, certain forward-looking statements with respect to its management of net interest income and margin, the ability to realize gains on equity investments, allowance and provision for loan losses and expected levels of certain non-interest expenses.income growth initiatives. The Corporation cautions that these forward-looking statements are subject to various assumptions, risks and uncertainties. Because of the possibility of changes in these assumptions, risks and uncertainties, actual results could differ materially from forward-looking statements. In addition to the factors identified herein, the following could cause actual results to differ materially from such forward looking statements: pricing pressures on loanloans and deposit products,deposits, actions of bank and nonbank competitors, changes in local and national economic conditions, changes in regulatory requirements and regulatory oversight of the Corporation and actions of the Federal Reserve Board the Corporation's success in merger and acquisition integration and the impact of changes in third-party contracts.(FRB). 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. MERGER AND ACQUISITION ACTIVITY - ------------------------------- On February 23, 2000, the Corporation entered into a merger agreement to acquire Skylands Financial Corporation (SFC) of Hackettstown, New Jersey. SFC is a $225 million bank holding company whose sole banking subsidiary, Skylands Community Bank (Skylands), operates eight community banking offices in Morris, Warren and Sussex counties. Under the terms of the merger agreement, each of the 2.5 million shares of SFC's common stock will be exchanged for 0.819 shares of the Corporation's common stock. In addition, the 308,000 options to acquire SFC stock will also be exchanged for options to purchase the Corporation's common stock. If the price of the Corporation's stock as of a defined pricing period prior to the merger is higher or lower than specified maximum and minimum prices, the agreement may be terminated or the exchange ratio may be modified. The acquisition is subject to approval by bank regulatory authorities and SFC shareholders. The transaction is expected to be completed in the third quarter of 2000 and will be accounted for as a purchase. As a result of the acquisition, SFC will be merged with and into Fulton Financial Corporation (parent company) and Skylands will become the Corporation's twelfth banking subsidiary. RESULTS OF OPERATIONS - --------------------- Quarter ended March 31,June 30, 2000 versus Quarter ended March 31,June 30, 1999 - ----------------------------------------------------------------- The---------------------------------------------------------------- Fulton Financial Corporation's net income for the firstsecond quarter of 2000 increased $1.8$1.9 million, or 7.6%7.8%, in comparison to net income for the firstsecond quarter of 1999. Diluted net income per share increased $0.03,$0.04, or 9.4%12.1%, compared to 1999. FirstSecond quarter net income of $25.3$25.9 million, or $0.35$0.37 per share (basic and diluted), represented a 9 return on average assets (ROA) of 1.67%1.70% and a return on average equity (ROE) of 16.57%17.48%. This compares to 1999 net income of $23.5$24.0 million, or $0.32 per share$0.33 (basic and diluted) (1.66%diluted -- 1.65% ROA and 15.62%15.45% ROE). The increase in net income in 2000 resulted mainly from strong loan growth, continued expansionhigh asset quality, control of the Corporation's core banking business, as shown by increases in both net interestnon-interest expenses and fee income and non-interest income. Offsetting these increases were modest increases in the provision for loan losses and other expenses as well as a decrease in investment securities gains.generation initiatives. Net Interest Income - ------------------- Net interest income increased $2.5 million,$841,000, or 4.3%1.4%, for the quarter. Overall, thisThis small increase was a result of growthreflects the recent changes in the interest rate environment as the FRB raised the federal funds rate six times over the past year. While these actions have caused downward pressure on the Corporation's balance sheet, offset by a declinenet interest margin and have reduced the growth rate in net interest margin.income, the Corporation has been able to generate strong loan and balance sheet growth. The following tables summarize the components of the increase in net interest income as well as the changes in average balances of interest-earning assets and interest-bearing liabilities from the firstsecond quarter of 1999 to the firstsecond quarter of 2000 and the average interest rates thereon. All dollar amounts are in thousands. 9
Three Months Ended March 31June 30 Change -------------------------------------- ------------------------------------- 2000 1999 $ % ----------------- ----------------- --------------------------------- ----------------- Interest income ................. $ 109,011112,368 $ 101,308103,426 $ 7,703 7.6%8,942 8.6% Interest expense................. 47,891 42,682 5,209 12.2%50,530 42,429 8,101 19.1 ----------------- ----------------- --------------------------------- ----------------- Net interest income.............. $ 61,12061,838 $ 58,62660,997 $ 2,494 4.3%841 1.4% ================= ================= ================================= =================
Three Months Ended March 31June 30 -------------------------------------- 2000 1999 Change ----------------- ----------------- ---------------- Loans................................................. $ 4,468,5164,551,173 $ 4,040,5474,106,462 $ 427,969444,711 Investment securities................................. 1,232,289 1,315,965 (83,676)1,220,125 1,339,539 (119,414) Other earning assets.................................. 8,991 6,067 2,924 ----------------- ----------------- ----------------8,012 11,109 (3,097) ---------------------------------------------------------- Total interest-earning assets......................... $ 5,709,7965,779,310 $ 5,362,5795,457,110 $ 347,217 ================= ================= ================322,200 ========================================================== Yield on earning assets (fully taxable equivalent).... 7.79% 7.74% 0.05%7.93% 7.72% 0.21% Deposits.............................................. $ 3,821,6133,866,477 $ 3,790,3173,803,803 $ 31,29662,674 Short-term borrowings................................. 478,442 268,398 210,044488,277 302,184 186,093 Long-term debt........................................ 340,692 295,900 44,792 ----------------- ----------------- ----------------321,164 301,238 19,926 ---------------------------------------------------------- Total interest-bearing liabilities.................... $ 4,640,7474,675,918 $ 4,354,6154,407,225 $ 286,132 ================= ================= ================268,693 ========================================================== Cost of interest-bearing liabilities.................. 4.15% 3.97% 0.18%4.34% 3.86% 0.48% Net interest margin (fully taxable equivalent)........ 4.42% 4.52% (0.10%4.41% 4.60% (0.19%)
The 7.6%5.9% increase in interest income was mainly volume driven as the growth in the Corporation's balance sheet, particularly average loans,earning assets accounted for an interest income increase of approximately $6.7$6.2 million. The fiveremaining $2.7 million increase was a result of the increase in average yields on earning assets. Average yields increased from the second quarter of 1999 to the second quarter of 2000 due to a general increase in interest rates as a result of the actions of the FRB. However, the 21 basis point increase in average yields was not as pronounced as the average yield and an additional day in the 2000 quarter as a result of leap year accounted for the remaining $1.0 million increase. The average balance sheet growth was fueled mainly by loans, which increased $428 million, or 10.6%, in 2000 as compared to 1999. Commercial lending continued to be strong, as shown by a $314 million, or 15.7%, increase in the average balances of commercial loans and mortgages. Although the Corporation has had success in growing its loan portfolio, overall yields on loans have remained flat over the past year, despite an152 basis point increase in the Corporation's average prime lending rate from 7.75%(7.75% in 1999 and 9.27% in 2000) as a result of competition. The Corporation's average loan portfolio grew by approximately $445 million, or 10.8%, mainly in commercial loans ($153 million, or 16.2% increase), commercial mortgages ($168 million, or 15.5% increase) and home equity loans ($80 million, or 25.1% increase). Loan demand has been strong due to 8.68% in 2000. This has resulted from the continuing competition for new loansfavorable economic conditions in the Corporation's markets. The increase 10 in the prime rate was related to the actions of the Federal Reserve Board,Investment securities, excluding unrealized gains and reflects the changes in the interest rate environment in general. Average investment securitieslosses, decreased $84$119 million, or 6.4%8.9%. In general, this decrease resulted fromNet maturities and payoffs of United States obligationsTreasury and mortgage-backedAgency securities being reinvestedand mortgage backed securities ($148 million) were used to support the strong loan growth in loans. The Corporation did continue its recent strategylieu of investing in tax-free municipal securities which, over the past year, have had taxable equivalent rates which were at least comparable to other investmentfunding alternatives. The 5.7% increase in average balance of these investments increased $45interest-bearing liabilities resulted in a $2.6 million or 28.1%, to $204 million.increase in interest expense. The 12.2%remaining $5.5 million increase in interest expense was a result of both volume and rate increases. The 6.6% increase in average interest-bearing liabilities resulted in a $2.8 million increase in interest expense. The remaining $2.4 million increase resulted from the 18 basis point increase in the average cost of funds. The increase in interest-bearing liabilities was realized mainly in short-term borrowings as deposit growth lagged the increases in loans and alternative funding sources were used. As a result of this shift from deposits to higher priced borrowings and the increases in rates in general, the Corporation's cost of funds as well as an additional day during the 2000 quarter. Deposit growth continued to be a challenge as shown by an average balance increase of only $31 million, or 0.8%. To support the strong loan growth, the Corporation looked to alternative funding sources. Short-term borrowings increased $210 million, or 78.3%, mainly in federal funds purchased. Long-term debt, which consists almost entirely of advances from the Federal Home Loan Bank, increased $45 million, or 15.1%. The Corporation's average cost of interest-bearing liabilities increased 1848 basis points fromas compared to the firstsecond quarter of 1999 to 4.15% in 2000. This increase, which is 13 basis points higher than the change experienced on interest earning assets, was the1999. As a result of a shiftthe noted changes in funding toward borrowingsassets, liabilities and strong competition for deposits. Overall,rates, the Corporation's net interest margin on a fully taxable equivalent basis decreased ten19 basis points to 4.42%4.41% in 2000 from 4.52%4.60% in 1999. This reflects the pricing competition for loans and deposits and an increase in borrowings as a funding source. Despite these factors, however, management believes thatThe Corporation continues to manage its asset/liability management strategies documentedposition and interest rate risk through the methods 10 discussed in the "Market Risk" discussionsection of this document. Management believes that these procedures have been successfulminimized the reduction in minimizing the net interest margin decline.during this period of increasing rates. Provision and Allowance for Loan Losses - --------------------------------------- The following table summarizes loans outstanding (including unearned income) as of the dates shown:
March 31 December 31 2000 1999 ---------------- ---------------- (in thousands) Commercial, financial and agricultural............. $ 1,095,176 $ 1,051,958 Real estate - construction......................... 181,899 164,583 Real estate - mortgage............................. 2,396,110 2,371,764 Consumer .......................................... 770,431 774,098 Leasing and other.................................. 69,791 69,627 ---------------- ---------------- Totals.......................................... $ 4,513,407June 30 December 31 2000 1999 ---------------- ---------------- (in thousands) Commercial, financial and agricultural..... $ 1,075,286 $ 1,051,958 Real estate - construction................. 201,268 164,583 Real estate - mortgage..................... 2,492,137 2,371,764 Consumer .................................. 739,484 774,098 Leasing and other.......................... 74,484 69,627 ---------------- ---------------- Totals.................................. $ 4,582,659 $ 4,432,030 ================ ================
The loans summary as of December 31, 1999 as shown above has been restated to conform to the presentation adopted in 2000 as a result of changes in the Corporation's financial reporting system. In addition to some immaterial classification changes, approximately $400 million of loans previously classified as commercial mortgages are now being shown as commercial loans. This reclassification has no impact on the Corporation's assessment of the risk of these loans for allowance evaluation purposes. The allowance for loan loss procedures as documented in the following section are applied to categories of loans based on source systemsub-system classification or to individually large credits. These procedures are not dependent upon the ultimate classification of the loans for financial reporting purposes. 11 The following table summarizes the activity in the Corporation's allowance for loan losses:
Three Months Ended March 31 ------------------------------------June 30 -------------------------- 2000 1999 --------------- --------------------------- ------------ (dollars in thousands) Loans outstanding at end of period (net of unearned)............... $ 4,503,5694,571,831 $ 4,050,009 =============== ===============4,172,560 ============ ============ Daily average balance of loans and leases.......................... $ 4,468,5164,551,173 $ 4,040,547 =============== ===============4,106,062 ============ ============ Balance of allowance for loan losses at beginning of period........................................ $ 57,63158,034 $ 57,41558,440 Loans charged-off: Commercial, financial and agricultural......................... 816 6241,268 148 Real estate - mortgage......................................... 349 157282 436 Consumer....................................................... 1,777 1,4031,571 2,458 Leasing and other.............................................. 93 17 --------------- ---------------87 51 ------------ ------------ Total loans charged-off........................................ 3,035 2,201 --------------- ---------------3,208 3,093 ------------ ------------ Recoveries of loans previously charged-off: Commercial, financial and agricultural......................... 376 560689 791 Real estate - mortgage......................................... 288 28452 187 Consumer....................................................... 748 415675 532 Leasing and other.............................................. 113 - --------------- --------------------------- ------------ Total recoveries............................................... 1,413 1,259 --------------- ---------------1,429 1,510 ------------ ------------ Net loans charged-off.............................................. 1,622 9421,779 1,583 Provision for loan losses.......................................... 2,025 1,967 --------------- ---------------2,085 ------------ ------------ Balance at end of period........................................... $ 58,03458,280 $ 58,440 =============== ===============58,942 ============ ============ Net charge-offs to average loans (annualized)...................... 0.16% 0.15% 0.09% =============== =========================== ============ Allowance for loan losses to loans outstanding..................... 1.29% 1.44% =============== ===============1.27% 1.41% ============ ============
The following table summarizes the Corporation's non-performing assets as of the indicated dates.
March 31June 30 Dec. 31 March 31June 30 (Dollars in thousands) 2000 1999 1999 --------------- --------------- --------------------------------- -------------- ----------------- Nonaccrual loans..................................... $ 18,91417,138 $ 18,653 $ 18,14917,974 Loans 90 days past due and accruing.................. 6,8648,541 8,516 11,0097,528 Other real estate owned (OREO)....................... 816892 917 1,478 --------------- --------------- ---------------1,442 ------------------ -------------- ----------------- Total non-performing assets.......................... $ 26,59426,571 $ 28,086 $ 30,636 =============== =============== ===============26,944 ================== ============== ================= Non-performing loans/Total loans..................... 0.57%0.56% 0.61% 0.72%0.61% Non-performing assets/Total assets................... 0.43% 0.46% 0.53%0.45% Non-performing assets/Gross loans and OREO........... 0.59%0.58% 0.63% 0.76%0.65%
Additions to the allowance for loan losses are charged to income through the provision for loan losses when, in the opinion of management and based on continuing analyses of the loan portfolio, it is believed that the allowance is not adequate.adequate to absorb the losses inherent in the portfolio. Management considers various factors in assessing the adequacy 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 12 characteristics of loan types in the portfolio, and the balance of 12 the allowance relative to total and nonperforming loans. Additional consideration is given to local and national economic conditions. The Corporation's policy is individually applied to each of its eleven affiliate banks. Resulting provisions and allowances are aggregated for consolidated financial reporting. For the firstsecond quarter of 2000, net charge-offs totaled $1.6$1.8 million, or 0.15%0.16%, of average loans on an annualized basis. This compares to $942,000,net charge-off rate was not significantly different from the $1.6 million, or 0.09%0.15%, forin the firstsecond quarter of 1999. Non-performing loans, including loans 90 days past due and still accruing, to total loans were 0.57%0.56% at March 31,June 30, 2000, as compared toa considerable improvement over the 0.61% at December 31, 1999 and 0.72% at March 31,June 30, 1999. The provision for loan losses increased $58,000,decreased $60,000, or 2.9%, to $2.0 million in 2000. This increase was due to andecrease occurred despite a 10.8% increase in net charge-offs. However, given thataverage loans outstanding, reflecting the continued improvement in the Corporation's overall loan quality continued to be strong, as reflected by the non-performing assets ratios at March 31, 2000, the provision did not increase relative to the level of charge-offs.asset quality. The Corporation's periodic loan portfolio review and allowance calculation resulted in an unallocated allowance for loan losses of 28% at March 31,June 30, 2000 and 32% at December 31, 1999. This fairly stable unallocated level supports the provision for loan losses for the quarter and the balance of the allowance for loan losses as of March 31,June 30, 2000. Management believes that the allowance balance of $58.0$58.3 million is sufficient to cover losses incurred in the loan portfolio and is appropriate based on applicable accounting standards. Other Income - ------------ Other income for the quarter ended March 31,June 30, 2000 was $16.7$17.0 million. This was a increase of $1.3$2.0 million, or 8.7%13.2%, over the comparable period in 1999. Excluding investment security gains, which decreasedincreased from $3.1$1.7 million in 1999 to $2.5$2.1 million in 2000, other income increased $1.9$1.6 million, or 15.7%11.9%. Increases were realized in every major category, except mortgage banking income. Investment management and trust services income increased $1.5$1.0 million, or 44.0%, primarily due to the continued roll-out of investment brokerage services at all eleven of26.0%. On May 1, 2000, the Corporation's subsidiary banks.twelfth affiliate, Fulton Financial Advisors, N.A. (FFA), became operational. FFA, which consolidated the Corporation's previously fragmented investment management and trust services business, provides the structure to expand this line of business throughout the Corporation's market. Service charges on deposit accounts increased $814,000,$713,000, or 17.1%13.8%, as a result of an increase in cash management income ($331,000,352,000, or 41.5%41.1%, increase) and overdraft fees (234,000,(227,000, or 13.9%12.1%, increase). Other service charges and fees increased $295,000,$276,000, or 10.6%9.3%, mainly due to debit card income. Mortgage banking income, which consists of gains on mortgage loan sales and servicing income, decreased $693,000,$437,000, or 54.0%35.9%. This decline was almost entirely due to a dropdecline in mortgage loan sale volume as interest rates have risen and refinance activity has therefore decreased. Other Expenses - -------------- Total other expenses for the firstsecond quarter of 2000 of $39.8$39.9 million increased $1.1 million,were essentially flat compared to 1999, increasing only $85,000, or 2.8%, from 1999.0.2%. The Corporation's efficiency ratio, which is the ratio of noninterest expense to fully taxable equivalent revenues (excluding security gains), decreased to 51.6%50.8% in 2000 from 53.4%52.4% in 1999. Salaries and employee benefits increased $1.4 million,$496,000, or 6.5%, in comparison to the first quarter of 1999. This increase reflectswas due to normal merit increases and an increase in average full-timethe number of full time equivalent employees from 2,3282,327 in 1999 to 2,3562,368 in 2000, a lower volume of mortgage originations, resulting in lower deferred salary expense, and the addition of manager level staff2000. Additional employees have been necessary to support expanding businessnew initiatives primarily in investment management and trust services.such as FFA. Other expenses, excluding salaries and benefits, remained fairly stable, decreasing $295,000,decreased $411,000, or 1.7%2.3%, from $17.3$17.7 million in 1999 to $17.0$17.3 million in 2000. The Corporation continues to monitor and manage its expenses to produce maximum 13 efficiency. Such efforts include centralization of the data processing function and other back office procedures when practical. Income Taxes - ------------ Income tax expense for the firstsecond quarter of 2000 was $10.6$11.0 million, a $900,000,$943,000, or 9.2%9.4%, increase from $9.7$10.1 million in 1999. The Corporation's effective tax ratesrate remained fairly stable at 29.6%29.8% in 2000 and 29.3%29.5% in 1999. The effective rate is lower than the federal statutory rate of 35% due mainly to investments in tax-free municipal securities and federal tax credits from investments in low and moderate income housing partnerships. Six Months ended June 30, 2000 versus Six Months ended June 30, 1999 - -------------------------------------------------------------------- Fulton Financial Corporation's net income for the first six months of 2000 increased $3.7 million, or 7.7%, in comparison to net income for the same period in 1999. Diluted net income per share increased $0.07, or 10.8%, compared to 1999. Net income for the first six months of 2000 of $51.2 million, or $0.72 per share (basic and diluted), represented an ROA of 1.69% and an ROE of 17.02%. This compares to 1999 net income of $47.6 million, or $0.66 per share (basic) and $0.65 per share (diluted -- 1.65% ROA and 15.54% ROE). The increase in net income in 2000 resulted from continued growth of the Corporation's core banking business, as shown by increases in both net interest income and non-interest income. These increases were offset by decreases in investment securities gains and a small increase in other expenses. Net Interest Income - ------------------- Net interest income increased $3.3 million, or 2.8%, for the first nine months of 1999. Overall, this increase was a result of growth in the Corporation's balance sheet, offset by a rising cost of funds. The following tables summarize the components of the increase in net interest income as well as the changes in average balances of interest-earning assets and interest-bearing liabilities from the first half of 1999 to the first half of 2000 and the average interest rates thereon. All dollar amounts are in thousands.
Six Months Ended June 30 Change -------------------------------------- ------------------------------------- 2000 1999 $ % ----------------- ----------------- ---------------- ----------------- Interest income ................. $221,379 $204,734 $16,645 8.1% Interest expense................. 98,421 85,111 13,310 15.6 -------- -------- ------- ---- Net interest income.............. $122,958 $119,623 $ 3,335 2.8% ======== ======== ======= ====
14
Six Months Ended June 30 -------------------------------------- 2000 1999 Change ----------------- ----------------- ---------------- Loans................................................. $ 4,509,845 $ 4,073,687 $ 436,158 Investment securities................................. 1,226,205 1,327,818 (101,613) Other earning assets.................................. 8,501 8,601 (100) ----------- ----------- ----------- Total interest-earning assets......................... $ 5,744,551 $ 5,410,106 $ 334,445 =========== =========== =========== Yield on earning assets (fully taxable equivalent).... 7.86% 7.71% 0.15% Deposits.............................................. $ 3,844,045 $ 3,797,097 $ 46,948 Short-term borrowings................................. 483,360 285,385 197,975 Long-term debt........................................ 330,928 298,583 32,345 ----------- ----------- ----------- Total interest-bearing liabilities.................... $ 4,658,333 $ 4,381,065 $ 277,268 =========== =========== =========== Cost of interest-bearing liabilities.................. 4.25% 3.92% 0.33% Net interest margin (fully taxable equivalent)........ 4.42% 4.54% (0.12%)
The 6.2% increase in average earning assets accounted for an interest income increase of approximately $12.8 million, with the remaining $3.8 million coming from the 15 basis point increase in average yields on total earning assets. As with the second quarter, the growth in earning assets resulted mainly from loans during the first six months of the year and the increase in average rates was a result of the interest rate environment in general. The Corporation's average loan portfolio grew by approximately $436 million, or 10.7%, mainly in commercial loans ($164 million, or 17.7% increase), commercial mortgages ($152 million or 14.1% increase) and home equity loans ($69 million or 22.2% increase). Loan growth has been strong due to favorable local economic conditions. Investment securities, excluding unrealized gains and losses, decreased $102 million, or 7.7%. Funds from maturing investments have generally been used to support loan growth rather than being re-invested in lower-yielding securities. As interest rates continued to rise during the first half of 2000, the Corporation was able to achieve a higher yield on earning assets than it did in 1999. However, the strength of the competition in its markets and the fact that much of the Corporation's loan portfolio has fixed rates, has not allowed the yields to grow in proportion to the prime lending rate. The Corporation's average prime lending rate increased 125 basis points from 7.75% in 1999 to 9.00% in 2000, whereas the yield on average loans has only increased seven basis points, from 8.27% in 1999 to 8.34% in 2000. Refer to the "Market Risk" section of this document for additional information on the Corporation's fixed rate versus floating rate loan portfolio. The 6.3% increase in average interest-bearing liabilities resulted in a $5.4 million increase in interest expense, with an additional $7.9 million increase attributable to the 33 basis point increase in the average cost of funds. Average short-term borrowings increased $198 million, or 69.4%, mainly as a funding alternative to support the strong loan growth in light of sluggish deposit growth. Due to the shorter-term nature of the Corporation's interest bearing liabilities, the 33 basis point increase in the cost of funds has been more dramatic - reflecting the change in the general interest rate environment - than that realized on the earning assets. The overall impact of this has been downward pressure on the Corporation's net interest margin, which decreased 12 basis points to 4.42% in 2000 as compared to 4.54% in 1999. 15 Provision for Loan Losses - ------------------------- The following table summarizes the activity in the Corporation's allowance for loan losses:
Six Months Ended June 30 ------------------------------ 2000 1999 ------------ ------------ (dollars in thousands) Loans outstanding at end of period (net of unearned)............... $ 4,571,831 $ 4,172,560 ============ ============ Daily average balance of loans and leases.......................... $ 4,509,845 $ 4,073,687 ============ ============ Balance of allowance for loan losses at beginning of period........................................ $ 57,631 $ 57,415 Loans charged-off: Commercial, financial and agricultural......................... 2,084 772 Real estate - mortgage......................................... 631 593 Consumer....................................................... 3,348 3,861 Leasing and other.............................................. 180 68 ------------ ------------ Total loans charged-off........................................ 6,243 5,294 ------------ ------------ Recoveries of loans previously charged-off: Commercial, financial and agricultural......................... 1,065 1,351 Real estate - mortgage......................................... 340 471 Consumer....................................................... 1,423 947 Leasing and other.............................................. 14 - ------------ ------------ Total recoveries............................................... 2,842 2,769 ------------ ------------ Net loans charged-off.............................................. 3,401 2,525 Provision for loan losses.......................................... 4,050 4,052 ------------ ------------ Balance at end of period........................................... $ 58,280 $ 58,942 ============ ============ Net charge-offs to average loans (annualized)...................... 0.15% 0.12% ============ ============ Allowance for loan losses to loans outstanding..................... 1.27% 1.41% ============ ============
Refer to the "Provision for Loan Losses" section of Management's Discussion of the second quarter results of operations for a summary of the Corporation's process for establishing the provision and allowance for loan losses. For the first six months of 2000, net charge-offs totaled $3.4 million, or 0.15%, of average loans on an annualized basis. This compares to $2.5 million, or 0.12%, for the first half of 1999 and 0.19% for all of 1999. Non-performing loans, including loans 90 days past due and still accruing, to total loans were 0.56% at June 30, 2000 as compared to 0.61% at December 31, 1999 and June 30, 1999. The provision for loan losses of $4.1 million for the first half of 2000 was essentially unchanged from 1999. The fact that the provision did not increase, despite a 10.7% increase in average loans, reflects the strong asset quality of the Corporation . The Corporation's periodic loan portfolio review and allowance calculation resulted in an unallocated allowance for loan losses of 28% at June 30, 2000 and 32% at December 31, 1999. This fairly stable unallocated level supports the provision for loan losses for the quarter and the balance of the allowance for loan losses as of June 30, 2000. Management believes that the allowance balance of $58.3 million is sufficient to cover losses incurred in the loan portfolio and appropriate based on applicable accounting standards. 16 Other Income - ------------ Other income for the six months ended June 30, 2000 was $33.7 million. This was an increase of $3.3 million, or 11.0%, over the comparable period in 1999. Excluding investment security gains, which decreased from $4.7 million in 1999 to $4.5 million in 2000, other income increased $3.5 million or 13.7%. The most significant increase, $2.5 million, or 34.3%, was realized in investment management and trust services income as a result of the formation of FFA and the continued roll out of brokerage services to all of the Corporation's affiliate banks. Service charges on deposit accounts increased $1.5 million, or 15.4%, as a result of cash management income ($682,000, or 41.2% increase) and overdraft fees ($460,000, or 13.0% increase). Other service charges and fees increased $571,000, or 9.9%, as a result of higher debit card revenue ($307,000, or 27.0% increase) and merchant fees ($318,000, or 32.3% increase) and other special fee revenue. Mortgage banking income decreased $1.1 million, or 45.2% as a result of higher interest rates reducing refinance volume. Other Expenses - -------------- Total other expenses for the first six months of 2000 of $79.7 million showed a moderate increase of $1.2 million, or 1.5%, over 1999. The Corporation's efficiency ratio continued to improve during the first six months of 2000, declining to 51.2% as compared to 52.9% in 1999. Salaries and employee benefits increased $1.9 million, or 4.3%, in comparison to the first six months of 1999. This increase was the result of an increase in the average number of full time equivalent employees to 2,361 in 2000 from 2,328 in 1999 as well as normal merit increases. Excluding salaries and benefits expense, other expenses decrease $706,000, or 2.0%. This decrease resulted from the Corporation's efforts to control expenses. Income Taxes - ------------ Income tax expense for the first six months of 2000 was $21.7 million as compared to $19.8 million for the comparable period in 1999, a $1.8 million, or 9.3% increase. The effective tax rate was fairly consistent at 29.7% in 2000 and 29.4% in 1999. FINANCIAL CONDITION - ------------------- At March 31,June 30, 2000, the Corporation had total assets of $6.1$6.2 billion, reflecting an increase of $59.9$114.6 million, or 1.0%1.9%, from December 31, 1999. The increase in assets was almost entirely due to loan growth, with loans (net of unearned) growing $81.2increasing $149.4 million, or 1.8%3.4%, to $4.5$4.6 billion at MarchJune 30, 2000 as compared to $4.4 billion at December 31, 2000.1999. As discussed in the "Net Interest Income" section, most of the recent loan growth has been realized primarily in commercial loans and mortgages. These loan typesPremises and equipment increased $66.0$5.7 million, or 2.9%7.2%, from December 31, 1999 to March 31, 2000.as construction continued on the new building at the Corporation's main headquarters. Offsetting the increase in loansasset growth was a $33.3$66.9 million, or 5.5%, decrease in investment securities as proceeds from maturities and payoffs were used to support the growth in the loan portfolio. Total deposits increased $123.1 million, or 2.7%, decreasemainly in investment securities. This decrease resulted from a $15.6non-interest bearing, which grew $84.8 million, increase in the net unrealized loss on investment securitiesor 11.7%. With respect to borrowings, long-term debt decreased $21.6 million, or 6.6%, as a result of interest rate and market conditions. The remaining decrease in investment securities balances resultedmaturities of long-term advances from the net effect of normal maturities and payoffs. Deposits increased $100.7Federal Home Loan Bank. These borrowings were replaced by short-term borrowings ($26.2 million, or 2.2%, to $4.6 billion at March 31, 2000. Of this increase, $68.8 million was realized in noninterest-bearing (a 9.5%5.4% increase), while the remainder was interest-bearing deposits (a 0.8% increase). The growth in noninterest-bearing deposits was somewhat distorted by large deposits by certain commercial customers on March 31, 2000. This also contributed to the $12.8 million, or 5.2%, increase in cash and due from banks. Short-term borrowings, which include federal funds purchased and repurchase agreements with customers and other third parties, declined $36.2 million, or 7.4%, to $451.4 million at March 31, 2000. Long-term debt also decreased, ending the quarter at $323.4, down $5.1 million. The Corporation was able to fund the strong loan growth during the quarter primarily with deposits, thus temporarily reducing its reliance on borrowings. as long-term fixed rates were not as attractive. 17 Capital Resources - ----------------- Shareholders' equity decreased $4.6$18.4 million, or 0.7%3.0%, during the first threesix months of 2000. This decrease was due to: 1) the Corporation continuing to buy back its stock pursuant to the repurchase plans discussed later 14 in this section,below, resulting in a $9.2$38.1 million, or 53.4%225%, increase in treasury stock; and 2) the net unrealized losses on available for sale investment securities, which resulted in a $10.1$10.0 million, or 85.0%84.7%, increase in the shareholders' equity portion of the loss. Offsetting these decreases was the net increase toin retained earnings as a result of net income for the period, less dividends paid to shareholders. The 40.4%40.2% dividend payout ratio on total net income of $25.3$51.2 million for the quarterfirst six months of 2000 resulted in a net increase toin retained earnings of $15.1$30.6 million. Common stock, capital surplus and retained earnings were also adjusted during the quarterfirst half of the year for the estimated impact of the 5% stock dividend declaredpaid on April 18,May 31, 2000. See Note B to the financial statements. On December 31, 1999, theThe Corporation's Board of Directors has approved an open market repurchase program for the Corporation's common stock for up to 1.05 million shares.shares through December 31, 2000. In January, 2000, the Board also approved a second open market repurchase program of up to 2.1 million shares. The second plan was adopted as a means to minimize any increase in the number of outstanding shares of the Corporation as a result of its merger with SFC. To consummate the merger, the Corporation will issueissued 2.1 million treasury shares acquired under these repurchase programs and, if necessary, shares acquired under prior repurchase programs or authorized but unissued shares.programs. Through March 31,June 30, 2000, 376,000 shares had been repurchased under the 1.05 million share program (310,000 shares during the first quarterhalf of 2000) and 338,0001.8 million shares had been repurchased under the 2.1 million share program. Current capital guidelines measure the adequacy of a bank holding company's capital by taking into consideration the differences in risk associated with holding various types of assets as well as exposure to off-balance sheet commitments. The guidelines call for a minimum risk-based Tier I capital percentage of 4.0% and a minimum risk-based total capital percentage of 8.0%. Tier I capital includes common shareholders' equity less goodwill and non-qualified intangible assets. Total capital includes all Tier I capital components plus the allowance for loan losses. The Corporation is also subject to a "leverage capital" requirement, which compares capital (using the definition of Tier I capital) to total balance sheet assets and is intended to supplement the risk based capital ratios in measuring capital adequacy. The minimum acceptable leverage capital ratio is 3.0% for institutions such as the Corporation which are highly-rated in terms of safety and soundness. Other institutions are expected to maintain capital levels at least one or two percent above the minimum. As of March 31,June 30, 2000, the Corporation and each of its subsidiaries met the minimum capital requirements. In addition, the Corporation and each of its subsidiaries' capital ratios exceeded the amounts required to be considered "well-capitalized" as defined in the regulations. The Corporation's total and Tier I risk-based capital ratios have placed the Corporation in the top half of its self-defined peer group over the past year. The Corporation's ratio of Tier I capital to average assets has placed it in the top quartile in comparison to its peers. 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 entities 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. 1518 Equity Market Price Risk - ------------------------ Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Corporation. The Corporation's equity investments consist of common stocks of publicly traded financial institutions (cost basis of approximately $52.0$52.6 million) and U.S. Government agency stock (cost basis of approximately $33.3$33.4 million). The Corporation's financial institutions stock portfolio had net unrealized gains of approximately $5.0$2.3 million at March 31,June 30, 2000. Although the book value of equity investments accounted for only 1.5%1.4% 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. Although the net unrealized gains at the end of the quarter were less than $5 million, gross unrealized gains were $10.0 million. 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 in the "Interest Rate Sensitivity" table on the following page since none have maturity dates. Interest Rate Risk - ------------------ 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. 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. 1619
FULTON FINANCIAL CORPORATION INTEREST RATE SENSITIVITY Expected Maturity Period (dollars in thousands)
Expected Maturity Period --------------------------------------------------------------------------------- (less than)-------------------------------------------------------------------------------------- Estimated Less than Greater than 1 Year 1-2 Years 2-3 Years 3-4 Years 4-5 Years ------------- ------------- ------------- ------------- -----------------5 Years Total Fair Value ----------- --------- --------- --------- --------- ------------ ----------- ------------ Fixed rate loans (1) $ 728,750808,528 $ 552,897574,042 $ 454,580471,748 $ 340,432359,926 $ 239,803238,052 $ 779,376 $ 3,231,672 $ 3,174,381 Average rate (1) 8.03% 7.80% 7.77% 7.78% 7.78%7.96% 7.85% 7.82% 7.81% 7.87% 7.72% 7.84% Floating rate loans (2) 409,199 148,292 124,700 113,439 82,807418,215 140,616 130,295 102,372 82,300 466,361 1,340,159 1,333,334 Average rate 9.43% 9.22% 9.07% 9.07% 8.37%9.76% 9.53% 9.62% 9.68% 8.72% 9.46% 9.55% Fixed rate investments (3) 189,027 175,444 225,625 143,132 124,405166,361 151,130 251,395 140,861 139,837 238,994 1,088,577 1,052,066 Average rate 6.07% 6.06% 6.15% 6.10% 6.19%6.05% 6.17% 6.18% 6.25% 6.14% 6.38% 6.22% Floating rate investments (3) 250 50 - 1,000 - 14,593 15,893 15,535 Average rate 8.00% 7.50% - 4.17% - 6.59% 6.46% Other interest-earning assets 3,7286,963 - - - - - 6,963 6,963 Average rate 6.55%5.43% - - - - --------------------------------------------------------------------------------- 5.43% ----------------------------------------------------------------------------------------------------- Total $ 1,330,9541,400,317 $ 876,683865,838 $ 804,905853,437 $ 598,003604,158 $ 447,015460,190 $1,499,325 $ 5,683,265 $ 5,582,278 Average rate 8.18% 7.69% 7.52% 7.62% 7.45% --------------------------------------------------------------------------------8.26% 7.83% 7.61% 7.76% 7.50% 8.04% 7.93% ----------------------------------------------------------------------------------------------------- Fixed rate deposits (4) $ 1,343,4071,293,506 $ 549,976592,869 $ 176,116193,809 $ 41,33132,268 $ 39,06246,874 $ 15,886 $ 2,175,213 $ 2,167,547 Average rate 5.15% 5.68% 5.84% 5.51% 5.88%5.33% 5.91% 6.01% 5.46% 6.18% 5.60% 5.57% Floating rate deposits (5) 583,369 79,911 76,167 76,167 76,167532,529 79,753 76,226 76,226 76,226 844,156 1,685,116 1,684,917 Average rate 3.59% 1.59% 1.52% 1.52% 1.52%3.92% 1.79% 1.72% 1.72% 1.72% 1.50% 2.31% Fixed rate borrowings (6) 83,322 70,780 85,280 67,780 28067,133 77,844 90,347 67,850 353 3,110 306,637 367,661 Average rate 5.84% 4.60%6.30% 4.57% 5.43% 5.05% 5.76%5.46% 5.80% 5.34% Floating rate borrowings (7) 451,396 - - - -513,743 513,743 513,743 Average rate 5.34% - - -5.87% 5.87% ----------------------------------------------------------------------------------------------------- Total $ 2,406,910 $ 750,467 $ 360,382 $ 176,344 $ 123,453 $ 863,152 $ 4,680,709 $ 4,733,868 Average rate 5.16% 5.33% 4.96% 3.69% 3.42% 1.59% 4.42% -----------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Total $ 2,461,494 $ 700,667 $ 337,563 $ 185,278 $ 115,509 Average rate 4.84% 5.10% 4.76% 3.70% 3.00% --------------------------------------------------------------------------------
Expected Maturity Date Estimated (greater than) 5 Years Total Fair Value ---------------------- --------------- ------------- Fixed rate loans (1) $ 794,588 $ 3,111,050 $ 3,040,069 Average rate (1) 7.73% 7.83% Floating rate loans (2) 514,082 1,392,519 1,390,405 Average rate 8.72% 9.02% Fixed rate investments (3) 264,361 1,121,994 1,083,507 Average rate 6.14% 6.12% Floating rate investments (3) 15,145 16,445 16,232 Average rate 6.35% 6.25% Other interest-earning assets - 3,728 3,728 Average rate - 6.55% ------------------------------------------------------- Total $ 1,588,176 $ 5,645,736 $ 5,533,941 Average rate 7.77% 7.78% ------------------------------------------------------- Fixed rate deposits (4) $ 17,056 $ 2,166,948 $ 2,152,130 Average rate 5.54% 5.36% Floating rate deposits (5) 795,236 1,687,017 1,686,671 Average rate 1.39% 2.18% Fixed rate borrowings (6) 15,752 323,194 310,106 Average rate 5.04% 5.26% Floating rate borrowings (7) - 451,396 451,396 Average rate - 5.34% ------------------------------------------------------- Total $ 828,044 $ 4,628,555 $ 4,600,303 Average rate 1.54% 4.19% -------------------------------------------------------
Assumptions: 1) Amounts are based on contractual payments and 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 on contractual maturities, adjusted for expected prepayments on mortgage-backed securities, and expected calls on other securities. 4) Amounts are based on contractual maturities of time deposits. 5) Money market, Super NOW, NOW and savings accounts are placed based on history of deposit flows. 6) Amounts are based on contractual maturities of Federal Home Loan Bank advances. 7) Amounts are Federal Funds purchased and securities sold under agreements to repurchase, which mature in less than one year. 1720 The Corporation uses three complementary methods to measure and manage interest rate risk. They are static gap analysis, simulation of net interest income, and estimates of economic value of equity. Using these measurements in tandem provides a reasonably comprehensive summary of the magnitude of interest rate risk in the Corporation, level of risk as time evolves, and exposure to changes in interest rate relationships. Static gap analysis 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 into repricing periods based upon historical balance performance. Repricing for mortgage loans held for sale 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 percent of total earning assets. The Corporation was positioned within this range throughout the first quartersix months of 2000. At March 31,June 30, 2000, the cumulative 6-month gap was 0.94.0.92. 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. As of March 31,June 30, 2000, the Corporation had a larger exposure to upward rate shocks, with net interest income at risk of loss over the next twelve months of 0.2%1.8%, 4.0%0.8% and 5.1%1.4% where interest rates are shocked upward by 100, 200 and 300 basis points, respectively. 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 in interest rates. As of March 31,June 30, 2000, upward shocks of 100, 200 and 300 basis points were estimated to have negative effects upon economic value of 0.4%1.8%, 0.3%4.3% and 0.3%6.9%, respectively. Downward shocks of 100 and 200 basis points were estimated to have negative effects upon economic value of 0.9% and 0.6%, respectively. 1821 PART II -- OTHER INFORMATION - ---------------------------- Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits -- The following is a list of the exhibits required by Item 601 of Regulation S-K and filed as part of this report: (1) 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. (2) Instruments defining the right of securities holders, including indentures: (a) Rights Agreement 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. (3) 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. (4) Financial Data Schedule - March 31,June 30, 2000 (b) Reports on Form 8-K: (1) Form 8-K dated March 7, 2000 reporting the execution of an Agreement and Plan of Merger between Fulton Financial Corporation and Skylands Financial Corporation. 19- None 22 FULTON FINANCIAL CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements 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 Date: May 8,August 10, 2000 -------------------------------- /s/ Rufus A. Fulton, Jr. -------------------------- --------------------------------------------------------------------- Rufus A. Fulton, Jr. Chairman, President and Chief Executive Officer Date: May 8,August 10, 2000 ------------------------------- /s/ Charles J. Nugent -------------------------- --------------------------------------------------------------------- Charles J. Nugent Executive Vice President and Chief Financial Officer 2023 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. 4. Instruments defining the rights of security holders, including indentures. (a) Rights Agreement dated June 20, 1989, as amended and restated on April 27, 1999 between Fulton Financial Corporation and Fulton Bank - Incorporated by reference to Exhibit 1 of the Fulton Financial Corporation Current Report on Form 8-K dated April 27, 1999. 10. Material Contracts (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; Charles J. Nugent, as of November 19, 1992; and Richard J Ashby, Jr., as of May 17, 1988. (b) Incentive Stock Option Plan adopted September 19, 1995 - Incorporated by reference from Exhibit A of Fulton Financial Corporation's 1996 Proxy Statement. 27. Financial data schedule - March 31,June 30, 2000. 2124