UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000,March 31, 2001 , 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
------------------------------------------------------------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2195389
------------------------------------------------------------------------------------------------------------------------------------
(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
------------------------------------------------------------------------------------------------------------------------------------
(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 - 71,839,01375,901,281 shares outstanding as of
-------------------------------------------------------------------
October 31, 2000.
----------------
1May 4, 2001.
-----------
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000MARCH 31, 2001
INDEX
-----
Description Page
-
----------- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
(a) Consolidated Balance Sheets -
September 30, 2000March 31, 2001 and December 31, 1999.............................2000............................................ 3
(b) Consolidated Statements of Income -
Three and nine months ended September 30, 2000March 31, 2001 and 1999..............2000...................................... 4
(c) Consolidated Statements of Shareholders' Equity -
NineThree months ended September 30, 2000March 31, 2001 and 1999........................2000...................................... 5
(d) Consolidated Statements of Cash Flows -
NineThree months ended September 30, 2000March 31, 2001 and 1999........................2000...................................... 6
(e) Notes to Consolidated Financial Statements - September 30, 2000......March 31, 2001..................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................Operations.............................. 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 18Risk................. 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ 23
SIGNATURES............................................................... 248-K........................................... 20
SIGNATURES.......................................................................... 21
2
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per-share data)
September 30March 31 December 31
2001 2000
1999
--------------- -------------------------------------------------------
ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks ..............................................................banks................................................................ $ 237,913245,496 $ 245,572267,178
Interest-bearing deposits with other banks ........................................... 3,161 1,798banks............................................. 1,885 3,199
Mortgage loans held for sale ......................................................... 3,667 1,016sale........................................................... 14,233 5,241
Investment securities:
Held to maturity (Fair(estimated fair value: $95,277$68,667 in 20002001 and $84,777$83,836 in
1999) .............. 96,590 85,4742000)............................................................................ 68,132 84,762
Available for sale .............................................................. 1,130,482 1,137,846sale................................................................ 1,140,779 1,140,646
Loans, ................................................................................ 4,816,449 4,432,030net of unearned income.......................................................... 4,846,995 4,866,767
Less: Allowance for loan losses ................................................ (61,072) (57,631)
Unearned income .......................................................... (12,750) (9,623)losses.................................................. (60,357) (60,269)
----------- -----------------------
Net Loans ................................................... 4,742,627 4,364,776Loans..................................................... 4,786,638 4,806,498
----------- -----------------------
Premises and equipment ............................................................... 93,689 79,217equipment................................................................. 101,027 97,147
Accrued interest receivable .......................................................... 37,828 31,496receivable............................................................ 38,887 40,411
Other assets ......................................................................... 132,816 122,824assets........................................................................... 127,575 126,073
----------- -----------------------
Total Assets ................................................Assets.................................................. $ 6,478,7736,524,652 $ 6,070,0196,571,155
=========== =======================
LIABILITIES
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing .............................................................Noninterest-bearing............................................................... $ 807,655839,536 $ 724,778
Interest-bearing ................................................................ 4,016,839 3,822,035857,696
Interest-bearing.................................................................. 4,170,491 4,076,709
----------- -----------------------
Total Deposits .............................................. 4,824,494 4,546,813Deposits................................................ 5,010,027 4,934,405
----------- -----------------------
Short-term borrowings:
Securities sold under agreements to repurchase................................... 273,309 309,790repurchase.................................... 262,284 248,375
Federal funds purchased.......................................................... 179,000 172,250purchased........................................................... 48,000 155,000
Demand notes of U.S. Treasury ................................................... 3,871 5,506Treasury..................................................... 4,189 4,791
----------- -----------------------
Total Short-Term Borrowings ................................. 456,180 487,546Borrowings................................... 314,473 408,166
----------- -----------------------
Accrued interest payable ............................................................. 42,379 32,313payable............................................................... 41,846 41,637
Other liabilities .................................................................... 60,120 60,803liabilities...................................................................... 70,872 65,638
Long-term debt ....................................................................... 448,575 328,250debt......................................................................... 382,005 441,973
----------- -----------------------
Total Liabilities ........................................... 5,831,748 5,455,725Liabilities............................................. 5,819,223 5,891,819
----------- -----------------------
SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Common stock, ($2.50 par)
Shares:$2.50 par; Authorized 400,000,000- 400 million shares; Issued 72,824,439;- 76.5 million;
Outstanding 71,756,343 (71,924,447- 75.8 million in 1999) ........2001 and 75.5 million in 2000....................... 191,070 182,052
173,392
Capital surplus ...................................................................... 444,899 394,234surplus........................................................................ 505,358 444,570
Retained earnings .................................................................... 52,130 75,482earnings...................................................................... 12,469 67,201
Accumulated other comprehensive income................................................ (12,298) (11,846)income................................................. 9,195 2,358
Treasury stock, at cost (1,068,096(709,000 shares in 20002001 and 899,992944,000 shares in 1999)......... (19,758) (16,968)2000)............ (12,663) (16,845)
----------- -----------------------
Total Shareholders' Equity .................................. 647,025 614,294Equity.................................... 705,429 679,336
----------- -----------------------
Total Liabilities and Shareholders' Equity...................Equity.................... $ 6,478,773 $ 6,070,0196,524,652 $6,571,155
=========== =======================
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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
Nine Months Ended
September 30 September 30
--------------------------------- -----------------------------March 31
---------------------------------------
2001 2000
1999 2000 1999
-------------- ------------- ---------- -------------------------------------------------
INTEREST INCOME
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Loans, including fees ......................................fees................................................... $ 101,169101,005 $ 86,671 $ 287,357 $ 253,13491,368
Investment securities:
Taxable ............................................... 14,345 15,452 42,664 47,661
Tax-exempt ............................................ 2,147 2,271 6,504 6,119
Dividends ............................................. 1,133 991 3,347 3,004Taxable................................................................. 14,043 14,189
Tax-exempt.............................................................. 2,144 2,205
Dividends............................................................... 1,132 1,105
Other interest income....................................... 188 26 489 227
-------------- ------------- ----------income.................................................... 182 144
----------- ----------
Total Interest Income ............ 118,982 105,411 340,361 310,145Income................................................. 118,506 109,011
INTEREST EXPENSE
- ---------------------------------------------------------------------------------------------------------------------------------
Deposits ................................................... 42,706 35,511 119,268 106,851----------------------------------------------------------------------------------------------------------------
Deposits................................................................. 44,017 37,226
Short-term borrowings ...................................... 7,460 4,302 20,724 10,401borrowings.................................................... 5,304 6,256
Long-term debt ............................................. 4,479 3,894 13,074 11,566
-------------- ------------- ----------debt........................................................... 5,281 4,409
----------- ----------
Total Interest Expense ............ 54,645 43,707 153,066 128,818
-------------- ------------- ----------Expense................................................ 54,602 47,891
----------- ----------
Net Interest Income ............... 64,337 61,704 187,295 181,327Income................................................... 63,904 61,120
PROVISION FOR LOAN LOSSES .................................. 2,345 1,997 6,395 6,049
-------------- ------------- ----------LOSSES................................................ 2,779 2,025
----------- ----------
Net Interest Income After
Provision for Loan Losses ...... 61,992 59,707 180,900 175,278
-------------- ------------- ----------Losses............................................ 61,125 59,095
----------- ----------
OTHER INCOME
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Investment management and trust services.................... 4,769 4,635 14,747 12,066services................................. 6,103 4,921
Service charges on deposit accounts ........................ 6,226 5,494 17,700 15,441accounts...................................... 6,467 5,584
Other service charges and fees ............................. 3,699 2,760 10,019 8,509fees........................................... 3,641 3,081
Mortgage banking income..................................... 842 935 2,213 3,436income.................................................. 1,689 590
Investment securities gains ................................ 1,354 1,587 5,895 6,313
-------------- ------------- ----------gains.............................................. 3,908 2,476
----------- ----------
Total Other Income ................ 16,890 15,411 50,574 45,765Income..................................................... 21,808 16,652
OTHER EXPENSES
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits ............................. 24,016 22,520 69,362 65,987benefits........................................... 25,549 22,745
Net occupancy expense ...................................... 3,441 3,361 10,443 9,803expense.................................................... 3,831 3,591
Equipment expense .......................................... 2,494 2,345 7,218 7,023
Special services ........................................... 2,739 2,693 8,066 8,347
Other ...................................................... 9,010 9,487 26,320 27,782
-------------- ------------- ----------expense........................................................ 2,526 2,483
Data processing.......................................................... 2,714 2,773
Other.................................................................... 9,909 8,194
----------- ----------
Total Other Expenses .............. 41,700 40,406 121,409 118,942
-------------- ------------- ----------Expenses................................................... 44,529 39,786
----------- ----------
Income Before Income Taxes ........ 37,182 34,712 110,065 102,101Taxes............................................. 38,404 35,961
INCOME TAXES................................................ 11,061 10,303 32,723 30,122
-------------- ------------- ----------TAXES............................................................. 11,160 10,647
----------- ----------
Net Income ........................Income............................................................. $ 26,12127,244 $ 24,409 $ 77,342 $ 71,979
============== ============= ==========25,314
=========== ==========
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA:
Net income (basic)................................................................................................. $ 0.370.36 $ 0.34
$ 1.09 $ 0.99
Net income (diluted)........................................ 0.37..................................................... 0.36 0.34
1.08 0.99
Cash dividends ............................................. 0.160 0.143 0.463 0.416dividends........................................................... 0.152 0.136
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
4
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2001 AND 2000 AND 1999
Accumulated
Other
Comprehen-
Common Capital Retained Sive Income Treasurysive
(Dollars in thousands, except per-share data) Stock Surplus Earnings (Loss) Stock TotalIncome
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999................................. $173,392 $394,2342000.................................. $ 75,482 $(11,846)182,052 $ (16,968)444,570 $ 614,29467,201 $ 2,358
Comprehensive income:
Net income................................................. 77,342 77,342income............................................... 27,244
Other - net unrealized gain on securities (net of $3.7
million tax expense)............................. 6,837
Total comprehensive income..........................
Stock dividends declared - 5% (3.6 million shares)............ 9,018 61,410 (70,428)
Stock issued (232,000 shares of treasury stock)............... (622)
Cash dividends - $0.152 per share............................. (11,548)
-------------------------------------------------------------------
Balance at March 31, 2001..................................... $ 191,070 $ 505,358 $ 12,469 $ 9,195
===================================================================
Balance at December 31, 1999.................................. $ 173,392 $ 394,234 $ 75,482 $ (11,846)
Comprehensive income:
Net income............................................... 25,314
Other - net unrealized loss on securities (net of $243,000$5.4
million tax benefit)......................... (452) (452)
---------............................. (10,064)
Total comprehensive income.............................. 76,890
---------income..........................
Stock dividends issueddeclared - 5% (3.5(3.6 million shares)............. 8,660 59,065 (67,796) (71)............ 8,492 57,929 (66,421)
Stock issued for acquisition of Skylands Financial
Corporation (2.1 million shares)........................ (7,421) 39,282 31,861
Stock issued (161,000(62,000 shares of treasury stock).............. (979) 3,090 2,111................ (434)
Acquisition of treasury stock (2.4 million(681,000 shares)........... (45,162) (45,162)................
Cash dividends - $0.463$0.136 per share............................ (32,898) (32,898)
--------------------------------------------------------------------share............................. (10,221)
-------------------------------------------------------------------
Balance at September 30, 2000................................ $182,052 $444,899March 31, 2000..................................... $ 52,130 $(12,298)181,884 $ (19,758)451,729 $ 647,025
====================================================================24,154 $ (21,910)
===================================================================
Treasury
Stock Total
------------------------------------
Balance at December 31, 1998................................. $157,638 $293,897 $136,6682000.................................. $ 23,619(16,845) $ (3,488) $ 608,334679,336
Comprehensive income:
Net income.............................................. 71,979 71,979income............................................... 27,244
Other - net unrealized gain on securities (net of $3.7
million tax expense)............................. 6,837
---------------
Total comprehensive income.......................... 34,081
---------------
Stock dividends declared - 5% (3.6 million shares)............ -
Stock issued (232,000 shares of treasury stock)............... 4,182 3,560
Cash dividends - $0.152 per share............................. (11,548)
---------------------------------
Balance at March 31, 2001..................................... $ (12,663) $ 705,429
=================================
Balance at December 31, 1999.................................. $ (16,968) $ 614,294
Comprehensive income:
Net income............................................... 25,314
Other - net unrealized loss on securities (net of $14.0$5.4
million tax benefit).......... (26,036) (26,036)
---------............................. (10,064)
---------------
Total comprehensive income......................... 45,943
---------income.......................... 15,250
---------------
Stock dividends issueddeclared - 10% (6.65% (3.6 million shares)............ 15,754 102,099 (117,917 ) (64)-
Stock issued (149,000(62,000 shares of treasury stock) ............. (1,286) 3,104 1,818................ 1,002 568
Acquisition of treasury stock (589,000(681,000 shares)............... (11,535) (11,535)................ (10,153) (10,153)
Cash dividends - $0.416$0.136 per share............................ (30,197 ) (30,197)
--------------------------------------------------------------------share............................. (10,221)
---------------------------------
Balance at September 30, 1999................................ $173,392 $394,710March 31, 2000..................................... $ 60,533(26,119) $ (2,417) $ (11,919) $ 614,299
====================================================================
- -----------------------------------------------------------------------------------------------------------------------------------609,738
==================================
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
5
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
NineThree Months Ended
September 30
-------------------------------March 31
---------------------------------
2001 2000
1999
------------- ----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income........................................................................Income................................................................. $ 77,34227,244 $ 71,97925,314
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses ................................................... 6,395 6,049losses............................................. 2,779 2,025
Depreciation and amortization of premises and equipment ..................... 7,589 7,364equipment............... 2,627 2,536
Net amortization of investment security premiums ............................ 323 1,026premiums...................... 61 131
Investment security gains ................................................... (5,895) (6,313)gains............................................. (3,908) (2,476)
Net (increase) decreaseincrease in mortgage loans held for sale...................... (2,651) 6,185sale.......................... (8,992) (403)
Amortization of intangible assets ........................................... 1,047 974
(Increase) decreaseassets..................................... 826 328
Decrease (increase) in accrued interest receivable .......................... (5,086) 2,938receivable.................... 1,524 (115)
Decrease in other assets .................................................... 6,760 4,321assets.............................................. 8,615 8,718
Increase (decrease) in accrued interest payable ............................. 9,674 (567)
(Decrease) increasepayable.................................. 209 1,213
Increase in other liabilities..................................... (3,953) 3,074
------------- -------------liabilities......................................... 5,215 3,796
--------------- --------------
Total adjustments...................................................... 14,203 25,051
------------- -------------adjustments............................................... 8,956 15,753
--------------- --------------
Net cash provided by operating activities .............................. 91,545 97,030
------------- -------------activities........................ 36,200 41,067
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale ............................. 24,089 14,434sale....................... 17,193 4,809
Proceeds from maturities of securities held to maturity .......................... 30,514 78,331maturity.................... 17,556 9,285
Proceeds from maturities of securities available for sale ........................ 127,924 250,978sale.................. 159,528 40,422
Purchase of securities held to maturity .......................................... (1,683) (917)maturity.................................... (926) (346)
Purchase of securities available for sale ........................................ (123,606) (291,236)
(Increase) decreasesale.................................. (162,489) (33,964)
Increase (decrease) in short-term investments .................................... (1,069) 1,741investments.............................. 1,314 (511)
Net increasedecrease (increase) in loans ............................................................ (217,123) (257,107)
Cash acquired from Skylands Financial Corporation................................. 11,632loans........................................... 17,081 (82,784)
Purchase of Dearden Maguire................................................ (14,624) -
Purchase of premises and equipment................................................ (18,284) (9,249)
------------- -------------equipment......................................... (6,507) (4,771)
--------------- --------------
Net cash provided by (used in) investing activities .................... (167,606) (213,025)
------------- -------------activities.............. 28,126 (67,860)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (Decrease) increase (decrease) in demand and savings deposits ........................... 3,513 (59,194)deposits..................... (24,753) 88,673
Net increase (decrease) in time deposits ......................................... 58,230 (27,415)
Increasedeposits.............................................. 100,375 12,042
Decrease in long-term debt........................................................ 120,325 1,757
(Decrease) increasedebt................................................. (59,968) (5,056)
Decrease in short-term borrowings ..................................... (38,766) 218,669borrowings.......................................... (93,693) (36,150)
Dividends paid ................................................................... (31,778) (29,230)paid............................................................. (11,529) (10,288)
Net proceeds from issuance of common stock ....................................... 2,040 1,754stock................................. 3,560 568
Acquisition of treasury stock .................................................... (45,162) (11,535)
------------- -------------stock.............................................. - (10,153)
--------------- --------------
Net cash (used in) provided by financing activities............................... 68,402 94,806
------------- -------------activities.............. (86,008) 39,636
--------------- --------------
Net Decrease(Decrease) Increase in Cash and Due From Banks .......................................... (7,659) (21,189)Banks......................... (21,682) 12,843
Cash and Due From Banks at Beginning of Period ...................................Period............................. 267,178 245,572
247,558
------------- ---------------------------- --------------
Cash and Due From Banks at End of Period .........................................Period................................... $ 237,913245,496 $ 226,369
============= =============258,415
=============== ==============
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest ....................................................................Interest.............................................................. $ 143,39254,393 $ 129,38546,678
Income taxes ................................................................ 28,738 22,113
Stock issued for acquisition of Skylands Financial Corporation ................... 31,861taxes.......................................................... - - -----------------------------------------------------------------------------------------------------------------------------500
- --------------------------------------------------------------------------------
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 nine month periodsperiod ended September 30, 2000March 31, 2001
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.2001.
NOTE B - 5% Stock DividendDividends
The Corporation issueddeclared a 5% stock dividend on April 12, 2001 which will be
paid on May 31, 2000.25, 2001 to shareholders of record on May 2, 2001. 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 72.1 million 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. DilutedFor diluted net income per
share, is calculated as 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 Nine months ended
September 30 September 30
---------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Weighted average shares outstanding (basic)............. 71,030 72,393 71,031 72,540
Impact of common stock equivalents...................... 470 431 377 439
-------- -------- -------- --------
Weighted average shares outstanding (diluted)........... 71,500 72,824 71,408 72,979
======== ======== ======== ========
Three months ended
March 31,
---------------------
2001 2000
---- ----
Weighted average shares outstanding (basic)..... 75,663 75,230
Impact of common stock equivalents.............. 477 323
------ ------
Weighted average shares outstanding (diluted)... 76,140 75,553
====== ======
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):
2001 2000 1999
---- ----
Unrealized holding lossesgains (losses) arising during period...............................period.............. $ 3,3809,377 $ (21,933)(8,455)
Less: reclassification adjustment for gains included
in net income............ 3,832 4,103
--------- ----------income.................................................. 2,540 1,609
---------------- ---------------
Net unrealized lossesgains (losses) on securities...........................................securities.......................... $ (452)6,837 $ (26,036)
========= ==========(10,064)
================ ===============
7
NOTE E - New Accounting Standards
Accounting for Derivative Instruments and Hedging Activities: In June, 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (Statement 133). This statement expanded the 7
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, iswas effective for years beginning after June
15, 2000. The Corporation does not expect the
adoption ofadopted Statement 133 to have aon January 1, 2001 and there was
no material effectimpact on its balance sheet, comprehensive income or net income.
NOTE F - Acquisitions
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 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 0.819 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 Fulton Financial
Corporation (parent company) and Skylands became the Corporation's third banking
subsidiary located in New Jersey.
The acquisition was accounted for as a purchase. Goodwill of approximately $17.5
million was recorded as the purchase price paid in excess of the net assets
acquired. The goodwill will be amortized to expense on a straight line basis
over 15 years. The accounts and results of operations of Skylands are included
in the financial statements of the Corporation prospectively from the August 1,
2000 acquisition date.
Dearden, Maguire, Weaver and Barrett, Inc. - On October 30, 2000, the
Corporation announced its intention to acquire asset management company Dearden,
Maguire, Weaver and Barrett, Inc. (Dearden Maguire). This acquisition, which
will be a cash purchase, is expected to close in the first quarter of 2001.
Dearden Maguire provides investment advice to, and manages the assets of,
clients in the mid-Atlantic region. The firm currently has $1.25 billion in
assets under management. Dearden Maguire will retain its name and will operate
in conjunction with Fulton Financial Advisors, N.A., the Corporation's
investment management and trust services subsidiary.
NOTE G - Reclassifications
Certain amounts in the 19992000 consolidated financial statements and notes have
been reclassified to conform to the 20002001 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 income growth
initiatives.expenses. 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-lookingforward looking statements: pricing
pressures on loansloan and deposits,deposit products, actions of bank and nonbank competitors,
changes in local and national economic conditions, changes in regulatory
requirements and regulatory oversight of the Corporation, actions of the Federal
Reserve Board (FRB) and customers' acceptance of the Corporation's productssuccess in merger and services.acquisition
integration.
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
- -------------------------------
Skylands Financial Corporation - On August 1, 2000, the Corporation completed
its acquisition of Skylands Financial Corporation (SFC) of Hackettstown, New
Jersey. SFC's sole subsidiary, Skylands Community Bank (Skylands), had
approximately $240 million in total assets on the acquisition date. This
acquisition allowed the Corporation to expand its geographical reach into
northern New Jersey through Skylands's eight community banking offices located
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, options to acquire shares of SFC stock were also
exchanged for options to purchase the Corporation's common stock. SFC was merged
with and into the Corporation and, as a result, Skylands became the
Corporation's third banking subsidiary located in New Jersey.
The acquisition was accounted for as a purchase, and goodwill of approximately
$17.5 million was recorded as the purchase price paid in excess of the net
assets acquired. The goodwill is being amortized to expense on a straight-line
basis over 15 years. Since the acquisition was accounted for as a purchase, the
accounts and results of operations of Skylands are included in the financial
statements of the Corporation for the first quarter of 2001 only.
Dearden, Maguire, Weaver and Barrett, Inc. - On January 2, 2001, the Corporation
completed its previously announced acquisition of investment management and
advisory company Dearden, Maguire, Weaver and Barrett, Inc. (Dearden Maguire).
Dearden Maguire provides investment advice to, and manages the assets of,
clients in the mid-Atlantic region. The firm has approximately $1.3 billion in
assets under management. Dearden Maguire retained its name and operates in
conjunction with Fulton Financial Advisors, N.A. (Advisors), the Corporation's
investment management and trust services subsidiary.
9
The acquisition was accounted for as a purchase, and goodwill of approximately
$14.4 million was recorded as the initial purchase price paid in excess of the
net assets acquired. Additional payments of up to $6.6 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.
The goodwill is being amortized to expense on a straight-line basis over 20
years. Since the acquisition was accounted for under the purchase method of
accounting, the accounts and results of operations of Dearden Maguire are not
included in the financial statements of the Corporation for periods prior to
January 2, 2001.
Drovers Bancshares Corporation - On December 27, 2000, the Corporation entered
into a merger agreement to acquire Drovers Bancshares Corporation (Drovers), of
York, Pennsylvania. Drovers is an $825 million bank holding company whose
primary subsidiary is The Drovers & Mechanics Bank (Drovers Bank), which has 16
community banking offices in York County, Pennsylvania and one office in
Frederick County, Maryland.
Under the terms of the merger agreement, each of the approximately 5.1 million
shares of Drover's common stock outstanding will be exchanged for 1.302 shares
of the Corporation's common stock. In addition, each of the options to acquire
Drovers stock will be converted to options to purchase the Corporation's stock.
The acquisition is subject to approval by bank regulatory authorities and
Drovers' shareholders and is expected to be completed in the third quarter of
2001. The acquisition will be accounted for as a pooling of interests.
Drovers will be merged into the Corporation and, shortly thereafter, Drovers
Bank will be merged into Fulton Bank, the Corporation's largest subsidiary bank.
The Frederick County, Maryland office of Drovers Bank will be transferred to
Hagerstown Trust Company, another subsidiary bank of the Corporation. The trust
business of Drovers Bank will be transferred to Advisors. This acquisition will
allow the Corporation to expand its presence in the York County, Pennsylvania
market.
Sovereign Bank Branches - On January 29, 2001, the Corporation entered into a
definitive agreement with Sovereign Bank (Sovereign) to acquire 18 branch
offices located in Delaware, New Jersey and Pennsylvania. These branch offices,
which include approximately $300 million in deposits and $50 million in loans,
will be operated through the following existing banking subsidiaries of the
Corporation: Fulton Bank (1), Delaware National Bank (6), The Bank of Gloucester
County (2), and the Woodstown National Bank and Trust Company (9). All required
regulatory approvals have been obtained and the acquisition is expected to be
completed in the second quarter of 2001.
RESULTS OF OPERATIONS
- ---------------------
Quarter ended September 30, 2000March 31, 2001 versus Quarter ended September 30, 1999March 31, 2000
- ------------------------------------------------------------------------
Fulton Financial------------------------------------------------------------------
The Corporation's net income for the thirdfirst quarter of 20002001 increased $1.7$1.9
million, or 7.0%7.6%, in comparison to net income for the thirdfirst quarter of 1999.2000.
Diluted net income per share increased $0.03,$0.02, or 8.8%5.9%, compared to 1999. Third2000. First
quarter net income of $26.1$27.2 million, or $0.37$0.36 per share (basic and diluted),
represented aan annualized return on average assets (ROA) of 1.64%1.70% and aan
annualized return on average equity (ROE) of 16.61%16.11%. This compares to 19992000 net
income of $24.4$25.3 million, or $0.34 per share (basic and diluted -- 1.64%1.67% ROA and
15.81%16.57% ROE).
The increase in net income was impacted by the net contributions of Skylands
(net income of $794,000 for the quarter) and Dearden Maguire (net income of
$165,000 for the quarter) whose results of operations were not included in 2000
resultedamounts as these acquisitions were accounted for as purchases. The Corporation
also benefited from growth in other income, mainly from strongas a result of mortgage sale
gains. These increases were offset
10
by a higher provision for loan growth,
continued high asset quality, control of non-interestlosses, increases in expenses and feea decrease in
net interest income growth.(after excluding the impact of Skylands).
Net Interest Income
- -------------------
Net interest income increased $2.6 million, or 4.3%,is the Corporation's largest revenue source, accounting for
almost 80% of total revenues. For the quarter. Excluding
a one-time recovery of $1.0 million in interest income on a non-accrual loan,quarter, net interest income increased
$1.6$2.8 million, or 2.6%4.6%. Excluding the impact of Skylands, which added $3.2
million during the quarter, net interest income actually decreased by $402,000,
or 0.7%. This modest increase
reflecteddecline resulted mainly from continued pressure on the
Corporation's net interest margin due to loan and deposit competition and
changes in the general interest rate environment as short-term rates
continued to rise over the past year. Rising rates affected the cost of the
Corporation's short-term borrowings and put upward pricing pressure on its
deposits. Due to the shorter term nature of these funding sources relative to
the Corporation's loan portfolio, the result was slower net interest income
growth and a downward trend for net interest margin, despite strong balance
sheet growth.environment. The following table provides a
comparative average balance sheet and net interest income analysis for the thirdfirst
quarter of 20002001 as compared to the same period in 1999.2000. All dollar amounts are
in thousands.
9
Quarter Ended September 30, 2000March 31, 2001 Quarter Ended September 30, 1999
--------------------------------------- ----------------------------------------March 31, 2000
------------------------------------------ ---------------------------------------------
Average Yield/ Average Yield/
ASSETS Balance Interest Rate (1) Balance Interest Rate (1)
- --------------------------------------- ------------ ------------ -------- ------------ ------------ ------------------ ------------- ----------- --------------
Interest-earning assets:
Loans and leases..................... $ 4,717,9944,870,855 $ 101,169 8.59%101,005 8.41% $ 4,216,4324,468,516 $ 86,671 8.21%91,368 8.22%
Taxable investment securities........ 935,634 14,345 6.13 1,040,438 15,452 5.94912,370 14,043 6.24 943,467 14,189 6.05
Tax-exempt investment securities..... 201,093 2,147 6.21 207,875 2,271 6.40198,963 2,144 4.37 204,122 2,205 4.34
Equity securities.................... 86,169 1,133 5.24 83,769 991 4.7183,673 1,132 5.49 84,700 1,105 5.25
Short-term investments............... 8,769 188 8.53 2,365 26 3.71
------------ ------------ -------- ------------ ------------ --------11,786 182 6.26 8,991 144 6.44
Total interest-earning assets.......... 5,949,659 118,982 8.09 5,550,879 105,411------------- ----------- ----- ------------ ----------- ----
6,077,647 118,506 7.91 5,709,796 109,011 7.68
Noninterest-earning assets:
Cash and due from banks.............. 234,324 202,923222,272 225,788
Premises and equipment............... 90,530 77,64299,822 80,551
Other assets......................... 131,567 148,485165,315 122,492
Less: Allowance for loan losses...... (60,839) (59,303)
------------(61,252) (58,476)
------------- ------------
Total Assets................. $ 6,345,2416,503,804 $ 5,920,626
============6,080,151
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits...................... $ 604,523617,218 $ 2,441 1.61%2,285 1.50% $ 580,276583,476 $ 1,909 1.30%2,136 1.47%
Savings deposits..................... 1,052,182 6,905 2.61 1,038,961 5,774 2.201,047,247 6,221 2.41 1,020,293 6,019 2.37
Time deposits........................ 2,325,011 33,360 5.71 2,197,762 27,828 5.022,440,054 35,511 5.90 2,217,844 29,071 5.27
Short-term borrowings................ 493,224 7,460 6.00 365,815 4,302 4.67406,598 5,304 5.29 478,442 6,256 5.26
Long-term debt....................... 345,191 4,479 5.16 298,467 3,894 5.18401,952 5,281 5.33 340,692 4,409 5.20
------------- ----------- ---- ------------ ------------ -------- ------------ ------------ ------------------- ----
Total interest-bearing liabilities..... 4,820,131 54,6454,913,069 54,602 4.51 4,481,281 43,707 3.874,640,747 47,891 4.15
Noninterest-bearing liabilities:
Demand deposits...................... 809,515 734,341798,814 730,625
Other................................ 89,796 92,548
------------106,212 94,358
------------- ------------
Total Liabilities............ 5,719,442 5,308,1705,818,095 5,465,730
Shareholders' equity................... 625,799 612,456
------------685,709 614,421
------------- ------------
Total Liabilities and
Shareholders' Equity....... $ 6,345,2416,503,804 $ 5,920,626
============6,080,151
============= ============
Net interest income.................... $ 64,33763,904 $ 61,704
============61,120
========== ===========
Net interest margin (FTE).............. 4.44% 4.55%
======== ========4.36% 4.42%
==== ====
(1) Yields on tax-exempt securities are not fully taxable equivalent (FTE).
The increases in average balances from 19992000 to 20002001 were positively impacted
by the purchase accounting acquisition of Skylands on August 1, 2000.Skylands. Approximately $112.6$175.6 million of the $402.3
million increase in average loans and $150.6$243.9 million of the $367.9 million
increase in average total interest-earning assets resulted from the
inclusion of Skylands in the above numbers from August 1, 2000
through the end2001 average balances. Similarly, approximately
$236.2 million of the quarter. Similarly, approximately $146.9$351.1 million of
the increase in average deposits is
attributable to the Skylands
acquisition.Skylands.
11
Although the balance increases were affected, the yields and costs for each
period were not significantly impacted, as the total assets of Skylands account
for less than 5% of the total assets of the Corporation.
The
discussion that follows does not isolate the impact of Skylands in any
further detail as the effect on the overall discussion is negligible.
Total interest income increased $13.6$9.5 million, or 12.9%8.7%. Of this increase,
approximately $7.5$7.0 million was attributable to the increase in average earning
assets. The remaining $2.5 million increase resulted from the $398.8 million, or 7.2%,
increase in average interest-earning assets, with the remaining $6.1
million increase resulting from the 4123 basis point
increase in average yields.
Average totalyields to 7.91% in 2001 from 7.68% in 2000, offset by one
less day in 2001 as a result of leap year in 2000.
The average balance sheet growth was fueled mainly by loans, grew by $501.6which increased
$402 million, or 11.9%9.0%, in 2001 as compared to 2000 ($227 million, or 5.1%,
excluding the impact of Skylands). Commercial loans increased $168 million, or
15.6%, and commercial mortgages increased $191 million, or 15.8%, to $4.7 billion in
the third quarter of 2000. This growth occurred mainly in commercial loans
and mortgages ($371.1 million, or 17.7% increase), residential mortgages
($65.4 million, or 8.1% increase) and home equity loans ($69.2 million, or
20.5% increase). In
10
terms of rates,provide the
majority of the commercialgrowth.
Average investment securities decreased $37 million, or 3.0% as a portion of the
funds from maturing investments was used to support the loan growth.
Total interest expense increased $6.7 million, or 14.0%. Unlike interest income,
the increase ($250.6 million)
was realized in fixedmore evenly distributed between rate loans. As borrowers locked in fixed rates over the
past year, the average yield on loans increased only 38 basis points, as
compared to a 139and volume. The 36 basis
point increase in the average prime lending rate over
the same period.
Average investment securities decreased $109.2 million, or 8.2%, ascost of funds to 4.51% in 2001 from maturing investments were used to support loan growth.
Total interest expense increased $10.9 million, or 25.0%, from $43.7 million4.15% in 1999 to $54.6 million in 2000. This increase was primarily a result of higher
interest rates, which2000
contributed $7.6$3.9 million to the increase, withwhile the remaining $3.3$2.8 million
attributable to an increaseresulted from the growth in average balances.
Total interest-bearing deposits increased $164.7 million, or 4.3%, to $4.0
billion in 2000. Time deposits grew the fastest ($127.2 million, or 5.8 %
increase), mainly in maturities of between one and two years. With deposit
growth lagging the increase in loans, the Corporation continued to increase its
borrowings as an alternative funding source. Average short-term borrowings,
consisting mainly of overnight federal funds purchased, increased $127.4
million, or 34.8%, to $493.2 million. Long-term debt increased $46.7 million, or
15.7%.
The use of more costly short-term borrowings and time deposits as the primary
funding source for loan growth, as well as the increase in rates in general,
caused the Corporation's cost of funds to increase 64 basis points from 1999 to
2000. As the increase in the cost of funds outpaced the increase in the yield on
earning assets (64 bp vs. 41 bp),liabilities.
Overall, the Corporation's net interest margin realizedon a decline (4.44%fully taxable equivalent
basis decreased six basis points to 4.36% in 2001 from 4.42% in 2000. This
reflects the third quarterpricing competition for loans and deposits and the volatility in
interest rates over the past two years as a result of 2000 asinterest rate decisions
made by the FRB. Despite these factors, however, the Corporation's net interest
margin remains strong compared to 4.55%the industry in general. See "Market Risk" for
a discussion of the prior
year). The Corporation was able to moderate the decline by increasing its
non-interest bearing deposits by $75.2 million, or 10.2%.Corporation's asset/liability management strategies.
Provision and Allowance for Loan Losses
- ---------------------------------------
The following table summarizes loans outstanding (including unearned income) as of the dates shown:
September 30 December 31
2000 1999
----------- -----------
March 31 December 31 March 31
2001 2000 2000
---------------- ---------------- ----------------
(in thousands)
Commercial, financial and agricultural............. $ 1,259,140 $ 1,219,845 $ 1,095,176
Real estate - construction......................... 215,897 223,575 181,900
Real estate - residential mortgage................. 1,390,592 1,424,274 1,306,497
Real estate - commercial mortgage.................. 1,234,804 1,215,000 1,089,612
Consumer .......................................... 674,551 709,985 770,431
Leasing and other.................................. 84,566 87,004 69,792
Unearned income.................................... (12,555) (12,916) (9,839)
-------------- -------------- --------------
Total Loans..................................... $ 4,846,995 $ 4,866,767 $ 4,503,569
============== ============== ==============
As indicated by the above table, the Corporation maintained a diversified loan
portfolio despite recent growth realized mainly in commercial loans and
agricultural...... $ 1,159,742 $ 1,051,958
Real estate - construction.................. 217,657 164,583
Real estate - mortgage...................... 2,615,513 2,371,764
Consumer ................................... 737,295 774,098
Leasing and other........................... 86,242 69,627
----------- -----------
Totals................................... $ 4,816,449 $ 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 sub-system classification or to individually large credits. These
procedures are not dependent upon the ultimate classification of the loans for
financial reporting purposes.
11mortgages.
12
The following table summarizes the activity in the Corporation's allowance for
loan losses:
Three Months Ended
September 30
---------------------------------March 31
-------------------------------------
2001 2000
1999
------------ ---------------------------- ----------------
(dollars in thousands)
Loans outstanding at end of period (net of unearned)......................... $ 4,803,6994,846,995 $ 4,282,314
============ ============4,503,569
================ ================
Daily average balance of loans and leases.....................leases.......................... $ 4,717,9944,870,855 $ 4,216,432
============ ============4,468,516
================ ================
Balance of allowance for loan losses
at beginning of period...................................period........................................ $ 58,28060,269 $ 58,94257,631
Loans charged-off:
Commercial, financial and agricultural.................... 1,296 1,038agricultural......................... 1,716 816
Real estate - mortgage.................................... 401 436
Consumer.................................................. 1,430 1,497mortgage......................................... 234 349
Consumer....................................................... 1,726 1,777
Leasing and other......................................... 39 471
------------ ------------other.............................................. 154 93
---------------- ----------------
Total loans charged-off................................... 3,166 3,442
------------ ------------charged-off........................................ 3,830 3,035
---------------- ----------------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural.................... 268 74agricultural......................... 142 376
Real estate - mortgage.................................... 310 84
Consumer.................................................. 401 572mortgage......................................... 189 288
Consumer....................................................... 803 748
Leasing and other.........................................other.............................................. 5 1
53
------------ ---------------------------- ----------------
Total recoveries.......................................... 980 783
------------ ------------recoveries............................................... 1,139 1,413
---------------- ----------------
Net loans charged-off......................................... 2,186 2,659
Allowance acquired (Skylands)................................. 2,633 -charged-off.............................................. 2,691 1,622
Provision for loan losses..................................... 2,345 1,997
------------ ------------losses.......................................... 2,779 2,025
---------------- ----------------
Balance at end of period......................................period........................................... $ 61,07260,357 $ 58,280
============ ============58,034
================ ================
Net charge-offs to average loans (annualized)................. 0.19% 0.25%
============ ============...................... 0.22% 0.15%
================ ================
Allowance for loan losses to loans outstanding................ 1.27% 1.36%
============ ============outstanding..................... 1.25% 1.29%
================ ================
The following table summarizes the Corporation's non-performing assets as of the
indicated dates.
Sept. 30March 31 Dec. 31 Sept. 30March 31
(Dollars in thousands) 2001 2000 1999 1999
------------- ------------ --------------2000
--------------- --------------- ---------------
Nonaccrual loans................................loans..................................... $ 17,77920,499 $ 18,65319,465 $ 17,02218,914
Loans 90 days past due and accruing............. 7,226 8,516 7,349accruing.................. 8,953 7,127 6,864
Other real estate owned (OREO).................. 692 917 1,315
------------- ------------ --------------....................... 846 931 816
--------------- --------------- ---------------
Total non-performing assets.....................assets.......................... $ 25,69730,298 $ 28,08627,523 $ 25,686
============= ============ ==============26,594
=============== =============== ===============
Non-performing loans/Total loans................ 0.52%total loans..................... 0.61% 0.55% 0.57%
Non-performing assets/Total assets.............. 0.40%total assets................... 0.46% 0.42% 0.43%
Non-performing assets/Gross loans and OREO...... 0.53% 0.63% 0.60%OREO................. 0.62% 0.57% 0.59%
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
continuinginternal credit quality reviews and analyses, of the loan portfolio, it is believed that the allowance
is not adequate to absorb the losses inherent in the portfolio. Management
considers various factors in completing its analyses, 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, 12
adequacy of collateral, the mix and risk characteristics of
loan types in
13
the portfolio, and the balance of 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 affiliatesubsidiary banks. Resulting provisions and allowances are aggregated for
consolidated financial reporting.
For the thirdfirst quarter of 2000,2001, net charge-offs totaled $2.2$2.6 million, or 0.19%,0.22% of
average loans on an annualized basis. This net charge-off rate was an
improvement from $2.7compares to $1.6 million, or 0.25%0.15%,
for the first quarter of 2000. The increase was attributable to one commercial
loan, which offset the improvements that the Corporation continued to realize in
the third quarterquality of 1999.its consumer loan portfolio. Non-performing loans, including
loans 90 days past due and still accruing, to total loans were 0.52%0.61% at September 30,March
31, 2000 also an improvement over 0.61%as compared to 0.55% at December 31, 19992000 and 0.57% at September 30, 1999.
Despite the improvement in the asset quality measurements noted in the previous
paragraph, theMarch 31, 2000.
The provision for loan losses increased $348,000,$754,000, or 17.4%37.2%, to $2.3$2.8 million in
2000. This increase was attributable2001. The total provision for the quarter approximated net charge-offs and
increased mainly in response to the 12.2% growthhigher charge-off level. Despite the
increase in net charge-offs and the slight increase in its non-performing assets
ratios, the Corporation's overall loan portfolio since September 30, 1999.quality remains strong when such measures
are compared to the industry in general.
The Corporation's periodic loan portfolio review and allowance calculation
resulted in an unallocated allowance for loan losses of 23%21% at September 30,March 31, 2001,
as compared to 28% at March 31, 2000 and 32%30% at December 31, 1999.2000. Management
believes that the allowance balance of $61.1$60.4 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 September 30, 2000March 31, 2001 was $16.9 million. This
was$21.8 million, an increase
of $1.5$5.2 million, or 9.6%31.0%, over the comparable period in 1999.2000. Excluding
investment security gains, which decreasedincreased from $1.6 million in 1999
to $1.4$2.5 million in 2000 to $3.9
million in 2001, other income increased $1.7$3.7 million, or 12.4%26.3%. Skylands did not
contribute significantly to the increase in other income.
The acquisitionmost significant increase, in terms of Skylands contributed approximately $200,000 to this increase,
mainly in service charges on deposits.
Other service charges and fees increased the most dramatically, $939,000, or
34.0%, over the third quarter of 1999. Thispercentage growth, was led by merchant fees
($235,000, or 42.9% increase), debit cardrealized in
mortgage banking income, ($121,000, or 18.4% increase)
and commercial letter of credit fees ($122,000, or 58.2% increase) as the
Corporation continued to focus on other income opportunities.
Service charges on deposit accounts also realized strong growth, increasing
$732,000, or 13.3%, to $6.2 million in 2000. The strongest category of service
charge growth was in cash management fees from commercial customers, which increased $291,000,$1.1 million, or 29.5%186.3%. With
relatively low mortgage rates in place during the quarter, many consumers
refinanced to lower rate loans. The Corporation has continuedsold all qualifying fixed rate
mortgage loans it originated during the quarter in order to stress cash
management aslimit interest rate
risk, resulting in an attractive fee source.increase in mortgage sale gains of $1.1 million.
Investment management and trust services income increasedalso showed strong growth, with
an increase of $1.2 million, or 24.0%, mainly as a modest $134,000, or
2.9%, over 1999. Despite this modest growth, the formationresult of the Corporation's
investment management and trust services subsidiary, Fulton Financial Advisors,
N.A. (FFA) in May, 2000 is expected to contribute to more significant revenue
growth inDearden Maguire
acquisition. Service charges on deposit accounts increased $906,000, or 16.3%,
as deposit balances grew during the future.
Mortgage banking income, which consistsperiod. Other service charges also realized
a moderate increase of gains on mortgage loan sales and
servicing income, decreased $93,000,$537,000, or 9.9%17.3%. This decline was almost entirely
due to a decline in mortgage loan sale volume, as interest rates have risen and
refinance activity has, therefore, decreased.
Other Expenses
- --------------
Total other expenses for the thirdfirst quarter of 20002001 of $41.7$44.5 million increased
$1.3$4.7 million, or 3.2%11.9%, in comparisonfrom 2000. The acquisitions of Skylands and Dearden
Maguire contributed $2.7 million to the third quarter of 1999. This increase
resulted almost entirely from the acquisition of Skylands, which contributed
$1.2 million to totalincrease. Excluding these amounts, other
expenses for the quarter.increased $2.0 million, or 5.0%. The Corporation's efficiency ratio,
which is the ratio of noninterest expense to fully taxable equivalent revenues
(excluding security gains), improvedincreased to 51.1%53.3% in 20002001 from 52.3%51.6% in 1999.
13
2000.
Salaries and employee benefits increased $1.5$2.8 million, or 6.6%12.3%, in comparison
to the thirdfirst quarter of 1999. Excluding2000 ($993,000, or 4.3%, excluding Skylands and Dearden
Maguire). Benefits expense generated much of the impactincrease, as health plan
expenses increased approximately 30% due to rising medical insurance costs. The
increase in salaries expense was a less dramatic 3.2% and resulted from normal
merit increases.
14
Net occupancy and equipment expenses increased $240,000, or 6.7%, and $43,000,
or 1.7%, respectively. These increases resulted mainly from the addition of
two monthsSkylands. The Corporation will complete its $25 million headquarters office
space construction project in the second quarter of 2001, which will contribute
to an increase in occupancy costs in future periods. The Corporation will
recover a portion of these costs by leasing available space to third parties.
Data processing expense decreased $59,000, or 2.1% as the Corporation continued
to realize a benefit from Skylands, totaling $517,000, salaries and benefitsits renegotiated outside data processing services
contract. Other expense increased $979,000,$1.7 million, or 4.3%. This20.9%, to $9.9 million in
2001. Excluding Skylands and Dearden Maguire, the increase is in line with the Corporation's expectations for
average merit increases and also reflects a small increase in the number of
employees.
Other expenses, excluding salaries and benefits expenses, decreased $202,000,was $891,000, or
1.1%. Excluding the $635,000 increase attributable to Skylands, the decrease was
even more pronounced at $837,000, or 4.7%. This decrease resulted from several
factors, including a reduction in data processing expense10.9%, mainly due to the renewal of
the Corporation's contract with its third party provider and the continued
emphasis on cost controls throughout the organization.goodwill amortization resulting from these acquisitions.
Income Taxes
- ------------
Income tax expense for the thirdfirst quarter of 20002001 was $11.1$11.2 million, a $758,000,$513,000,
or 7.4%4.8%, increase from $10.3$10.6 million in 1999.2000. The Corporation's effective tax
rate remained consistent at 29.7%was approximately 29.1% in both 2000 and 1999.2001 as compared to 29.6% in 2000. 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.
Nine Months ended September 30, 2000 versus Nine Months ended September 30, 1999
- --------------------------------------------------------------------------------
Fulton Financial Corporation's net income for the first nine months of 2000
increased $5.4 million, or 7.5%, in comparison to net income for the same period
in 1999. Diluted net income per share increased $0.09, or 9.1%, compared to
1999. Net income for the first nine months of 2000 of $77.3 million, or $1.09
per share (basic) and $1.08 per share (diluted), represented an ROA of 1.67% and
an ROE of 16.88%. This compares to 1999 net income of $72.0 million, or $0.99
per share (basic and diluted -- 1.65% ROA and 15.63% 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 $6.0 million, or 3.3%, for the first nine months
of 2000. Overall, this increase was a result of growth in the Corporation's
balance sheet, offset by a rising cost of funds. The following table provides a
comparative average balance sheet and net interest income analysis for the first
nine months of 2000 as compared to the same period in 1999. All dollar amounts
are in thousands.
14
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
---------------------------------------- ----------------------------------------
Average Yield/ Average Yield/
ASSETS Balance Interest Rate (1) Balance Interest Rate (1)
- --------------------------------------- ------------- ------------- -------- ------------- ------------- --------
Interest-earning assets:
Loans and leases..................... $ 4,579,734 $ 287,357 8.43% $ 4,121,791 $ 253,134 8.25%
Taxable investment securities........ 937,210 42,664 6.07 1,063,696 47,661 5.98
Tax-exempt investment securities..... 202,212 6,504 6.25 184,071 6,119 6.49
Equity securities.................... 85,672 3,347 5.21 81,488 3,004 4.92
Short-term investments............... 8,590 489 7.60 6,500 227 4.66
------------- ------------- ------- ------------- ------------- -------
Total interest-earning assets.......... 5,813,418 340,361 7.94 5,457,546 310,145 7.71
Noninterest-earning assets:
Cash and due from banks.............. 229,162 208,184
Premises and equipment............... 84,867 76,944
Other assets......................... 122,873 158,563
Less: Allowance for loan losses...... (59,382) (58,979)
------------- -------------
Total Assets................. $ 6,190,938 $ 5,842,258
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits...................... $ 593,664 $ 6,870 1.50% $ 574,152 $ 5,610 1.31%
Savings deposits..................... 1,036,242 19,378 2.49 1,031,642 16,965 2.19
Time deposits........................ 2,260,365 93,020 5.50 2,198,009 84,276 5.13
Short-term borrowings................ 486,673 20,724 5.67 312,489 10,401 4.45
Long-term debt....................... 335,717 13,074 5.20 298,545 11,566 5.18
------------- ------------- ------- ------------- ------------- -------
Total interest-bearing liabilities..... 4,712,661 153,066 4.34 4,414,837 128,818 3.90
Noninterest-bearing liabilities:
Demand deposits...................... 773,123 718,506
Other................................ 92,986 93,126
------------- -------------
Total Liabilities............ 5,578,770 5,226,469
Shareholders' equity................... 612,168 615,789
------------- -------------
Total Liabilities and
Shareholders' Equity....... $ 6,190,938 $ 5,842,258
============= =============
Net interest income.................... $ 187,295 $ 181,327
============= =============
Net interest margin (FTE).............. 4.42% 4.56%
======= =======
(1) Yields are fully taxable equivalent (FTE)
The acquisition of Skylands did not have as significant an impact on
average balances for the first nine months of 2000 as it did for the third
quarter. Average loans and average total interest earning assets increased
approximately $37 million and $50 million, respectively, as a result of the
acquisition. Average deposits increased approximately $49 million.
Total interest income for the first nine months of 2000 increased $30.2
million, or 9.7%. Of this increase, approximately $20.6 million resulted
from the $355.9 million, or 6.5%, increase in average interest-earning
assets, with the remaining $9.6 million increase resulting from the 23
basis point increase in average yields.
Average total loans grew by $457.9 million, or 11.1%, to $4.6 billion for
the first nine months of 2000. This growth occurred mainly in commercial
loans and mortgages ($334.5 million, or 16.4% increase). In addition, the
Corporation experienced moderate growth in residential mortgages and home
equity loans. As with the quarter, the majority of the loan growth was
realized in fixed rate loans, which limited the benefit that the
Corporation received from the increase in interest rates in general from
1999 to 2000. While the average prime lending rate increased 128 basis
points from 7.88% in 1999 to 9.16% in 2000, the average yield on loans
increased only 18 basis points to 8.43%.
15
Loan growth was supported in part through funds provided by maturities and
payoffs of investment securities. Average investments decreased $104.2 million,
or 7.8%, during the first nine months of 2000. In general, investments have
lower yields than loans, and the change in the mix of interest-earning assets
from investments to loans had a positive impact on overall yields, which
increased 23 basis points to 7.94%.
Total interest expense increased $24.2 million, or 18.8%, from $128.8 million in
1999 to $153.1 million in 2000. This increase was primarily a result of higher
interest rates, which contributed $14.6 million to the increase, with the
remaining $9.6 million attributable to an increase in average balances.
Average total interest-bearing deposits increased $86.5 million, or 2.3%, to
$3.9 billion for the first nine months of 2000. Time deposits provided the
majority of this growth, increasing $62.4 million, or 2.8%, mainly in maturities
of between one and two years. As deposit growth lagged loan growth, the
shortfall in funding was made up with borrowings. Average short-term borrowings,
consisting mainly of overnight federal funds purchased, increased $174.2
million, or 55.7%, to $486.7 million. Long-term debt increased $37.2 million, or
12.5%.
The use of more costly short-term borrowings and time deposits as the primary
funding source for loan growth, as well as the increase in rates in general,
caused the Corporation's cost of funds to increase 44 basis points from 1999 to
2000. As a result of the cost of funds increasing more dramatically than the
yield on earning assets (44 bp vs. 23 bp), the Corporation also registered a
decline in its net interest margin for the year to date period (4.42% for the
first nine months of 2000 as compared to 4.56% in the prior year).
16
Provision for Loan Losses
- -------------------------
The following table summarizes the activity in the Corporation's allowance for
loan losses:
Nine Months Ended
--------------------------------
September 30
2000 1999
----------- -----------
(dollars in thousands)
Loans outstanding at end of period (net of unearned)......... $ 4,803,699 $ 4,282,314
=========== ===========
Daily average balance of loans and leases.................... $ 4,579,734 $ 4,121,791
=========== ===========
Balance of allowance for loan losses
at beginning of period.................................. $ 57,631 $ 57,415
Loans charged-off:
Commercial, financial and agricultural................... 3,380 1,810
Real estate - mortgage................................... 1,032 1,029
Consumer................................................. 4,778 5,358
Leasing and other........................................ 219 539
----------- -----------
Total loans charged-off.................................. 9,409 8,736
----------- -----------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural................... 1,333 1,425
Real estate - mortgage................................... 650 555
Consumer................................................. 1,824 1,519
Leasing and other........................................ 15 53
----------- -----------
Total recoveries......................................... 3,822 3,552
----------- -----------
Net loans charged-off........................................ 5,587 5,184
Allowance acquired (Skylands)................................ 2,633 -
Provision for loan losses.................................... 6,395 6,049
----------- -----------
Balance at end of period..................................... $ 61,072 $ 58,280
=========== ===========
Net charge-offs to average loans (annualized)................ 0.16% 0.17%
=========== ===========
Allowance for loan losses to loans outstanding............... 1.27% 1.36%
=========== ===========
Refer to the "Provision for Loan Losses" section of Management's Discussion of
the third quarter results of operations for a summary of the Corporation's
process for establishing the provision and allowance for loan losses. For the
first nine months of 2000, net charge-offs totaled $5.6 million, or 0.16%, of
average loans on an annualized basis. This compares to $5.2 million, or 0.17%,
for the first nine months 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
0.52% at September 30, 2000 as compared to 0.57% at September 30, 1999 and 0.61%
at December 31, 1999.
The provision for loan losses of $6.4 million for the first nine months of 2000
was $346,000, or 5.7%, higher than 1999. This increase resulted from loan growth
offset by the impact of the continuing improvement of the quality of the
Corporation's loan portfolio. The Corporation's periodic loan portfolio review
and allowance calculation resulted in an unallocated allowance for loan losses
of 23% at September 30, 2000 and 32% at December 31, 1999. Management believes
that the allowance balance of $61.1 million is sufficient to cover losses
incurred in the loan portfolio and appropriate based on applicable accounting
standards.
17
Other Income
- ------------
Other income for the nine months ended September 30, 2000 was $50.6 million.
This was an increase of $4.8 million, or 10.5%, over the comparable period in
1999. Excluding investment security gains, which decreased from $6.3 million in
1999 to $5.9 million in 2000, other income increased $5.2 million, or 13.2%. The
most significant increase, $2.7 million, or 22.2%, 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 $2.3 million, or 14.6%, as a
result of cash management income ($973,000, or 36.8% increase) and overdraft
fees ($633,000, or 11.4% increase). Other service charges and fees increased
$1.5 million, or 17.7%, as a result of higher debit card revenue ($429,000, or
23.8% increase) and merchant fees ($634,000, or 41.4% increase). Mortgage
banking income decreased $1.2 million, or 35.6% as a result of higher interest
rates reducing refinance volume.
Other Expenses
- --------------
Total other expenses for the first nine months of 2000 of $121.4 million showed
a moderate increase of $2.5 million, or 2.1%, over 1999. Excluding the expenses
of Skylands in 2000, total other expenses increased $1.3 million, or 1.1%. The
Corporation's efficiency ratio continued to improve during the first nine months
of 2000, declining to 51.2% as compared to 52.7% in 1999.
Salaries and employee benefits increased to $69.4 million, a $3.4 million, or
5.1%, increase in comparison to the first nine months of 1999. In general, this
was attributable to normal merit increases as well as growth in the employee
base from an average of 2,352 full-time equivalent employees in 1999 to 2,407 in
2000.
Excluding salaries and benefits expense, other expenses decreased $908,000, or
1.7%. This decrease resulted from the Corporation's efforts to control expenses,
as well as the benefits noted in the quarter discussion.
Income Taxes
- ------------
Income tax expense for the first nine months of 2000 was $32.7 million as
compared to $30.1 million for the comparable period in 1999, a $2.6 million, or
8.6%, increase. The effective tax rate was fairly consistent at 29.7% in 2000
and 29.5% in 1999.
FINANCIAL CONDITION
- -------------------
At September 30, 2000,March 31, 2001, the Corporation had total assets of $6.5 billion, reflecting
an increasea decrease of $408.8$46.5 million, or 6.7%0.07%, from December 31, 1999. Of2000 and an increase of
$395 million, or 6.4% from March 31, 2000 ($275 million of this increase
approximately $258 million was attributable toresulted from the acquisition of
Skylands and the recording of the resulting goodwill on the transaction.acquisition).
The increasedecrease in assets was realized almost entirely in loans, which grew $381.3
million, or 8.6%, to $4.8 billion at September 30, 2000 as compared to $4.4
billion atfrom December 31, 1999. As discussed2000 to March 31, 2001 resulted mainly
from a net decrease in the "Net Interest Income" section,
most of thisloans. Moderate growth was in commercial loans and mortgages.
Investment securities were essentially flat, increasing $3.8commercial
mortgages ($59.0 million, or 0.3%2.4%, from December 31, 1999. Thisincrease) was more than offset by runoff in
the residential mortgage portfolio ($33.7 million, or 2.4%, decrease) and
consumer loans ($35.4 million, or 5.0%). Residential mortgage balances decreased
due to available funds being usedcontinued refinance activity and consumer loans decreased due to support
the strong loan growth rather than investing ina lower
yielding securities.
Premisesvolume of indirect lending.
Total cash and equipment increased $14.5 million, or 18.3%, as construction
continued on the new building at the Corporation's headquarters in Lancaster,
PA. Other assets increased $10.0due from banks decreased $21.7 million, or 8.1%, mainlyand total
investment securities decreased $16.5 million, or 1.4%. Available funds were
used to reduce the Corporation's net short-term borrowing position. Other assets
remained essentially unchanged at $127.6 million as a result of recording $17.5the $14.4
million increase in goodwill related tofrom the Dearden Maguire acquisition being offset
by a $10.3 million decrease in the accumulated cash value of Skylands.corporate-owned
life insurance.
Total deposits increased $277.7saw moderate growth during the first quarter of 2001, increasing
$75.6 million, or 6.1%1.5%, mainlyprimarily in non-interest
bearing, which grew $82.9interest-bearing types. Since these
additional funds were not needed to support loan growth, the Corporation's
borrowings were reduced. Short-term borrowings, primarily Federal funds
purchased, decreased $93.7 million, or 11.4%23.0%. Long-term debt, increased $120.3
million, or 36.7%, as the Corporation lengthened the maturitiesconsisting mainly
of its funding
sources through advances from the Federal Home Loan Bank. This was done to
reduce the
18
impact of changes in short-term rates on the Corporation's cost of funds. These
advances replaced short-term borrowings, whichBank, decreased $31.4$60.0, or 13.6%.
Other liabilities increased $5.2 million, or 6.4%.8.0% due to accrued federal income
taxes which were not due until April, 2001.
Capital Resources
- -----------------
Shareholders'Total shareholders' equity increased $32.7$26.1 million, or 5.3%3.8%, during the first
ninethree months of 2000.2001. This growth occurredincrease was due to net income of $77.3$27.2 million, offset
by $32.9a
$6.8 million improvement in dividends paid to shareholders, a 42.5% payout ratio.
Although shareholders' equity also increased $31.9 million as a result of the Skylands acquisition, this was offset by $45.2net unrealized gain on investment securities and
$3.6 million in stock repurchasesissuances. These increases were offset by $11.5 million in
cash dividends to shareholders. In addition, the Corporation did not have any
stock repurchase plans in place during the period, the majority of which was reissued to consummate the merger.first quarter and, consequently, no
shares were repurchased.
15
Common stock, capital surplus and retained earnings were also adjusted during
the first half ofquarter for the year for theestimated impact of the 5% stock dividend paiddeclared on May
31, 2000.April
12, 2001. See Note B to the financial statements.
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 1.05 million shares through December 31, 2000. The
second was an 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.
Under the second plan, 2.0 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,
429,000 shares had been repurchased through September 30, 2000.
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 September 30, 2000,March 31, 2001, 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.
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.
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 $53.1$51.7 million) and U.S. Government agency stock (cost basis of
approximately $34.3$34.5 million). The Corporation's financial institutions stock
portfolio had net unrealized gains of approximately $6.8$7.4 million at September
30, 2000.
19
March 31,
2001.
Although the bookcarrying 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.
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.
16
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.
2017
FULTON FINANCIAL CORPORATION
INTEREST RATE SENSITIVITY
(dollars in thousands)
Expected Maturity Period
Estimated
------------------------
*1 Year 1-2 Years 2-3 Years 3-4 Years
4-5 Years **5 Years Total Fair Value
----------------- --------- --------- ---------
--------- --------- ----------- ------------
Fixed rate loans (1) $ 890,348 $620,289932,629 $ 485,177645,564 $ 349,596485,051 $ 227,894 $ 772,694 $3,345,998 $ 3,305,770311,916
Average rate (1) 8.14% 7.95% 7.91% 7.89% 7.94% 7.75% 7.94%7.93% 8.01% 8.01% 8.01%
Floating rate loans (2) 485,872 158,295 149,141 110,531 91,169 462,693 1,457,701 1,450,873539,860 199,815 162,717 130,338
Average rate 9.81% 9.60% 9.59% 9.66% 8.68% 8.77% 9.35%8.76% 8.96% 9.06%
Fixed rate investments (3) 226,568 220,763 262,209 117,923 111,151 204,363 1,142,977 1,117,453203,631 207,327 248,137 176,980
Average rate 5.82% 6.20% 6.12% 6.20% 6.29% 6.45% 6.18%6.33% 6.30% 6.26% 6.25%
Floating rate investments (3) 250 50 - 1,000 -
- 14,360 15,660 15,483
Average rate 8.36% 7.50% 6.42%7.51% - 5.55% - 6.87% 6.87%
Other interest-earning assets 6,82816,118 - - -
- - 6,828 6,828
Average rate 6.46%5.53% - - -
- - 6.46%
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total $1,609,866 $999,397 $ 897,5271,692,288 $ 578,0501,052,706 $ 430,214 $1,454,110 $5,969,164896,905 $ 5,896,407619,234
Average rate 8.31%7.98% 7.82% 7.66% 7.88% 7.67% 7.88% 7.94%
-----------------------------------------------------------------------------------------------------7.25% 7.73%
------------------------------------------------------------------
Fixed rate deposits (4) $1,368,308 $642,618 $ 196,1221,705,382 $ 33,016482,754 $ 46,798127,564 $ 19,005 $2,305,867 $ 2,303,40059,473
Average rate 5.56% 6.13% 6.10% 5.54% 6.29% 5.62% 5.78%5.77% 5.97% 5.88% 5.83%
Floating rate deposits (5) 572,857 85,477 81,649 81,649 74,913 814,427 1,710,972 1,710,972599,231 126,166 121,843 121,843
Average rate 3.66% 2.03% 1.97% 1.97% 1.89% 1.55% 2.34%3.06% 1.10% 1.05% 1.05%
Fixed rate borrowings (6) 136,115 150,840 130,345 27,851 358 3,066 448,575 439,86971,409 280 27,780 280
Average rate 6.06% 5.44% 5.32% 5.01% 6.35% 5.79% 5.57%4.60% 5.76% 5.00% 5.76%
Floating rate borrowings (7) 456,180314,473 - - -
- - 456,180 456,180
Average rate 5.98%4.85% - - -
------------------------------------------------------------------
Total $ 2,690,495 $ 609,200 $ 277,187 $ 181,596
Average rate 5.03% 4.96% 3.67% 2.62%
------------------------------------------------------------------
-------------------------- Estimated
4-5 Years **5 Years Total Fair Value
----------- ---------- ------- ------------
Fixed rate loans (1) $ 215,395 $ 676,261 $ 3,266,816 $ 3,354,608
Average rate (1) 8.05% 7.64% 7.91%
Floating rate loans (2) 107,298 440,151 1,580,179 1,568,954
Average rate 8.72% 8.45% 8.47%
Fixed rate investments (3) 129,397 128,693 1,094,165 1,100,873
Average rate 6.08% 5.70% 6.15%
Floating rate investments (3) - 13,379 14,429 14,441
Average rate - 6.86% 6.77%
Other interest-earning assets - - 5.98%
-----------------------------------------------------------------------------------------------------
Total $2,533,460 $878,935 $ 408,116 $ 142,516 $ 122,069 $ 836,498 $4,921,594 $ 4,910,42116,118 16,118
Average rate 5.23% 5.61% 5.02% 3.39% 3.59% 1.66% 4.58%
------------------------------------------------------------------------------------------------------ - 5.53%
--------------------------------------------------------------------
Total $ 452,090 $ 1,258,484 $ 5,971,707 $ 6,054,994
Average rate 7.64% 7.72% 7.73%
--------------------------------------------------------------------
Fixed rate deposits (4) $ 37,690 $ 15,251 $ 2,428,114 $ 2,466,475
Average rate 6.15% 5.52% 5.82%
Floating rate deposits (5) 121,843 1,490,987 2,581,913 2,581,733
Average rate 1.05% 0.85% 1.40%
Fixed rate borrowings (6) 73,280 208,976 382,005 384,195
Average rate 6.36% 5.46% 5.44%
Floating rate borrowings (7) - - 314,473 314,473
Average rate - 4.85%
-------------------------------------------------------------------
Total $ 232,813 $ 1,715,214 $ 5,706,505 $ 5,746,876
Average rate 3.55% 1.45% 3.74%
-------------------------------------------------------------------
* denotes lessLess than
** denotes greaterGreater than
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 and Super NOW deposits are shown in first year. NOW and
savings accounts are placedspread based on history of deposit flows.
6) Amounts are based on contractual maturities of Federal Home Loan Bank
advances.
7) Amounts are Federal Fundsfunds purchased and securities sold under
agreements to repurchase, which mature in less than one year.
2190 days.
18
The Corporation uses three complementary methods to measure and manage interest
rate risk. They are static gap analysis, simulation of net interest income,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.
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
percent15% of total earning assets. The Corporation was positioned within this
range throughout the first six months of 2000. At September 30, 2000, the
cumulative 6-month gap as
of March 31, 2001 was 0.98.1.15.
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 September 30, 2000,At March 31, 2001 the
Corporation'sCorporation had a larger exposure to downward rate shocks, with net interest
income at risk of loss over the next twelve months was 2.3%of 1%, 2% and 4% where
interest rates are shocked upward by 200 or 300 basis points. Net
interest income at risk of loss was 2.1%, 2.0% and 3.9% when rates are shocked downward 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"shock" movement in interest rates. As of September 30, 2000, upwardMarch 31, 2001,
downward shocks of 100, 200 andor 300 basis points were estimated to have negative
effects upon economic value of 2.6%1%, 5.1%3%, and 7.6%6%, respectively.
2219
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 endedas of
November 19, 1992 - Incorporated by referenceended 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 - September, 2000
(b) Reports on Form 8-K :8-K:
(1) Form 8-K dated August 10, 2000January 2, 2001 reporting the acquisitionexecution of Skylands
Financial Corporation on August 1, 2000.
(2) Form 8-K dated September 20, 2000 reporting 30 daysan
Agreement and Plan of combined
results of operations forMerger by and between Fulton Financial
Corporation and Skylands
Financial Corporation subsequent to August 1, 2000 acquisition.
23Drovers Bankshares Corporation.
20
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: November 10, 2000 \s\May 11, 2001 /s/ Rufus A. Fulton, Jr.
---------------------------- -------------------------------------------------------- ------------------------------------------
Rufus A. Fulton, Jr.
Chairman President and
Chief Executive Officer
Date: November 10, 2000 \s\May 11, 2001 /s/ Charles J. Nugent
----------------------------- ----------------------------------------------------------- ----------------------------------------
Charles J. Nugent
Senior Executive Vice President and
Chief Financial Officer
2421
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 - September 30, 2000.
2522