UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459
FORM 10-Q
(Mark(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended
March 31,September 30, 2003 ,or
-------------- [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
¨ 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(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)
PENNSYLVANIA 23-2195389 (State or other jurisdiction of
incorporation or organization)(I.R.S. Employer
Identification No.)One Penn Square, P.O. Box 4887 Lancaster, Pennsylvania 17604 (Address of principal executive offices) (Zip Code) (717) 291-2411
---------------------------------------------------- (Registrant's(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]x No[_]¨Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act.Act). Yes[X]x No[_]¨APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer'sissuer’s classes of common stock, as of the latest practicable date:Common Stock, $2.50 Par Value
- 105,578,000– 108,450,000 shares outstanding as of-------------------------------------------------------------------- April 30,October 31, 2003.---------------FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
MARCH 31,SEPTEMBER 30, 2003
Description
Page - ----------- ----PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
3 4 5 6 (e)Notes to Consolidated Financial Statements
- March 31,– September 30, 2003...............7 Item 2.
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations........................ 1011 Item 3.Quantitative and Qualitative Disclosures about Market Risk
........... 1825 Item 4.Controls and Procedures
.............................................. 2129 PART II. OTHER INFORMATION
Item 6.Exhibits and Reports on Form 8-K
..................................... 2230 31 Exhibit Index
................................................................. 2632 2Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------------------------------------- (Dollars(Dollars in thousands, except per-share data)
March 31 December 31 2003 2002 ------------------------------ ASSETS - ------------------------------------------------------------------------------------------------------------------------------Cash and due from banks ................................................................... $ 348,229 $ 314,857 Interest-bearing deposits with other banks ................................................ 10,903 7,899 Mortgage loans held for sale .............................................................. 79,956 70,475 Investment securities: Held to maturity (Fair value: $32,885 in 2003 and $34,135 in 2002) ................... 31,611 32,684 Available for sale ................................................................... 2,409,730 2,383,607 Loans, net of unearned income ............................................................. 5,289,036 5,317,068 Less: Allowance for loan losses ..................................................... (71,786) (71,920) ----------- ----------- Net Loans .................................................................. 5,217,250 5,245,148 ----------- ----------- Premises and equipment .................................................................... 121,873 123,450 Accrued interest receivable ............................................................... 40,704 42,675 Goodwill .................................................................................. 61,048 61,048 Other assets .............................................................................. 109,026 105,935 ----------- ----------- Total Assets ............................................................... $ 8,430,330 $ 8,387,778 =========== =========== LIABILITIES - ------------------------------------------------------------------------------------------------------------------------------ Deposits: Noninterest-bearing ................................................................. $ 1,238,087 $ 1,118,227 Interest-bearing .................................................................... 5,106,481 5,127,301 ----------- ----------- Total Deposits ............................................................. 6,344,568 6,245,528 ----------- ----------- Short-term borrowings: Securities sold under agreements to repurchase ....................................... 325,420 297,556 Federal funds purchased .............................................................. 180,000 330,000 Demand notes of U.S. Treasury ........................................................ 2,487 4,638 ----------- ----------- Total Short-Term Borrowings ................................................ 507,907 632,194 ----------- ----------- Accrued interest payable .................................................................. 27,046 27,608 Other liabilities ......................................................................... 145,980 77,651 Federal Home Loan Bank Advances and long-term debt ........................................ 535,210 535,555 Corporation-obligated mandatorily redeemable capital securities of subsidiary trust ....... 5,500 5,500 ----------- ----------- Total Liabilities .......................................................... 7,566,211 7,524,036 ----------- ----------- SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------------ Common stock, $2.50 par value, 400 million shares authorized, 109.2 million shares issued.. 272,940 259,943 Additional paid-in capital ................................................................ 565,042 481,028 Retained earnings ......................................................................... 58,948 138,501 Accumulated other comprehensive income .................................................... 27,479 34,801 Treasury stock (3.6 million shares in 2003 and 3.0 million shares in 2002) ................ (60,290) (50,531) ----------- ----------- Total Shareholders' Equity ................................................. 864,119 863,742 ----------- ----------- Total Liabilities and Shareholders' Equity ................................. $ 8,430,330 $ 8,387,778 =========== =========== - ------------------------------------------------------------------------------------------------------------------------------
September 30
2003December 31
2002ASSETS
Cash and due from banks
$ 333,253 $ 314,857 Interest-bearing deposits with other banks
7,514 7,899 Mortgage loans held for sale
53,707 70,475 Investment securities:
Held to maturity (Fair value: $26,252 in 2003 and $34,135 in 2002)
25,412 32,684 Available for sale
2,680,051 2,383,607 Loans, net of unearned income
5,844,788 5,317,068 Less: Allowance for loan losses
(77,857 ) (71,920 ) Net Loans
5,766,931 5,245,148 Premises and equipment
121,822 123,450 Accrued interest receivable
31,385 35,527 Goodwill
123,565 61,048 Other assets
136,649 113,083 Total Assets
$ 9,280,289 $ 8,387,778 LIABILITIES
Deposits:
Noninterest-bearing
$ 1,259,811 $ 1,118,227 Interest-bearing
5,574,356 5,127,301 Total Deposits
6,834,167 6,245,528 Short-term borrowings:
Securities sold under agreements to repurchase
396,744 297,556 Federal funds purchased
387,343 330,000 Demand notes of U.S. Treasury
5,070 4,638 Total Short-Term Borrowings
789,157 632,194 Accrued interest payable
26,766 27,608 Other liabilities
75,882 77,651 Federal Home Loan Bank Advances and long-term debt
594,841 535,555 Corporation-obligated mandatorily redeemable capital securities of subsidiary trust
32,000 5,500 Total Liabilities
8,352,813 7,524,036 SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value, 400 million shares authorized, 114.0 million shares issued
284,962 259,943 Additional paid-in capital
636,934 481,028 Retained earnings
99,014 138,501 Accumulated other comprehensive income
4,569 34,801 Treasury stock (5.5 million shares in 2003 and 3.0 million shares in 2002)
(98,003 ) (50,531 ) Total Shareholders’ Equity
927,476 863,742 Total Liabilities and Shareholders’ Equity
$ 9,280,289 $ 8,387,778 See Notes to Consolidated Financial Statements
3FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars(Dollars in thousands, except per-share data)
Three Months Ended March 31 --------------------------------- 2003 2002 ------------- -------------INTEREST INCOME - ----------------------------------------------------------------------------------------------- Loans, including fees .................................... $ 85,112 $ 94,659 Investment securities: Taxable ............................................... 20,734 19,629 Tax-exempt ............................................ 2,520 2,381 Dividends ............................................. 1,148 1,054 Other interest income .................................... 670 76 ------------- ------------- Total Interest Income ....................... 110,184 117,799 INTEREST EXPENSE - ----------------------------------------------------------------------------------------------- Deposits ................................................. 25,707 33,574 Short-term borrowings .................................... 1,753 1,513 Long-term debt ........................................... 7,086 6,382 ------------- ------------- Total Interest Expense ...................... 34,546 41,469 ------------- ------------- Net Interest Income ......................... 75,638 76,330 PROVISION FOR LOAN LOSSES 2,835 2,780 ------------- ------------- Net Interest Income After Provision for Loan Losses ................. 72,803 73,550 ------------- ------------- OTHER INCOME - ----------------------------------------------------------------------------------------------- Investment management and trust services ................. 8,343 7,160 Service charges on deposit accounts ...................... 9,216 8,784 Other service charges and fees ........................... 4,586 4,105 Mortgage banking income .................................. 5,951 3,282 Investment securities gains .............................. 2,229 1,398 Other .................................................... 1,340 1,954 ------------- ------------- Total Other Income .......................... 31,665 26,683 ------------- ------------- OTHER EXPENSES - ----------------------------------------------------------------------------------------------- Salaries and employee benefits ........................... 33,320 31,047 Net occupancy expense .................................... 5,080 4,292 Equipment expense ........................................ 2,680 2,799 Data processing .......................................... 2,864 3,213 Advertising .............................................. 1,232 1,793 Intangible amortization .................................. 359 359 Other .................................................... 10,347 11,425 ------------- ------------- Total Other Expenses ........................ 55,882 54,928 ------------- ------------- Income Before Income Taxes .................. 48,586 45,305 INCOME TAXES 14,543 13,075 ------------- ------------- Net Income .................................. $ 34,043 $ 32,230 ============= ============= PER-SHARE DATA: - ----------------------------------------------------------------------------------------------- Net income (basic) ....................................... $ 0.32 $ 0.30 Net income (diluted) ..................................... 0.32 0.30 Cash dividends ........................................... 0.143 0.130 - -----------------------------------------------------------------------------------------------
Three Months Ended
September 30Nine Months Ended
September 302003 2002 2003 2002 INTEREST INCOME
Loans, including fees
$ 85,159 $ 92,072 $ 254,812 $ 280,977 Investment securities:
Taxable
16,512 21,489 55,636 62,303 Tax-exempt
2,740 2,489 7,786 7,361 Dividends
904 1,015 3,205 2,971 Other interest income
592 91 1,818 230 Total Interest Income
105,907 117,156 323,257 353,842 INTEREST EXPENSE
Deposits
22,773 31,353 72,480 95,767 Short-term borrowings
1,515 1,510 4,960 5,080 Long-term debt
7,840 6,455 22,030 19,269 Total Interest Expense
32,128 39,318 99,470 120,116 Net Interest Income
73,779 77,838 223,787 233,726 PROVISION FOR LOAN LOSSES
2,190 4,370 7,515 9,830 Net Interest Income After Provision for Loan Losses
71,589 73,468 216,272 223,896 OTHER INCOME
Investment management and trust services
8,527 6,890 25,679 21,633 Service charges on deposit accounts
9,810 9,506 28,527 27,590 Other service charges and fees
4,782 4,693 14,076 13,071 Mortgage banking income
6,100 5,807 17,892 11,871 Investment securities gains
6,990 2,677 14,028 6,047 Other
1,304 1,827 3,510 4,590 Total Other Income
37,513 31,400 103,712 84,802 OTHER EXPENSES
Salaries and employee benefits
35,516 33,336 103,330 97,001 Net occupancy expense
4,982 4,556 14,869 13,111 Equipment expense
2,618 2,859 7,886 8,374 Data processing
2,864 3,018 8,504 9,181 Advertising
1,570 1,336 4,589 4,989 Intangible amortization
622 359 1,341 1,078 Other
11,378 11,109 32,978 34,271 Total Other Expenses
59,550 56,573 173,497 168,005 Income Before Income Taxes
49,552 48,295 146,487 140,693 INCOME TAXES
15,170 14,474 44,000 41,652 Net Income
$ 34,382 $ 33,821 $ 102,487 $ 99,041 PER-SHARE DATA:
Net income (basic)
$ 0.32 $ 0.31 $ 0.96 $ 0.92 Net income (diluted)
0.32 0.31 0.96 0.91 Cash dividends
0.160 0.143 0.463 0.415 See Notes to Consolidated Financial Statements
4CONSOLIDATED STATEMENTS OF
SHAREHOLDERS'SHAREHOLDERS’ EQUITY (UNAUDITED)THREENINE MONTHS ENDED
MARCH 31,SEPTEMBER 30, 2003 AND 2002- -------------------------------------------------------------------------------- (Dollars(Dollars in thousands, except per-share data)
Accumulated Other Number of Additional Comprehen- Shares Common Paid-In Retained sive Income Treasury Outstanding Stock Capital Earnings (Loss) Stock Total - ------------------------------------------------------------------------------------------------------------------------------------Balance at December 31, 2002 106,162,000 $ 259,943 $ 481,028 $ 138,501 $ 34,801 $ (50,531) $ 863,742 Comprehensive Income: Net income 34,043 34,043 Other - net unrealized loss on securities (net of $3.2 million tax benefit) (5,873) (5,873) Less - reclassification adjustment for gains included in net income (net of $780,000 tax expense) (1,449) (1,449) --------- Total comprehensive income 26,721 --------- Stock dividend - 5% 12,997 85,470 (98,467) - Stock issued 192,000 (1,456) 3,246 1,790 Acquisition of treasury stock (756,000) (13,005) (13,005) Cash dividends - $0.143 per share (15,129) (15,129) ------------------------------------------------------------------------------------------- Balance at March 31, 2003 105,598,000 $ 272,940 $ 565,042 $ 58,948 $ 27,479 $ (60,290) $ 864,119 =========== ========= ========= ========== ============ ========== ========= Balance at December 31, 2001 108,429,000 $ 207,962 $ 536,235 $ 65,649 $ 12,970 $ (11,362) $ 811,454 Comprehensive Income: Net income 32,230 32,230 Other - unrealized gain on securities (net of $838,000 tax expense) 1,557 1,557 Less - reclassification adjustment for gains included in net income (net of $489,000 tax expense) (909) (909) ---------- Total comprehensive income 32,878 ---------- Stock issued 221,000 (2,011) 3,491 1,480 Stock split paid in the form of a 25% stock dividend 51,981 (51,981) - Acquisition of treasury stock (350,000) (6,068) (6,068) Cash dividends - $0.130 per share (14,045) (14,045) ------------------------------------------------------------------------------------------- Balance at March 31, 2002 108,300,000 $ 259,943 $ 482,243 $ 83,834 $ 13,618 $ (13,939) $ 825,699 =========== =========== ========== =========== =========== ========= ========== - ------------------------------------------------------------------------------------------------------------------------------------
Number of
Shares
OutstandingCommon
StockAdditional
Paid-In
CapitalRetained
EarningsAccumulated
Other
Comprehensive
Income (Loss)Treasury
StockTotal Balance at December 31, 2002
106,162,000 $ 259,943 $ 481,028 $ 138,501 $ 34,801 $ (50,531 ) $ 863,742 Comprehensive Income:
Net income
102,487 102,487 Other – net unrealized loss on securities (net of $11.4 million tax benefit)
(21,114 ) (21,114 ) Less – reclassification adjustment for gains included in net income (net of $4.9 million tax expense)
(9,118 ) (9,118 ) Total comprehensive income
72,255 Stock issued
512,300 (3,433 ) 8,912 5,479 Stock issued for acquisition of Premier Bancorp, Inc.
4,615,700 12,021 79,848 (3,692 ) 88,177 Stock dividend – 5%
12,998 79,491 (92,526 ) (37 ) Acquisition of treasury stock
(2,729,000 ) (52,692 ) (52,692 ) Cash dividends - $0.463 per share
(49,448 ) (49,448 ) Balance at September 30, 2003
108,561,000 $ 284,962 $ 636,934 $ 99,014 $ 4,569 $ (98,003 ) $ 927,476 Balance at December 31, 2001
108,429,000 $ 207,962 $ 536,235 $ 65,649 $ 12,970 $ (11,362 ) $ 811,454 Comprehensive Income:
Net income
99,041 99,041 Other – net unrealized gain on securities (net of $9.9 million tax expense)
18,374 18,374 Less – reclassification adjustment for gains included in net income (net of $2.1 million tax expense)
(3,930 ) (3,930 ) Total comprehensive income
113,485 Stock issued
344,000 (2,997 ) 6,346 3,349 Stock split paid in the form of a 25% stock dividend
51,981 (52,050 ) (69 ) Acquisition of treasury stock
(1,698,000 ) (30,059 ) (30,059 ) Cash dividends - $0.415 per share
(44,967 ) (44,967 ) Balance at September 30, 2002
107,075,000 $ 259,943 $ 481,188 $ 119,723 $ 27,414 $ (35,075 ) $ 853,193 See Notes to Consolidated Financial Statements
5CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------------- (In(In thousands)
Three Months Ended March 31 ------------------------------- 2003 2002 --------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES:Net Income .............................................................. $ 34,043 $ 32,230 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses .......................................... 2,835 2,780 Depreciation and amortization of premises and equipment ............ 3,115 3,148 Net amortization of investment security premiums ................... 4,108 247 Investment security gains .......................................... (2,229) (1,398) Net increase in mortgage loans held for sale ....................... (9,481) (13,606) Amortization of intangible assets .................................. 359 359 Decrease in accrued interest receivable ............................ 1,971 2,233 Decrease in other assets ........................................... 492 26 Decrease in accrued interest payable ............................... (562) (3,700) Increase in other liabilities ...................................... 7,813 3,322 ------------- ------------- Total adjustments ............................................. 8,421 (6,589) ------------- ------------- Net cash provided by operating activities ..................... 42,464 25,641 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale .................... 277,424 10,555 Proceeds from maturities of securities held to maturity ................. 6,024 5,442 Proceeds from maturities of securities available for sale ............... 350,982 141,734 Purchase of securities held to maturity ................................. (4,969) (1,469) Purchase of securities available for sale ............................... (607,081) (281,783) (Increase) decrease in short-term investments ........................... (3,004) 2,512 Net decrease in loans ................................................... 25,061 4,587 Net purchase of premises and equipment .................................. (1,538) (2,181) ------------- ------------- Net cash provided by (used in) investing activities ........... 42,899 (120,603) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand and savings deposits ............................. 155,011 40,109 Net decrease in time deposits ........................................... (55,971) 83,138) Decrease in long-term debt .............................................. (345) (5,420) (Decrease) increase in short-term borrowings ............................ (124,287) 61,992 Dividends paid .......................................................... (15,184) (14,042) Net proceeds from issuance of common stock .............................. 1,790 1,480 Acquisition of treasury stock ........................................... (13,005) (6,068) ------------- ------------- Net cash used in financing activities ......................... (51,991) (5,087) ------------- ------------- Net Increase (Decrease) in Cash and Due From Banks ...................... 33,372 (100,049) Cash and Due From Banks at Beginning of Period .......................... 314,857 356,539 ------------- ------------- Cash and Due From Banks at End of Period ................................ $ 348,229 $ 256,490 ============= ============= Supplemental Disclosures of Cash Flow Information Cash paid during the period for: Interest ........................................................... $ 35,108 $ 45,169 Income taxes ....................................................... 955 1,492 - ----------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 302003 2002 CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income
$ 102,487 $ 99,041 Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
7,515 9,830 Depreciation and amortization of premises and equipment
9,349 9,550 Net amortization of investment security premiums
16,155 1,502 Investment security gains
(14,028 ) (6,047 ) Net decrease (increase) in mortgage loans held for sale
18,020 (26,126 ) Amortization of intangible assets
1,341 1,078 Decrease in accrued interest receivable
4,142 2,855 Decrease (increase) in other assets
3,552 (1,082 ) Decrease in accrued interest payable
(3,855 ) (5,468 ) (Decrease) increase in other liabilities
(6,759 ) 1,251 Total adjustments
35,432 (12,657 ) Net cash provided by operating activities
137,919 86,384 CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale
442,369 23,765 Proceeds from maturities of securities held to maturity
14,557 15,824 Proceeds from maturities of securities available for sale
1,257,386 489,080 Purchase of securities held to maturity
(7,331 ) (5,027 ) Purchase of securities available for sale
(1,877,724 ) (863,088 ) Decrease in short-term investments
16,293 2,138 Net (increase) decrease in loans
(164,583 ) 34,506 Net cash acquired from Premier Bancorp, Inc
17,222 — Net purchases of premises and equipment
(2,745 ) (6,651 ) Net cash used in investing activities
(304,556 ) (309,453 ) CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in demand and savings deposits
340,745 295,135 Decrease in time deposits
(206,456 ) (22,735 ) Decrease in long-term debt
(5,240 ) (7,906 ) Increase (decrease) in short-term borrowings
150,410 (16,019 ) Dividends paid
(47,213 ) (43,555 ) Net proceeds from issuance of common stock
5,479 3,280 Acquisition of treasury stock
(52,692 ) (30,059 ) Net cash provided by financing activities
185,033 178,141 Net Increase (Decrease) in Cash and Due From Banks
18,396 (44,928 ) Cash and Due From Banks at Beginning of Period
314,857 356,539 Cash and Due From Banks at End of Period
$ 333,253 $ 311,611 Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest
$ 103,325 $ 125,584 Income taxes
37,851 37,798 See Notes to Consolidated Financial Statements
6NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A
-– Basis of PresentationThe accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the
three-month periodthree and nine-month periods endedMarch 31,September 30, 2003 are not necessarily indicative of the results that may beexpectedexperienced for the year ending December 31, 2003.NOTE B
-– Net Income Per ShareThe
Corporation'sCorporation’s basic net income per share is calculated as net income divided by the weighted average number of shares outstanding. For diluted net income per share, net income is divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. TheCorporation'sCorporation’s common stock equivalents consist solely of outstanding stock options.A reconciliation of the weighted average shares outstanding used to calculate basic net income per share and diluted net income per share follows:
Three months ended March 31 ----------------------------- 2003 2002 ------------ ----------- (in thousands)Weighted average shares outstanding (basic) ............... 105,922 108,339 Impact of common stock equivalents ........................ 713 740 ------------ ----------- Weighted average shares outstanding (diluted) ............. 106,635 109,079 ============ ===========
Three months ended
September 30Nine months ended
September 302003 2002 2003 2002 Weighted average shares outstanding (basic)
107,856 107,983 106,412 108,222 Impact of common stock equivalents
875 720 777 740 Weighted average shares outstanding (diluted)
108,731 108,703 107,189 108,962 NOTE C
-– Stock DividendThe Corporation
declaredpaid a 5% stock dividend onApril 15, 2003 which will be paid onMay 23,2003 to shareholders of record on April 30,2003. All share and per-share information has been restated to reflect the impact of this stock dividend.In addition, shareholders' equity accounts have been adjusted to reflect the impact of the dividend, assuming 5.2 million shares will be issued on the payment date.NOTE D
-– Disclosures about Segments of an Enterprise and Related InformationThe Corporation does not have any operating segments which require disclosure of additional information. While the Corporation owns
teneleven separate banks, each engages in similar activities, provides similar products and services, and operates in the same general geographical area. TheCorporation'sCorporation’s non-banking activities are immaterial and, therefore, separate information has not been disclosed.NOTE E
- Goodwill– Acquisition of Premier Bancorp, Inc.On August 1, 2003, the Corporation acquired all of the outstanding common stock of Premier Bancorp, Inc. (Premier), a $600 million financial holding company, and
Intangible Assetsits wholly-owned subsidiary, Premier Bank. The total purchase price was $92.0 million, including $2.1 million of direct acquisition costs. The Corporationissued 1.407 shares of its stock for each of the 3.4 million shares of Premier outstanding on the acquisition date. The purchase price was determined based on the value of the Corporation’s stock on the date when the final terms of the acquisition were agreed to and announced.
Premier Bank is located in Doylestown, Pennsylvania and its eight community banking offices in Bucks, Northampton and Montgomery Counties, Pennsylvania complement the Corporation’s existing retail banking network.
The acquisition was accounted for as a purchase and the Corporation’s results of operations include Premier from the date of the acquisition. The purchase price was allocated based on estimated fair values on the acquisition date as follows (in thousands):
Cash and due from banks
$ 19,290 Other earning assets
30,701 Investment securities available for sale
168,022 Loans, net
364,715 Premises and equipment
4,976 Core deposit intangible asset
8,890 Goodwill
62,517 Other assets
5,241 Total assets acquired
664,352 Deposits
454,350 Short-term borrowings
20,094 Long-term debt
91,026 Other liabilities
6,895 Total liabilities assumed
572,365 Net assets acquired
$ 91,987 NOTE F – Stock-Based Compensation
In
October,December 2002, theCorporation adoptedFinancial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No.147 "Acquisitions of Certain Financial Institutions"148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (Statement147)148). Statement147 changed148 clarifies the accounting forcertain branch acquisitionsoptions issued in prior periods when a company elects toallowtransition from Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) accounting to Statement 123, “Accounting for Stock-Based Compensation” (Statement 123) accounting. It also requires additional disclosures with respect to accounting for stock-based compensation. Finally, Statement No. 148 amends Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information.The Corporation has elected to continue application of APB 25 and related interpretations in accounting for its stock-based employee compensation plans and, accordingly, no compensation expense is reflected in net income. Had compensation cost for these plans been recorded consistent with the
purchase price paidfair value provisions of Statements 123 and 148, the Corporation’s net income and net income per share would have been reduced to the following pro-forma amounts:
Three months ended
September 30Nine months ended
September 302003 2002 2003 2002 Net income as reported
$ 34,382 $ 33,821 $ 102,487 $ 99,041 Stock based employee compensation expense under the fair value method, net of tax
1,634 1,816 1,758 1,938 Pro-forma net income
$ 32,748 $ 32,005 $ 100,729 $ 97,103 Net income per share (basic)
$ 0.32 $ 0.31 $ 0.96 $ 0.92 Pro-forma net income per share
0.30 0.30 0.95 0.90 Net income per share (diluted)
$ 0.32 $ 0.31 $ 0.96 $ 0.91 Pro-forma net income per share
0.30 0.29 0.94 0.89 NOTE G – Reclassifications
Certain amounts in
excess of net assets acquiredthe 2002 consolidated financial statements and notes have been reclassified tobe accounted for as goodwill. Perconform to the 2003 presentation.NOTE H – New Accounting Standards
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities andIntangible Assets", goodwill is not amortized, but is testedEquity” (Statement 150). Statement 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both debt and equity.This statement was originally effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at
least annually for impairment. Adoptionthe beginning of the first interim period beginning on or after June 15, 2003. In November 2003 the FASB deferred the effective date of certain provisions of Statement147 resulted in the restatement150 related to corporation-obligated mandatorily redeemable capital securities ofresults for the first quarter of 2002.subsidiary trusts. Thefollowing table summarizes the results of this restatement (in thousands, except per share amounts): 72002 ---------- Net income, originally reported ........................... $ 32,089 Amortization of goodwill, net of taxes .................... 141 ---------- Net income, as restated ................................... $ 32,230 ========== Basic net income per share, originally reported (1) ....... $ 0.30 Amortization of goodwill, net of taxes .................... - ---------- Basic net income per share, as restated ................... $ 0.30 ========== Diluted net income per share, originally reported (1) ..... $ 0.29 Amortization of goodwill, net of taxes .................... - ---------- Diluted net income per share, as adjusted (2) ............. $ 0.30 ========== (1) As restated for the impact of stock dividends and splits. (2) AmountCorporation does notsum dueexpect the implementation of Statement 150 torounding. In prior filings, goodwill and intangible assets were combined for presentation purposes in the consolidated balance sheets. Goodwill is now presented as a separate line item and intangible assets totaling $10.9 million in 2003 and $11.2 million in 2002 are included with other assets.have any material impact on its financial statements.NOTE
F -I – Pending AcquisitionOn
January 16,August 25, 2003, the Corporation entered into a merger agreement to acquirePremier Bancorp, Inc. (Premier)Resource Bankshares Corporation (Resource), ofDoylestown, Pennsylvania. PremierVirginia Beach, Virginia. Resource isa $600an $850 million financial holding company whose primary subsidiary isPremierResource Bank, which operatessevensix community banking offices inBucks, NorthamptonNewport News, Chesapeake, Herndon, Virginia Beach (two locations) andMontgomery Counties, Pennsylvania.Richmond in Virginia. In addition, Resource operates 14 loan production and residential mortgage offices in Virginia, North Carolina, Maryland and Florida.Under the terms of the merger agreement, each of the approximately
3.56.0 million shares ofPremier'sResource’s common stock will be exchanged for1.4071.4667 shares(restated to reflect the impactof the5% stock dividend discussed in Note C) of the Corporation'sCorporation’s common stock. In addition, each of the options to acquirePremier'sResource’s stock will be converted to options to purchase theCorporation'sCorporation’s stock. The acquisition is subject to approval by bank regulatory authorities andPremier'sResource’s shareholders, and is expected to be completed in thethird quarterfirst half of2003.2004. As a result of the acquisition,PremierResource will be merged into the Corporation andPremierResource Bank will become a wholly-owned subsidiary.The acquisition will be accounted for as a purchase. Purchase accounting requires the Corporation to allocate the total purchase price of the acquisition to the assets acquired and liabilities assumed, based on their respective fair values at the acquisition date, with any remaining acquisition cost being recorded as goodwill. Resulting goodwill balances are then subject to an impairment review on at least an annual basis. The results of
Premier'sResource’s operations will be included in theCorporation'sCorporation’s financial statements prospectively from the date of the acquisition.The total purchase price is estimated to be approximately
$90$196.0 million, which includes the value of theCorporation'sCorporation’s stock to be issued,PremierResource options to be converted and certain acquisition related costs. The net assets ofPremierResource as ofDecember 31, 2002September 30, 2003 were$38.4$57.0 million and accordingly, the purchase price exceeds the carrying value of the net assets by51.6$139.0 million as of this date. The total purchase price will be allocated to the net assets acquired as of the merger effective date, based on fair market values at that date. The Corporation expects to record a core deposit intangible asset and goodwill as a result of the acquisition accounting.NOTE G - Stock-Based Compensation In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and 8Disclosure" (Statement 148). Statement 148 clarifies the accounting for options issued in prior periods when a company elects to transition from Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) accounting to Statement 123, "Accounting for Stock-Based Compensation" (Statement 123) accounting. It also requires additional disclosures with respect to accounting for stock-based compensation. Finally, Statement No. 148 amends Accounting Principles Board Opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. The Corporation has elected to continue application of APB 25 and related interpretations in accounting for its stock-based employee compensation plans and, accordingly, no compensation expense is reflected in net income. The Corporation did not grant any stock options during the first quarter of 2003 or 2002. As such, had stock-based compensation expense been recognized using the fair value method consistent with Statements 123 and 148, there would have been no impact on net income or net income per share for these periods. NOTE H - Reclassifications Certain amounts in the 2002 consolidated financial statements and notes have been reclassified to conform to the 2003 presentation. 9Item 2.
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of OperationsManagement'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
(Management's(Management’s Discussion) concerns Fulton Financial Corporation (the Corporation), a financial holding company incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly-owned subsidiaries.This discussion and analysisManagement’s Discussion should be read in conjunction with the consolidated financial statements and other financial information presented in this report.The Corporation’s results for the three and nine months ended September 30, 2003 were impacted by the August 1, 2003 acquisition of Premier Bancorp, Inc. (Premier). Where appropriate, this impact has been isolated in the discussion that follows. The terms of the acquisition are disclosed in Note E of the Notes to the Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
The Corporation has made, and may continue to make, certain forward-looking statements with respect to its management of net interest income and margin, mergers and acquisitions, the ability to realize gains on equity investments, allowance and provision for loan losses, expected levels of certain non-interest expenses, mortgage lending volumes and the liquidity position of the Corporation and
Parent Company.parent company. The Corporation cautions that these forward-looking statements are subject to various assumptions, risks and uncertainties. Because of the possibility of changes in these assumptions, risks and uncertainties, actual results could differ materially from forward-looking statements.In addition to the factors identified herein, the following could cause actual results to differ materially from such forward-looking statements: pricing pressures on loan and 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 the
Corporation'sCorporation’s success in merger and acquisition integration.The
Corporation'sCorporation’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.RESULTS OF OPERATIONS
Quarter ended
March 31,September 30, 2003 versus Quarter endedMarch 31,September 30, 2002Fulton Financial
Corporation'sCorporation’s net income for thefirstthird quarter of 2003 increased$1.8 million,$561,000, or5.6%1.7%, in comparison to net income for thefirstthird quarter of 2002. Diluted net income per share increased$0.02,$0.01, or6.7%3.2%, to $0.32 for the quarter, compared to $0.31 for the same period in 2002. Net income for the third quarter of 2003 of $34.4 million represented an annualized return on average assets of 1.51% and an annualized return on average equity of 14.79%.The increase from 2002 resulted from
an increaseincreases in other income and investment securities gains and a lower loan loss provision, offset by a decrease in net interest income and increases inexpenses and a higher loan loss provision.expenses.Net Interest Income
Net interest income decreased
$692,000,$4.1 million, from$76.3$77.8 million in 2002 to$75.6$73.8 million in 2003. Excluding Premier, net interest income decreased $6.5 million, or 8.4%. This decrease was due to continued low interest rates and slow overall loan growth. TheCorporation'sCorporation’s average prime lending rate decreased from 4.75% in thefirstthird quarter of 2002 to4.25%4.00% in thefirstthird quarter of 2003 as a result of the FRB reducing short-term interest rates in November,2002. This reduction2002 and June, 2003. These reductions in an already low interest rate environment negatively impacted theCorporation'sCorporation’s net interest margin as average yields on earning-assets decreasedfasterfurther than the average cost of deposits.The average yield on earning assets decreased
93128 basis points (a13.9 %20.3% decline) during the period while the cost of interest-bearing liabilities decreased7075 basis points (a17.5%28.4% decline). This resulted in a3871 basis point decrease in net interest margin compared to the same period in 2002. The Corporation continues to manage its asset/liability position and interest rate risk through the methods discussed in the"Market Risk"“Market Risk” section ofthis document.Management’s Discussion.The following table provides a comparative average balance sheet and net interest income analysis for the
firstthird quarter of 2003 as compared to the same period in 2002. All dollar amounts are in thousands.10
Quarter Ended September 30, 2003 Quarter Ended September 30, 2002 Average
BalanceInterest Yield/
Rate (1)Average
BalanceInterest Yield/
Rate (1)ASSETS
Interest-earning assets:
Loans and leases
$ 5,683,795 $ 85,159 5.94 % $ 5,378,701 $ 92,072 6.79 % Taxable investment securities
2,218,352 16,512 2.95 1,627,876 21,489 5.24 Tax-exempt investment securities
287,297 2,740 3.78 233,740 2,489 4.22 Equity securities
128,064 904 2.80 115,390 1,015 3.49 Total Investment securities
2,633,713 20,156 3.04 1,977,006 24,993 5.02 Short-term investments
51,398 592 4.57 19,891 91 1.82 Total interest-earning assets
8,368,906 105,907 5.02 % 7,375,598 117,156 6.30 % Noninterest-earning assets:
Cash and due from banks
302,248 262,971 Premises and equipment
125,835 123,775 Other assets
296,300 249,095 Less: Allowance for loan losses
(76,746 ) (74,136 ) Total Assets
$ 9,016,543 $ 7,937,303 LIABILITIES AND EQUITY
Interest-bearing liabilities:
Demand deposits
$ 1,213,594 $ 1,426 0.47 % $ 939,683 $ 1,966 0.83 % Savings deposits
1,709,803 2,468 0.57 1,534,828 4,332 1.12 Time deposits
2,522,767 18,879 2.97 2,599,115 25,055 3.82 Total Interest-bearing deposits
5,446,164 22,773 1.66 5,073,626 31,353 2.45 Short-term borrowings
695,550 1,515 0.86 387,159 1,510 1.55 Long-term debt
595,466 7,840 5.22 456,602 6,455 5.61 Total interest-bearing liabilities
6,737,180 32,128 1.89 % 5,917,387 39,318 2.64 % Non-interest-bearing liabilities:
Demand deposits
1,258,183 1,066,328 Other
98,594 94,915 Total Liabilities
8,093,957 7,078,630 Shareholders’ equity
922,586 858,673 Total Liabilities and Shareholders’ Equity
$ 9,016,543 $ 7,937,303 Net interest income
$ 73,779 $ 77,838 Net interest margin (FTE)
3.62 % 4.33 %
Quarter Ended March 31, 2003 Quarter Ended March 31, 2002 -------------------------------------- ------------------------------------- Average Yield/ Average Yield/ ASSETS Balance Interest Rate(1) Balance Interest Rate (1) - -------------------------------------- ------------ ------------ ---------- ------------ ------------ ---------Interest-earning assets: Loans and leases ................... $5,346,978 $ 85,112 6.46% $5,389,770 $ 94,659 7.12% Taxable investmentYields on tax-exempt securities ...... 1,959,036 20,734 4.29 1,398,133 19,629 5.69 Tax-exempt investment securities ... 241,180 2,520 4.24 219,671 2,381 4.40 Equity securities .................. 133,300 1,148 3.49 103,018 1,054 4.15 Short-term investments ............. 54,995 670 4.94 13,972 76 2.21 ---------- ----------- ------ ---------- ---------- ------ Total interest-earning assets ........ 7,735,489 110,184 5.78% 7,124,564 117,799 6.71% Noninterest-earning assets: Cash and due from banks ............ 257,555 244,949 Premises and equipment ............. 123,372 123,220 Other assets ....................... 238,132 227,330 Less: Allowance for loan losses .... (72,972) (72,441) ---------- ---------- Total Assets ............... 8,281,576 $7,647,622 ========== ========== Quarter Ended March 31, 2003 Quarter Ended March 31, 2002 -------------------------------------- ------------------------------------- Average Yield/ Average Yield/ LIABILITIES AND EQUITY Balance Interest Rate (1) Balance Interest Rate (1) - -------------------------------------- ------------ ------------ ---------- ------------ ------------ --------- Interest-bearing liabilities: Demand deposits .................... $1,049,624 $ 1,623 0.63% $ 820,944 $ 1,275 0.63% Savings deposits ................... 1,535,872 2,879 0.76 1,455,128 4,114 1.15 Time deposits ...................... 2,512,211 21,205 3.42 2,604,909 28,185 4.39 Short-term borrowings .............. 611,447 1,753 1.16 385,296 1,513 1.59 Long-term debt ..................... 540,906 7,086 5.31 463,706 6,382 5.58 ---------- ----------- ------ ---------- ---------- ------ Total interest-bearing liabilities ... 6,250,060 34,546 2.24% 5,729,983 41,469 2.94% Noninterest-bearing liabilities: Demand deposits .................... 1,071,184 1,000,248 Other .............................. 95,690 103,531 ---------- ---------- Total Liabilities .......... 7,416,934 6,833,762 Shareholders' equity ................. 864,642 813,860 ---------- ---------- Total Liabilities and Shareholders' Equity ..... $8,281,576 $7,647,622 ========== ========== Net interest income .................. $ 75,638 $ 76,330 =========== ========== Net interest marginare not fully taxable equivalent (FTE)............ 4.06% 4.44% ====== =======.(1) Yields on tax-exempt securities are not fully taxable equivalent (FTE). 11The following table summarizes the changes in interest income and expense due to changes in average balances (volume) and changes in rates.
2003 vs. 2002 Increase (decrease) due To change
September 30
2003 vs. 2002
Increase (decrease) due
to change inVolume Rate Net (in thousands) Interest income on:
Loans and leases
$ 5,223 $ (12,136 ) $ (6,913 ) Taxable investment securities
7,795 (12,772 ) (4,977 ) Tax-exempt investment securities
570 (319 ) 251 Equity securities
111 (222 ) (111 ) Short-term investments
294 207 501 Total interest-earning assets
$ 13,993 $ (25,242 ) $ (11,249 ) Interest expense on:
Demand deposits
$ 573 $ (1,113 ) $ (540 ) Savings deposits
494 (2,358 ) (1,864 ) Time deposits
(736 ) (5,440 ) (6,176 ) Short-term borrowings
1,203 (1,198 ) 5 Long-term debt
1,963 (578 ) 1,385 Total interest-bearing liabilities
$ 3,497 $ (10,687 ) $ (7,190 ) Approximately $237.5 million of the $305.1 million increase in
Volume Rate Net ---------- ----------- ---------- (in thousands) Interest income on: Loansaverage loans andleases ...................... $ (777) $ (8,770) $ (9,547) Taxable investment securities ......... 9,943 (8,838) 1,105 Tax-exempt investment securities ...... 244 (105) 139 Equity securities ..................... (320) 414 94 Short-term investments ................ 234 360 594 -------- --------- -------- Total$363.9 million of the $993.3 million increase in average total interest-earning assets....... $ 9,324 $ (16,939) $ (7,615) ======== ========= ======== Interest expense on: Demandresulted from the inclusion of Premier in the average balances from August 1, 2003 through the end of the quarter. Similarly, approximately $275.6 million of the $372.5 million increase in average interest-bearing deposits....................... $ 378 $ (30) $ 348 Savings deposits ...................... 242 (1,477) (1,235) Time deposits ......................... (1,053) (5,927) (6,980) Short-term borrowings ................. 917 (677) 240 Long-term debt ........................ 1,107 (403) 704 -------- --------- -------- Total interest-bearing liabilities .. $ 1,591 $ (8,514) $ (6,923) ======== ========= ========is attributable to Premier.Interest income decreased
$7.6$11.2 million, or6.5%9.6%, mainly as a result of the93128 basis point decrease in average yields on earning assets, which accounted for a$16.9$25.2 million decline in interest income. This decrease was partially offset by an increase in interest income due to growth in averagebalances, mainly in taxableinvestmentsecurities.securities and loan balances. The interest income increase attributable to volume was$9.3$14.0 million. Excluding Premier, the decrease in interest income would have been $15.2 million, or 13.0%.The decrease in the average yield on earning assets from the
firstthird quarter of 2002 wasmainlydue to several factors. First was the general decrease in interest rates as a result of the previously mentioned actions of theFederal Reserve Board.FRB. Second,an approximately $646 million change in the mix of the loan portfolio from fixed rate to floating rate loans occurred which trended the Corporation toward greater asset sensitivity to interest-rate changes. Finally,investment securities-– which generally have lower yields than loans-– became a larger component of total average earning assets. Finally, due to the high levels of mortgage refinancing activity during the period, there was an increase in prepayments of mortgage-backed securities. Prepayments negatively impact yields through the acceleration of premium amortization expense, which is netted against interest income, and the reinvestment of funds at lower rates. Premium amortization for the third quarter of 2003 was $6.8 million, including $6.3 million of accelerated amortization due to prepayments, compared to $1.1 million for the third quarter of 2002.Average investment securities increased $656.7 million, or 33.2%, as the growth in deposits and borrowings exceeded loan growth. The
Corporation'sCorporation used the excess funds to purchase investment securities, particularly mortgage-backed securities, which grew $555.0 million, or 37.8%. The average yield on investment securities declined 198 basis points from 5.02% in 2002 to 3.04% in 2003. Excluding accelerated amortization on mortgage-backed securities, the average yield on investment securities would have been 3.98% in 2003.The Corporation’s average loan portfolio
decreased $42.8increased $305.1 million, or 5.7%, mainly asincreasesa result of Premier which contributed $237.5 million to the increase. Increases in commercial mortgages ($108.6133.7 million, or7.4%7.8%, excluding Premier), commercial loans ($93.8 million, or 6.0%, excluding Premier), and consumer loans ($36.4 million, or 2.7%, excluding Premier) were offset by a decrease in residential mortgages ($198.9 million, or 26.7%, excluding Premier). Residential mortgages continued to decline as low mortgage rates fueled refinance activity and most qualifying, originated fixed rate mortgages were sold in the secondary market. Consumer loans increased mainly due to an increase in home equity lines of credit.Interest expense decreased $7.2 million, or 18.3%, mainly due to the 75 basis point decline in interest rates, which accounted for $10.7 million of the decrease. The net $819.8 million, or 13.9%, increase in average interest-bearing liabilities resulted in only a $3.5 million increase in interest expense due to the change in the composition of these liabilities from higher rate time deposits to lower rate demand and savings accounts and short-term borrowings. Excluding Premier, the decrease in interest expense would have been $8.7 million, or 22.1%.
Average interest bearing demand and savings deposits increased $448.9 million, or 18.1%, while time deposits decreased $76.3 million, or 2.9%. This change in the deposit mix reflects depositors’ reluctance to reinvest maturing time deposits at the current low rates. Excluding Premier, interest-bearing demand and savings deposits increased $308.2 million, or 12.5%, while time deposits decreased $211.2 million, or 8.1%.
Short-term borrowings increased $308.4 million, or 79.7%, and long-term debt increased $138.9 million, or 30.4%. The increase in average short-term borrowings was realized in customer repurchase agreements ($79.1 million, or 26.2%), and Federal funds purchased ($229.4 million, or 282.1%). Federal funds purchased were used to manage the Corporation’s interest-sensitivity gap and to fund investment securities purchases. The increase in average long-term debt was due to the Corporation locking in longer term funding during the fourth quarter of 2002 through the use of advances from the Federal Home Loan Bank (FHLB) in order to take advantage of the low interest rate environment.
Provision and Allowance for Loan Losses
The following table summarizes loans, net of unearned income as of the dates shown:
September 30
2003December 31
2002September 30
2002(in thousands) Commercial, financial and agricultural
$ 1,723,713 $ 1,679,100 $ 1,606,897 Real estate – construction
309,122 248,565 242,518 Real estate – residential mortgage
1,274,328 1,244,781 1,310,599 Real estate – commercial mortgage
1,932,735 1,527,144 1,528,167 Consumer
537,512 543,040 564,992 Leasing and other
67,378 74,438 76,328 Total Loans, net of unearned
$ 5,844,788 $ 5,317,068 $ 5,329,501 The following table summarizes the activity in the Corporation’s allowance for loan losses:
Three Months Ended
September 302003 2002 (dollars in thousands) Loans outstanding at end of period (net of unearned)
$ 5,844,788 $ 5,329,501 Daily average balance of loans and leases
$ 5,683,795 $ 5,378,701 Balance at beginning of period
$ 72,240 $ 72,801 Loans charged-off:
Commercial, financial and agricultural
1,606 3,931 Real estate – mortgage
131 129 Consumer
987 1,082 Leasing and other
130 155 Total loans charged-off
2,854 5,297 Recoveries of loans previously charged-off:
Commercial, financial and agricultural
150 258 Real estate – mortgage
181 32 Consumer
461 514 Leasing and other
15 11 Total recoveries
807 815 Net loans charged-off
2,047 4,482 Provision for loan losses
2,190 4,370 Allowance purchased (Premier)
5,474 — Balance at end of period
$ 77,857 $ 72,689 Net charge-offs to average loans (annualized)
0.14 % 0.33 % Allowance for loan losses to loans outstanding
1.33 % 1.36 % The following table summarizes the Corporation’s non-performing assets as of the indicated dates.
September 30
2003December 31
2002September 30
2002Nonaccrual loans
$ 27,155 $ 24,090 $ 29,698 Loans 90 days past due and accruing
10,286 14,095 15,872 Other real estate owned (OREO)
952 938 1,614 Total non-performing assets
$ 38,393 $ 39,123 $ 47,184 Non-accrual loans/Total loans
0.46 % 0.45 % 0.56 % Non-performing assets/Total assets
0.41 % 0.47 % 0.58 % Allowance/Non-performing loans
208 % 188 % 160 % The provision for loan losses for the third quarter of 2003 totaled $2.2 million, a decrease of $2.2 million, or 49.9%, from the same period in 2002. Net charge-offs totaled $2.0 million, or 0.14% of average loans on an
annualized basis, during the third quarter of 2003, a $2.4 million, or 54.3%, decrease from $4.5 million, or 0.33% of average loans, for the third quarter of 2002. Non-performing assets decreased to $38.4 million, or 0.41% of total assets, at September 30, 2003, from $47.2 million, or 0.58% of total assets, at September 30, 2002.
The improvements in the Corporation’s asset quality as of and for the quarter ended September 30, 2003 were mainly due to one problem commercial relationship which negatively impacted asset quality in 2002. The Corporation charged off $3.4 million of this relationship in the third quarter of 2002 and placed the remaining $11.1 million balance on non-accrual status. Subsequent to September 30, 2002, approximately $5.8 million of the loans were paid off. The remaining balance continues to be on non-accrual status.
Management believes that the allowance balance of $77.9 million at September 30, 2003 is sufficient to cover losses inherent in the loan portfolio on that date and is appropriate based on accounting standards for the allowance and provision for loan losses.
Other Income
Other income for the quarter ended September 30, 2003 was $37.5 million, an increase of $6.1 million, or 19.5%, over the comparable period in 2002. Excluding investment securities gains, which increased from $2.7 million in 2002 to $7.0 million in 2003, other income increased $1.8 million, or 6.3%. Premier did not contribute significantly to the overall increase in other income.
Investment management and trust services income increased $1.6 million, or 23.8%, mainly due to an increase in brokerage service fee income, particularly on annuity sales which have become popular in the current rate and economic environment. In addition, the Corporation continued to expand the services offered by its investment management and trust services subsidiary, Fulton Financial Advisors, throughout its affiliate bank network.
Mortgage banking income increased $293,000, or 5.0%. Mortgage banking income is comprised of two components, net gains on the sales of mortgage loans and servicing income, net of the amortization of mortgage servicing rights. Net gains on sales of loans sold increased $923,000, or 17.2%, partially offset by a decrease in net servicing income of $630,000, or 144.6%. The increase in gains on sales of mortgage loans was due to the continuing historically low average rates for 30-year fixed rate mortgage loans throughout the period, and to the Corporation dedicating additional resources to enhance its mortgage banking activities throughout its markets. The decrease in net servicing income resulted from a $703,000 increase in amortization of servicing rights due to an increase in loans being sold with servicing retained as well as an increase of prepayments of serviced loans.
Although mortgage rates were generally low throughout the third quarter of 2003, an upward trend was evident. If rates continue to increase, new loan volume will likely decrease, and the Corporation will not be able to sustain its recent levels of gains on sales of mortgage loans.
Service charges on deposit accounts increased $304,000, or 3.2%, due to growth in transaction accounts, such as savings and demand deposits. Other service charges and fees increased $89,000.
Income from debit card transactions, which is included in other service charges and fees, was unchanged from the third quarter of 2002, despite increases in purchase volumes. Due to recent legal settlements between VISA and MasterCard and a third party, beginning on August 1, 2003 the earnings rate paid by these companies decreased by approximately one third. As a result, debit card income was negatively impacted by approximately $250,000 for the third quarter of 2003, or $125,000 per month. This monthly reduction is expected to continue throughout the remainder of 2003. Due to uncertainties created by the terms of these settlements, the impact on debit card income for the Corporation beyond 2003 cannot reasonably be projected.
Investment securities gains increased $4.3 million, or 161.1%, during the period. Improvements in the equity markets bolstered the value of the Corporation’s equity portfolio during the quarter, resulting in increased realized security gains.
Other Expenses
Total other expenses for the third quarter of 2003 were $59.6 million, representing an increase of $3.0 million, or 5.3%, from 2002. Total other expenses for the quarter, excluding Premier, were $57.7 million, a $1.1 million, or 2.0%, increase from 2002.
Total salaries and benefits expense increased $2.2 million, or 6.5%, with Premier contributing $879,000 to the increase. Salary expense, excluding benefits and the impact of Premier, increased $1.4 million, or 4.9%, driven by an increase in commissions for mortgage originators and investment brokerage professionals as well as normal salary increases for existing employees. Employee benefits expense decreased $52,000, or 2.5%, due to increases in retirement plan expenses being offset by decreases in health insurance as a result of recent favorable health claim experience. Despite this recent decline in costs, management expects health care costs to continue to rise in the future consistent with overall national trends.
Net occupancy expense increased $426,000, or 9.4%, over the same period in 2002, due to general increases in rental expenses and real estate taxes as a result of growth in the Corporation’s branch network. Equipment expense decreased $241,000, or 8.4%, due to a reduction in depreciation expense as certain equipment became fully depreciated during 2002. Premier did not contribute significantly to either of these expense categories.
Data processing expense decreased $154,000, or 5.1%, due to favorable renegotiations of certain contracts for data processing services. Intangible amortization increased $263,000 due to the amortization of the core deposit intangible asset recorded as a result of the Premier acquisition. Advertising expense increased $234,000, or 17.5 %, and other expense increased $269,000, or 2.4%, both mainly due to Premier.
Income Taxes
Income tax expense for the third quarter of 2003 was $15.2 million, a $696,000, or 4.8%, increase from $14.5 million in 2002. The Corporation’s effective tax rate was approximately 30.6% in 2003 as compared to 30.0% in 2002. 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, 2003 versus Nine months ended September 30, 2002
The Corporation’s net income for the first nine months of 2003 increased $3.4 million, or 3.5%, in comparison to net income for the same period in 2002. Diluted net income per share increased $0.05, or 5.5%, compared to 2002. Net income for the first nine months of 2003 of $102.5 million, or $0.96 per share (basic and diluted), represented an annualized return on average assets of 1.60% and an annualized return on average equity of 15.49%. Premier’s impact on results for the nine-month period was not as pronounced as the impact for the quarter as results included Premier for only two months.
Net Interest Income
For the first nine months of 2003, net interest income decreased $9.9 million, or 4.3%. This decrease was due to decreasing interest rates and slow overall loan growth. The Corporation’s average prime lending rate
decreased from 4.75% for the first nine months of 2002 to 4.17% during the same period in 2003 as a result of the FRB reducing short-term interest rates in November, 2002 and June, 2003. This reduction in an already low interest rate environment negatively impacted the Corporation’s net interest margin as average yields on earning-assets decreased further than the average cost of deposits.
The following table provides a comparative average balance sheet and net interest income analysis for the first nine months of 2003 as compared to the same period in 2002. All dollar amounts are in thousands.
Nine Months Ended
September 30, 2003
Nine Months Ended
September 30, 2002
Average
BalanceInterest Yield/
Rate (1)
Average
BalanceInterest Yield/
Rate (1)ASSETS
Interest-earning assets:
Loans and leases
$ 5,473,055 $ 254,812 6.22 % $ 5,398,395 $ 280,977 6.96 % Taxable investment securities
2,074,947 55,636 3.58 1,519,411 62,303 5.48 Tax-exempt investment securities
260,266 7,786 4.00 228,753 7,361 4.30 Equity securities
129,895 3,205 3.30 109,197 2,971 3.64 Total Investment securities
2,465,108 66,627 3.61 1,857,361 72,635 5.23 Short-term investments
48,960 1,818 4.96 16,895 230 1.82 Total interest-earning assets
7,987,123 323,257 5.41 7,272,651 353,842 6.50 Non-interest-earning assets:
Cash and due from banks
279,650 248,964 Premises and equipment
123,681 123,834 Other assets
260,122 236,649 Less: Allowance for loan losses
(74,182 ) (73,218 ) Total Assets
$ 8,576,394 $ 7,808,880 LIABILITIES AND EQUITY
Interest-bearing liabilities:
Demand deposits
$ 1,116,959 $ 4,545 0.54 % $ 870,078 $ 4,609 0.71 % Savings deposits
1,614,721 8,090 0.67 1,506,714 12,739 1.13 Time deposits
2,498,711 59,845 3.20 2,577,925 78,419 4.07 Total Interest-bearing deposits
5,230,391 72,480 1.85 4,954,717 95,767 2.58 Short-term borrowings
634,745 4,960 1.04 425,280 5,080 1.60 Long-term debt
559,129 22,030 5.27 459,402 19,269 5.61 Total interest-bearing liabilities
6,424,265 99,470 2.07 5,839,399 120,116 2.75 Non-interest-bearing liabilities:
Demand deposits
1,170,831 1,036,553 Other
96,898 98,497 Total Liabilities
7,691,994 6,974,449 Shareholders’ equity
884,400 834,431 Total Liabilities and Shareholders’ Equity
$ 8,576,394 $ 7,808,880 Net interest income
$ 223,787 $ 233,726 Net interest margin (FTE)
3.86 % 4.42 % (1) Yields on tax-exempt securities are not fully taxable equivalent (FTE).
The following table summarizes the changes in interest income and expense due to changes in average balances (volume) and changes in rates.
September 30
2003 vs. 2002
Increase (decrease) due
to change in
Volume Rate Net (in thousands) Interest income on:
Loans and leases
$ 3,886 $ (30,051 ) $ (26,165 ) Taxable investment securities
22,780 (29,447 ) (6,667 ) Tax-exempt investment securities
1,014 (589 ) 425 Equity securities
563 (329 ) 234 Short-term investments
437 1,151 1,588 Total interest-earning assets
$ 28,680 $ (59,265 ) $ (30,585 ) Interest expense on:
Demand deposits
$ 1,308 $ (1,372 ) $ (64 ) Savings deposits
913 (5,562 ) (4,649 ) Time deposits
(2,410 ) (16,164 ) (18,574 ) Short-term borrowings
2,502 (2,622 ) (120 ) Long-term debt
4,183 (1,422 ) 2,761 Total interest-bearing liabilities
$ 6,496 $ (27,142 ) $ (20,646 ) Interest income decreased $30.6 million, or 8.6%, as a result of the 109 basis point decrease in average yields, which caused a $59.3 million decline in interest income. This was offset by a $28.7 million increase in interest income mainly due to growth in average investment securities balances.
Average investment securities increased $607.7 million, or 32.7%, as the growth in deposits and borrowings exceeded loan growth. The Corporation used the excess funds to purchase investment securities, particularly mortgage-backed securities, which grew $560.6 million, or 36.1%. The average yield on investment securities declined 162 basis points from 5.23% in 2002 to 3.61% in 2003. Excluding $14.7 million of accelerated premium amortization on mortgage-backed securities due to prepayments, the average yield on investment securities for the first nine months of 2003 would have been approximately 4.41%.
The Corporation’s average loan portfolio increased by approximately $74.7 million, or 1.4%. Growth in commercial mortgages ($178.2 million, or 10.6%) and commercial loans ($
161.8157.1 million, or10.5%10.2%)were more than, was offset bydecreasesdeclines in consumer loans ($84.612.8 million, or14.0%1.0%), leases ($9.7 million, or 11.8%), and residential mortgages ($250.9242.8 million, or17.6%30.3%). Residential mortgages continued to decline as low mortgage rates fueled refinance activity and most qualifying originated fixed rate mortgages were sold in the secondary market.In addition, in August 2002 the Corporation sold approximately $96 million of existing residential mortgages for balance sheet management purposes.Consumer loans and leases decreased due to payoffs as consumer debt wasrefinancedreplaced withmortgagesmortgage debt and the runoff of automobile loans and leases as the Corporationelectingelected not to competewith manufacturer-sponsored automobile loan rate incentives. Average investment securities increased $612.7 million, or 35.6%, as the growth in deposits and borrowings exceeded loan growth. The Corporation used the excess funds to purchase investment securities, particularly mortgage-backed securities, which grew $583.7 million, or 47.0%. The average yieldoninvestment securities declined 120 basis points from 5.44% in 2002 to 4.24% in 2003.rate.Interest expense decreased
$6.9$20.6 million, or16.7%17.2%,mainlydue to the decline in interest rates. The 68 basis point decline in the average cost of interest-bearing liabilities resulted in an $27.1 million decrease in interest expense. The net $584.9 million, or 10.0%, increase in average interest-bearing liabilities resulted in only a $6.5 million increase in interest expense due to the change in the composition of these liabilities.Interest bearing demand and savings deposits increased
$309.4$354.9 million, or13.6%14.9%, while time deposits decreased12$92.7$79.2 million, or3.6%3.1%. This change in the deposit mix reflectsthe depositors'depositors’ reluctance to reinvest maturing time deposits at the current low rates. Short-term borrowings increased$226.2$209.5 million, or58.7%49.3%, and long-term debt increased$77.2$99.7 million, or17.0%21.7%.The net $520.1 million, or 9.1%, increase in average interest-bearing liabilities resulted in only a $1.6 million increase in interest expense due to the change in the composition of these liabilities. The 70 basis point decline in the average cost of interest-bearing funds resulted in an $8.5 million decrease in interest expense.The increase in average short-term borrowings was realizedmainlyin customer repurchase agreements ($43.8 million, or 15.3%) and Federal funds purchasedwhich were used to reduce interest rate sensitivity to the previously mentioned change in the loan mix from fixed to floating rates. Long-term debt increased $77.2($166.9 million, or16.6%, from the same period in 2002. The Corporation locked in longer term funding rates through the use of advances from the Federal Home Loan Bank (FHLB) in order to take advantage of the low interest rate environment.124.3%).Provision
and Allowancefor Loan LossesThe following table summarizes loans outstanding (including unearned income) as of the dates shown:
March 31 December 31 March 31 2003 2002 2002 ----------- ----------- ----------- (in thousands)Commercial, financial and agricultural .. $ 1,710,323 $ 1,679,100 $ 1,548,492 Real estate - construction .............. 241,861 248,565 248,109 Real estate - residential mortgage ...... 1,170,664 1,244,781 1,421,517 Real estate - commercial mortgage ....... 1,570,509 1,527,144 1,461,896 Consumer 521,281 543,040 605,898 Leasing and other ....................... 74,398 74,438 79,952 ----------- ----------- ----------- Total Loans ........................... $ 5,289,036 $ 5,317,068 $ 5,365,864 =========== =========== ===========13The following table summarizes the activity in the
Corporation'sCorporation’s allowance for loan losses:
Three Months Ended March 31 ------------------------ 2003 2002 ----------- ---------- (dollars in thousands)Loans outstanding at end of period (net of unearned) ............. $5,289,036 $5,365,864 ========== ========== Daily average balance of loans and leases ........................ $5,346,978 $5,389,770 ========== ========== Balance at beginning of period ................................... $ 71,920 $ 71,872 Loans charged-off: Commercial, financial and agricultural ....................... 1,809 805 Real estate - mortgage ....................................... 644 810 Consumer ..................................................... 1,336 1,724 Leasing and other ............................................ 160 189 ---------- ---------- Total loans charged-off ...................................... 3,949 3,528 ---------- ---------- Recoveries of loans previously charged-off: Commercial, financial and agricultural ....................... 310 378 Real estate - mortgage ....................................... 215 38 Consumer ..................................................... 443 542 Leasing and other ............................................ 12 1 ---------- ---------- Total recoveries ............................................. 980 959 ---------- ---------- Net loans charged-off ............................................ 2,969 2,569 Provision for loan losses ........................................ 2,835 2,780 ---------- ---------- Balance at end of period ......................................... $ 71,786 $ 72,083 ========== ========== Net charge-offs to average loans (annualized) .................... 0.22% 0.19% ========== ========== Allowance for loan losses to loans outstanding ................... 1.36% 1.34% ========== ==========The following table summarizes the Corporation's non-performing assets as of the indicated dates. March 31 Dec. 31 March 31 (Dollars in thousands) 2003 2002 2002 -------- ------- -------- Non-accrual loans ....................... $25,686 $24,090 $22,054 Loans 90 days past due and accruing ..... 10,676 14,095 10,870 Other real estate owned (OREO) .......... 757 938 1,718 ------- ------- ------- Total non-performing assets ............. $37,119 $39,123 $34,642 ======= ======= ======= Non-accrual loans/Total loans ........... 0.49% 0.45% 0.61% Non-performing assets/Total assets ...... 0.44% 0.47% 0.44% Allowance/Non-performing loans .......... 197% 188% 219%
Nine Months Ended
September 302003 2002 (dollars in thousands) Loans outstanding at end of period (net of unearned)
$ 5,844,788 $ 5,329,501 Daily average balance of loans and leases
$ 5,473,055 $ 5,398,395 Balance of allowance for loan losses at beginning of period
$ 71,920 $ 71,872 Loans charged-off:
Commercial, financial and agricultural
4,542 6,284 Real estate – mortgage
1,434 1,095 Consumer
3,432 4,005 Leasing and other
357 476 Total loans charged-off
9,765 11,860 Recoveries of loans previously charged-off:
Commercial, financial and agricultural
684 736 Real estate – mortgage
552 261 Consumer
1,413 1,796 Leasing and other
64 54 Total recoveries
2,713 2,847 Net loans charged-off
7,052 9,013 Provision for loan losses
7,515 9,830 Allowance purchased (Premier)
5,474 — Balance at end of period
$ 77,857 $ 72,689 Net charge-offs to average loans (annualized)
0.17 % 0.22 % Allowance for loan losses to loans outstanding
1.33 % 1.36 % The provision for loan losses for the first
quarternine months of 2003 totaled$2.8$7.5 million,an increasea decrease of$55,000,$2.3 million, or2.0%23.6%, from the same period in 2002. Net charge-offs totaled$3.0$7.1 million, or0.22%0.17% of average loans on an annualized basis, during the firstquarternine months of 2003, a$400,000, or 15.6%, increase from the $2.6$2.0 million, or0.19%21.8%,in net charge-offsdecrease from $9.0 million, or 0.22% of average loans, for the firstquarternine months of 2002. Non-performing assetsincreaseddecreased to$37.1$38.4 million, or0.44%0.41% of total assets, atMarch 31,September 30, 2003, from$34.6$47.2 million, or0.44%0.58% of total assets, atMarch 31,September 30, 2002.14The improvements in the Corporation’s asset quality as of and for the nine months ended September 30, 2003 were mainly due to one problem commercial relationship which negatively impacted asset quality in 2002. The Corporation charged off $3.4 million of this relationship in the third quarter of 2002 and placed the remaining $11.1 million balance on non-accrual status. Subsequent to September 30, 2002, approximately $5.8 million of the loans were paid off. The remaining balance continues to be on non-accrual status.
The provision for loan losses resulted from the
Corporation'sCorporation’s allowance allocation procedures. Trends that would indicate the need for a higher provision include the general national and regional economies and the continued growth in theCorporation'sCorporation’s commercial loan and commercial mortgage portfolios, which are inherently morerisky.risky than residential mortgages. Despite thesefactors,general trends, theCorporation'sCorporation’s loan loss provision decreased from 2002 as overall asset qualitymeasures have remained consistent over the past several years. The net result of the Corporation's allowance allocation procedures was a provision for loan losses that was essentially unchanged from 2002 and was comparable to total net charge-offs for the quarter. Management believes that the allowance balance of $71.8 million at March 31, 2003 is sufficient to cover losses inherent in the loan portfolio on that date and is appropriate based on applicable accounting standards.improved.Other Income
Other income for the
quarternine months endedMarch 31,September 30, 2003 was$31.7$103.7 million, an increase of$5.0$18.9 million, or18.7%22.3%, over the comparable period in 2002. Excluding investment securities gains, which increasedfrom $1.4$8.0 million,in 2002or 132.0%, to$2.2$14.0 million in 2003, other income increased$4.1$10.9 million, or16.4%13.9%.The most significant increase in other income for the first nine months of 2003 was realized in mortgage banking income, which increased
$2.7$6.0 million, or44.8%50.7%, to$6.0$17.9 million. The national average rate for new fixed rate mortgage loans decreased 118 basis points from 7.16% in January of 2002 to 5.98% in September of 2003. In addition, the Corporation hasdevoteddedicated additional resources to mortgage banking activities to provide enhanced mortgage lending services throughout itsgeographicmarkets.In addition, the national monthly average for fixed rate mortgage loans decreased 114 basis points from 7.10% in the first quarter of 2002 to 5.96% in the first quarter of 2003.These factorsresulted in ancontributed to a $291.0 million increase in mortgage loan originationsof $75.4 million for a total of $258.8to $968.0 million in the first nine months of 2003ascompared to$183.4$677.0 million in the first nine months of 2002. In order to limit interest rate risk, the Corporation generally sells the qualifying fixed rate mortgage loans itoriginates, resultingoriginates. These sales resulted ingains.gains of $17.9 million for the first nine months of 2003, compared to $10.7 million for the first nine months of 2002.Although mortgage rates were generally low throughout the first nine months of 2003, a recent upward trend was evident. If rates continue to increase, new loan volume will likely decrease, and the Corporation will not be able to sustain its recent levels of gains on sales of mortgage loans.
Investment management and trust services income increased
$1.2$4.0 million, or16.5%18.7%,mainlydue to an increase in brokerageservices as fixed-rateservice fee income, particularly on annuities which have become popular in the current rate and economic environment. Service charges on deposit accounts increased$432,000,$937,000, or4.9%3.4%, mainly due to growth intransaction accounts, such assavings and demand deposits. Other service charges and fees increased$481,000,$1.0 million, or11.7%7.7%, as the scope and penetration of theCorporation'sCorporation’s other services continued to expand.Income from debit card transactions increased $111,000, or 9.9%,Other income decreased $1.1 million to
$1.2$3.5 million,formainly due to the reversal of $848,000 of negative goodwill during the firstquarternine months of2003 due to an increase in purchase volumes. In response to recent legal settlements between VISA and MasterCard and a third party, the earnings rate paid by these companies on debit card purchase volumes is expected to decrease by at least one third2002. This reversal resulted fromAugust 1, 2003 through the end of 2003. Due to uncertainties created by the terms of these settlements, the impact on debit card income forthe Corporationbeyond 2003 cannot reasonably be projected.adopting Statement of Financial Accounting Standard No. 141, “Business Combinations” on January 1, 2002.Investment securities gains increased
$831,000,$8.0 million, or59.4%.132.0%, to $14.0 million for the period. Investment securities gainsduringfor the firstquarternine months of 2003 consisted of realized gains of$2.2$11.8 millionof net gainson the sale of equity securities and$3.2$5.9 million on the sale of available for sale debt securities. These gains were offset by$3.2$3.4 million of losses recognized for equity securities exhibiting other than temporary impairment. Improvements in the equity markets bolstered the value of the Corporation’s equity portfolio, resulting in increased realized security gains.Other Expenses
Total other expenses for the first
quarternine months of 2003 were$55.9$173.5 million,representing ana $5.5 million, or 3.3%, increaseof $954,000, or 1.7%, fromover the same period in 2002. The increase was due toa $2.2 million, or 7.3%, increaseincreases in salaries and benefits, which grew $6.3 million, or 6.5%, andan increase inoccupancyexpenses of $788,000,expense, which increased $1.8 million, or18.4%13.4%.Partially offsetting theseThese increaseswas a decreasewere partially offset by decreases in equipment expense of$119,000,$488,000, or4.3%5.8%,a decrease indata processing expense of$349,000,$677,000, or10.9%7.4%,a decrease inadvertisingexpenseof$561,000,$400,000, or31.3%8.0%, anda decrease inother expense of$1.1$1.3 million, or9.4%3.8%.Salaries and employee benefits increased
$2.2$6.3 million, or7.3%6.5%, to $103.3 million in comparison to $97.0 million for the firstquarternine months of 2002. The salary expense component increased$1.6$5.5 million, or6.6%6.8%, driven bynormal salaryincreasesfor existing employees as well an increasein commissions paid in mortgage banking and trustservices.services and normal salary increases for existing employees. The employee benefits component of the expense increased$281,000,$856,000, or5.3%5.1%, due mainly to rising retirement plan expenses.Net occupancy expense increased
$788,000,$1.8 million, or18.4%13.4%, over the same period in 2002,mainly due to the particularly harsh winter in the Corporation's geographic locations which drove up the cost of snow removal 15and utilities expenses over the same period in 2002. The remaining increase wasdue to general increases in rental costs and real estate taxes. In addition, utilities expense and snow removal costs increased significantly during the first quarter of 2003 due to the relatively harsh winter in the Corporation’s geographic locations.Equipment expense decreased
$119,000,$488,000, or4.3%5.8%, due to a reduction in depreciation expense as certain equipment became fully depreciated during2002. The 10.9% decrease in data processingthe period. Data Processing expensewasdecreased $677,000, or 7.4%, due to favorable renegotiations of certaincontracts for data processing services.third-party contracts. Advertising expense decreased$561,000,$400,000, or31.3%8.0%,mainlydue to a significant branding campaign at theCorporation'sCorporation’s lead bank in 2002. Other expense decreased$1.1$1.3 million, or9.4%3.8%, to$10.3$33.0 million in 2003.Income Taxes
Income tax expense for the
first quarter of 2002nine months ended September 30, 2003 was$14.5$44.0 million, a$1.5$2.3 million, or11.2%,5.6% increase from$13.1$41.7 million in 2002. TheCorporation'sCorporation’s effective tax rate was approximately29.9%30.0% in 2003 as compared to28.9%29.6% in 2002. The effective rate is lower than the federal statutory rate of 35% due mainly to investments in tax-free municipal securities andfederalFederal tax credits from investments in low and moderate income housingpartnerships.partnershipsFINANCIAL CONDITION
Total assets of the Corporation at
March 31,September 30, 2003remained almost unchangedincreased $892.5 million, or 10.6% ($251.0 million, or 3.0%, excluding Premier), to $9.3 billion at September 30, 2003 from $8.4 billion at December 31,2002 at $8.4 billion.2002. Investment securities increased $289.2 million, or 12.0% ($125.1 million, or 5.2%, excluding Premier), as the growth in deposits and borrowings exceeded loan growth. The Corporation used the excess funds from deposits and borrowings to purchase investment securities, particularly mortgage-backed securities, which grew $262.8 million, or 14.6% ($129.6 million, or 7.2%, excluding Premier).Loans outstanding, net of unearned income,
decreased $28.0increased $527.7 million, or0.1%9.9% ($160.8 million, or 3.0%, excluding Premier), during the period. Commercial loans and commercial mortgages increased$74.6$505.0 million, or2.3%14.8% ($140.5 million, or, 4.1%, excluding Premier), and consumer loans increased $111.3 million, or 8.9% ($108.8 million, or 8.7%, excluding Premier), offset by a decrease in residential mortgages($74.1of $81.5 million, or6.0%)14.0% ($83.2 million, or 14.3%, excluding Premier), as a result of refinance activity.In addition, consumer loans and leases declined $21.8 million, or 3.5%.Cash and due from banks increased
$33.4$18.4 million, or10.6%5.8%, during theperiod. Dueperiod due tothe nature of these accounts, normal daily balances can fluctuate up or downfluctuations in the normal course of business.OnAccrued interest receivable decreased $11.3 million to $31.4 million at September 30, 2003 as amonthly average balance basis, cashresult of decreases in interest rates.Goodwill increased $62.5 due to the acquisition of Premier. Other assets increased $23.6 million to $136.6 million at September 30, 2003. This was due to the $8.9 million core deposit intangible asset recorded as a result of the Premier acquisition and
due from banksan increase in net deferred tax assets as net unrealized gains on investment securities decreased during the period. See Note E to the Notes to Consolidated Financial Statements for a detailed discussion of the Premier acquisition.Deposits increased
$10.7$588.6 million, or4.1%. Investment securities increased $58.19.4% ($136.1 million, or2.4%2.2%,as securities purchases of $672.9 million exceeded proceeds from maturities and sales of $632.9 million. Deposits increased $99.0 million, or 1.6%excluding Premier), from December 31, 2002.In addition to this slight increase, a change in the mix also occurred.Savings deposits and demand deposits increased by$122.3$241.0 million and$32.7$347.1, respectively, while time deposits increased $543,000. Excluding Premier, savings and demand deposits increased by $153.7 million, and $189.7 million, respectively, while time deposits decreased$56.0by $207.2 million. This reflects a continuing sentiment in the financial community that interest rates will start to rise in the future, leaving consumers reluctant toreinvest maturinginvest in time deposits at the current lower rates.Short-term borrowings, which consist mainly of Federal funds purchased and customer cash management accounts,
decreased $124.3increased $157.0 million, or19.7%24.8%, during the firstquarternine months of 2003. Federal funds purchaseddecreased $150.0increased $57.3 million, or45.5%17.4%, while customer cash management accounts increased$27.9$99.2 million, or9.4%33.3%.Federal funds purchased decreased as a result of the increase in deposits exceeding the demand for loans.Long-term debtdecreased slightly by $345,000, or 1.0%, as a result of maturing Federal Home Loan Bank advances. Other liabilitiesincreased$68.3$59.8 million, or88.0%11.2%, mainly due to$60.1the Premier acquisition. Corporation-obligated mandatorily redeemable capital securities of subsidiary trust increased $26.5 millionof investment securities which were purchased in March, but not yet settled at March 31, 2003.due to the Premier acquisition.Capital Resources
Total
shareholders'shareholders’ equity increasedonly $377,000$63.7 million during the firstthreenine months of 2003. Increases due to net income of$34.0$102.5 million and$1.8$88.2 millionin issuances ofdue to the stock issued for the Premier acquisition were offset by$15.1$49.4 million in cash dividends to shareholders,$13.0$52.7 million of stock repurchases and$7.3$30.2 million in net unrealized losses on securities.16CurrentThe Corporation and its subsidiary banks are subject to various regulatory capital
guidelines measurerequirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that could have a material effect on theadequacyCorporation’s financial statements. The regulations require that banks maintain minimum amounts and ratios ofa 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-basedtotal and Tier I capitalpercentage of 4.0%(as defined in the regulations) to risk weighted assets (as defined), anda minimum risk-based total capital percentage of 8.0%.Tier I capitalincludes 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 subjecttoa "leverage capital" requirement, which compares capital (using the definition of Tier I capital) to total balance sheetaverage assetsand 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 defined). As ofMarch 31,September 30, 2003, the Corporation and each of its bank subsidiaries met the minimum capital requirements. In addition, the Corporation and each of itssubsidiaries'bank subsidiaries’ capital ratios exceeded the amounts required to be considered"well-capitalized"“well-capitalized” as defined in the regulations.On January 15, 2002,The Corporation has a stock repurchase plan that was originally approved by the Board of Directors
approved a planin December 2002 and is currently scheduled to terminate in June 2004. This Plan allows for the repurchase of up to3.35.8 million shares of theCorporation'sCorporation’s common stockthrough June 30, 2002 (the plan was subsequently extended to December 31, 2002). Stock repurchased was added to the Corporate treasuryto be used for general corporate purposes.During the first quarter of 2002, the Corporation repurchased 350,000 shares under these plans. On December 17, 2002, the Board of Directors approved a program to repurchase up to 3.2 million shares through June 30, 2003. During the first quarter of 2003, the Corporation repurchased 756,000 shares under the current plan.Liquidity
The Corporation must maintain a sufficient level of liquid assets to meet the cash needs of its customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity is provided through scheduled and unscheduled principal and interest payments on outstanding loans and investments and through the availability of deposits and borrowings. In addition, the Corporation can borrow on a secured basis from the Federal Home Loan Bank to meet short-term liquidity needs.
The
Corporation'sCorporation’s sources and uses of cash were discussed in general terms in the net interest income section ofManagement'sManagement’s Discussion. The Consolidated Statements of Cash Flowsprovidesprovide additional information. The Corporation generated$42.5$137.9 million in cash from operating activities during the firstquarternine months of 2003, mainly due to net income. Investing activities resulted in a net cashinflowoutflow of$42.9$304.6 million, compared to a net cash outflow of$120.6$309.5 million in 2002, asprepaymentsproceeds from sales and maturities ofloans and mortgage-backedinvestment securitiesexceeded originations and purchases.decreased in proportion to purchases in both periods. Finally, financing activities resulted in a netoutflowinflow of$52.0$185.0 million as excess fundswere used to pay down borrowings.from net deposit growth exceeded payments of borrowings and net common stock activity.Liquidity must also be managed at the Fulton Financial Corporation
Parent Companyparent company level. For safety and soundness reasons, banking regulations limit the amount of cash that can be transferred from subsidiary banks to the Parent Company in the form of loans and dividends. Generally, these limitations are based on the subsidiarybanks'banks’ regulatory capital levels and their net income. The Parent Company has historically been able to meet its cash needs through normal, allowable dividends and loans. If additional cash needs arise that cannot be met through such dividends and loans, the Parent Company may need toinvestigatepursue alternativeliquidityfunding sources, including stock or debt issuances.Item 3. Quantitative and Qualitative Disclosures
Aboutabout Market RiskMarket risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by financial institutions include interest
17rate 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'sCorporation’s equity investments consist primarily of common stocks of publicly traded financial institutions(costwith a cost basis of approximately$79.3$75.8 million and a fair value of$85.0$86.0 million atMarch 31, 2003).September 30, 2003. TheCorporation'sCorporation’s financial institutions stock portfolio had gross unrealized gains of approximately$10.7$11.4 million atMarch 31,September 30, 2003.Although the carrying value of equity investments accounted for less than 1.0% of the
Corporation'sCorporation’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.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'sCorporation’s equity securities are classified as trading. Future cash flows from these investments are not provided in the table on page1926, as such investments do not have maturity dates.Certain of the
Corporation'sCorporation’s equity investmentshavehad shown negative returns in tandem with the general performance of equitymarkets.markets during the past year. The Corporationhashad evaluated, based on current and proposed accounting guidance, whether the decreases in value of any of these investmentsconstitute "otherconstituted “other thantemporary"temporary” impairment which would require a write-down through a charge to earnings. During the fourth quarter of 2002, the first quarter of 2003, and the third quarter of 2003 the Corporation recordedapre-taxchargecharges of $342,000, $3.2 million, and $175,000, respectively, for specific equity securities which were determined tohave "otherexhibit “other thantemporary"temporary” impairment invalue. Ifvalue as of themarket valuesend ofcertain equitythose periods. At September 30, 2003 these securitiesdo not improve over the next twelve months,showed unrealized gains of $900,000 compared to their adjusted carrying amounts. The Corporation continues to monitor its portfolio and will record additional impairment chargescould be deemed necessary.if appropriate.In addition to its equity portfolio, the
Corporation'sCorporation’s investment management and trust services revenue could be impacted by fluctuations in the securities markets. A portion of theCorporation'sCorporation’s trust revenue is based on the value of the underlying investment portfolios. If securities markets contract, theCorporation'sCorporation’s revenue could be negatively impacted. In addition, the ability of the Corporation to sell its equities brokerage services is dependent, in part, uponconsumers'consumers’ level of confidence in the outlook for rising securities prices.Interest Rate Risk
Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the
Corporation'sCorporation’s liquidity position and could affect its ability to meet obligations and continue to grow. Second, movements in interest rates can create fluctuations in theCorporation'sCorporation’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.
18The following table provides information about the
Corporation'sCorporation’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 theCorporation'sCorporation’s financial instruments are classified astrading.trading
Expected Maturity Period Total Estimated
Fair Value2003 2004 2005 2006 2007 Beyond Fixed rate loans (1)
$ 969,226 $ 667,288 $ 516,698 $ 397,038 $ 278,107 $ 557,694 $ 3,386,051 $ 3,536,630 Average rate
6.56 % 6.63 % 6.59 % 6.70 % 6.54 % 6.89 % 6.65 % Floating rate loans (1)
939,221 260,448 200,128 169,783 126,738 762,419 2,458,737 2,461,116 Average rate
4.74 % 4.57 % 4.47 % 4.38 % 4.35 % 4.22 % 4.49 % Fixed rate investments (2)
885,491 473,080 303,575 220,491 289,953 498,525 2,671,115 2,678,606 Average rate
3.15 % 3.47 % 3.60 % 3.89 % 3.99 % 3.58 % 3.49 % Floating rate investments (2)
433 — — — — 5,015 5,448 5,513 Average rate
5.85 % — — — — 3.04 % 3.26 % Other interest-earning assets
61,221 — — — — — 61,221 61,221 Average rate
6.03 % — — — — — 6.03 % Total
$ 2,855,592 $ 1,400,816 $ 1,020,401 $ 787,312 $ 694,798 $ 1,823,653 $ 8,582,572 $ 8,743,086 Average rate
4.89 % 5.18 % 5.28 % 5.41 % 5.08 % 4.86 % 5.04 % Fixed rate deposits (3)
$ 1,232,516 $ 501,898 $ 153,989 $ 237,911 $ 84,413 $ 74,341 $ 2,285,068 $ 2,345,321 Average rate
2.35 % 3.25 % 3.59 % 4.74 % 3.52 % 4.67 % 3.00 % Floating rate deposits (4)
1,957,669 158,894 158,894 158,894 158,894 1,955,854 4,549,099 4,549,099 Average rate
0.98 % 0.18 % 0.18 % 0.18 % 0.18 % 0.14 % 0.51 % Fixed rate borrowings (5)
54,286 83,589 603 10,755 210,624 270,690 630,547 657,574 Average rate
4.86 % 6.29 % 5.09 % 3.50 % 4.95 % 5.12 % 5.17 % Floating rate borrowings (6)
785,452 — — — — — 785,452 789,425 Average rate
0.66 % — — — — — 0.66 % Total
$ 4,029,923 $ 744,381 $ 313,486 $ 407,560 $ 453,931 $ 2,300,885 $ 8,250,166 $ 8,341,419 Average rate
1.39 % 2.94 % 1.86 % 2.93 % 3.02 % 0.87 % 1.57 % Assumptions:
Expected Maturity Period -------------------------------------------------------------------------------------------- 2003 2004 2005 2006 2007 Beyond ------------- ------------- ----------- ----------- ----------- -------------Fixed rate loans(1) ............ $ 870,933 $ 636,549 $ 432,918 $ 301,625 $ 192,857 $ 425,137 Average rate ................ 7.04% 7.26% 7.21% 7.24% 7.17% 7.41% Floating rate loans (1) ......... 872,668 272,234 213,206 176,737 135,094 759,078 Average rate ................ 5.21% 5.51% 5.54% 5.57% 4.76% 4.55% Fixed rate investmentsBased on contractual maturities, adjusted for expected prepayments.
(2) ...... 1,024,477 342,253 140,256 156,834 134,938 460,370 Average rate ................ 4.77% 4.79% 4.53% 4.42% 4.38% 3.92% Floating rate investments (2) ... 1,000 - - - - 7,942 Average rate ................ 7.55% - - - - 3.48% Other interest-earning assets ... 90,859 - - - - - Average rate ................ 5.78% - - - - - ------------- ------------- ----------- ----------- ----------- ------------- Total ........................... $ 2,859,937 $ 1,251,036 $ 786,380 $ 635,196 $ 462,889 $ 1,652,527 Average rate ................ 5.63% 6.20% 6.28% 6.08% 5.65% 5.11% ------------- ------------- ----------- ----------- ----------- ------------- Fixed rateBased on contractual maturities, adjusted for expected prepayments on mortgage-backed securities and expected calls on agency and municipal securities.
(3) Based on contractual maturities of time deposits.
(4) Money market and Super NOW deposits (3) ......... $ 1,283,151 $ 485,409 $ 196,309 $ 145,845 $ 128,670 $ 70,677 Average rate ................ 2.80% 3.60% 3.95% 4.66% 4.61% 4.86% Floating rate deposits (4) ...... 1,588,089 147,239 147,239 147,239 147,239 1,857,462 Average rate ................ 1.18% 0.16% 0.16% 0.16% 0.16% 0.15% Fixed rate borrowingsare shown in first year. NOW and savings accounts are spread based on history of deposit flows.
(5) ....... 45,623 5,240 78,254 10,268 140,416 255,373 Average rate ................ 4.80% 6.37% 6.29% 3.44% 4.72% 5.12% Floating rate borrowingsAmounts are based on expected payoffs and calls of Federal Home Loan Bank advances.
(6) .... 502,555 - - - - - Average rate ................ 1.11% - - - - - ------------- ------------- ----------- ----------- ----------- ------------- Total ........................... $ 3,419,418 $ 637,888 $ 421,802 $ 303,352 $ 416,325 $ 2,183,512 Average rate ................ 1.83% 2.83% 3.06% 2.43% 3.07% 0.88% ------------- ------------- ----------- ----------- ----------- -------------Estimated Total Fair Value ------------- ----------Fixed rate loans (1) ............ $ 2,860,019 $3,282,183 Average rate ................ 7.20% Floating rate loans (1) ......... 2,429,017 2,316,567 Average rate ................ 5.07% Fixed rate investments (2) ...... 2,259,128 2,295,458 Average rate ................ 4.54% Floating rate investments (2) ... 8,942 8,942 Average rate ................ 3.94% Other interest-earning assets ... 90,859 90,859 Average rate ................ 5.78% ------------- ---------- Total ........................... $ 7,647,965 $7,994,009 Average rate ................ 5.72% ------------- ---------- Fixed rate deposits (3) ......... $ 2,310,061 $2,371,675 Average rate ................ 3.35% Floating rate deposits (4) ...... 4,034,507 4,034,507 Average rate ................ 0.56% Fixed rate borrowings (5) ....... 535,174 570,179 Average rate ................ 5.14% Floating rate borrowings (6) .... 502,555 502,555 Average rate ................ 1.11% ------------- ---------- Total ........................... $ 7,382,297 $7,478,916 Average rate ................ 1.80% ------------- ----------Amounts are Federal funds purchased and securities sold under agreements to repurchase, which mature in less than 90 days. Assumptions: (1) Based on contractual maturities, adjusted for expected prepayments. (2) Based on contractual maturities, adjusted for expected prepayments on mortgage-backed securities. (3) Based on contractual maturities of time deposits. (4) Money market and Super NOW deposits are shown in first year. NOW and savings accounts are spread based on history of deposit flows. (5) Amounts are based on expected payoffs and calls of Federal Home Loan Bank advances. (6) Amounts are Federal funds purchased and securities sold under agreements to repurchase, which mature in less than 90 days.The Corporation uses three complementary methods to measure and manage interest rate risk. They are static gap analysis, simulation of earnings, and estimates of economic value of equity. Using these measurements in tandem provides a reasonably comprehensive summary of the magnitude of interest rate risk in the Corporation, level of risk as time evolves, and exposure to changes in interest rate relationships.
Static gap provides a measurement of repricing risk in the
Corporation'sCorporation’s balance sheet as of a point in time. This measurement is accomplished through stratification of theCorporation'sCorporation’s assets and liabilities19into predeterminedrepricingperiods.periods based on contractual repricings and maturities and other assumptions. Theassetsassumptions used are monitored andliabilities in each of these periods are summed and compared for mismatches within that maturity segment.periodically revised based on current market conditions. Core deposits not havingnoncontractual maturitiesa contractual maturity are placed into repricing periods based upon historical balance performance. Repricing for mortgage loans held and for mortgage-backed securitiesincludes the effect of expected cash flows. Estimated prepayment effects are applied to these balancesreflect both contractual maturities and estimated prepayments based upon industry projections for prepayment speeds. TheCorporation'sCorporation’s policy limits the cumulative 6-month gap to plus or minus 15% of total earning assets. The cumulative 6-month gap as ofMarch 31,September 30, 2003 was1.12.0.98.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'sCorporation’s short-term earnings exposure to rate movements. TheCorporation'sCorporation’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"“shock” in interest rates. A"shock'“shock’ is an immediate upward or downward movement of interest rates across the yield curve based upon changes in the prime rate. The following table summarizes the expected impact of interest rate shocks on net interestincome: Annual change -------------- ------------------- -------------- --------------income. These results are not necessarily indicative of future operating results, nor do they reflect certain actions that the Corporation may take innetresponse to future interest-------------- Rate Shock income % Change -------------- ------------------- -------------- +300 bp +$ 23.1 million + 8.1% +200 bp +$ 17.1 million + 5.9% +100 bp +$ 12.8 million + 4.4% -100 bp -$ 17.8 million - 6.2%rate changes.
Rate Shock
Annual change
in net interest
income% Change
+300 bp
+$ 15.8 million + 5.4% +200 bp
+$ 10.3 million + 3.5% +100 bp
+$ 6.5 million + 2.3% -100 bp
-$ 12.9 million - 4.5% 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 termlonger-term re-pricing risks and options in theCorporation'sCorporation’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. The following table summarizes the expected impact of interest rate shocks on economic value of equity.Change in -------------- ------------------ -------------- -------------- economic value -------------- Rate Shock of equity % Change -------------- ------------------ -------------- +300 bp +$ 20.4 million + 1.5% +200 bp +$ 19.2 million + 1.4% +100 bp +$ 73.0 million + 5.4% -100 bp -$ 30.6 million - 2.3% 20
Rate Shock
Change in
economic value
of equity
% Change
+300 bp
-$ 77.9 million - 6.5% +200 bp
-$ 65.4 million - 5.4% +100 bp
-$ 27.1 million - 2.3% -100 bp
-$ 14.6 million - 1.2% Item 4. Controls and Procedures
Within the 90 days prior to the filing date of this report, theThe Corporation carried out an evaluation, under the supervision and with the participation of the
Corporation'sCorporation’s management, including theCorporation'sCorporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, theCorporation'sCorporation’s Chief Executive Officer and Chief Financial Officer concluded that, as of theCorporation'send of the period covered by this quarterly report, the Corporation’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Corporation reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and ExchangeCommission'sCommission’s rules and forms.There have been no
significantchanges in our internalcontrolscontrol over financial reporting during the fiscal quarter covered by this quarterly report that has materially affected, orin other factors that could significantlyis reasonably likely to materially affect, our internalcontrols subsequent to the date we carried out this evaluation. 21control over financial reporting. PART II
--— OTHER INFORMATIONItem 6. Exhibits and Reports on Form 8-K
(a) Exhibits -- The following is a list of the exhibits required by Item 601 of Regulation S-K and filed as part of this report: (1) Articles of incorporation, as amended and restated, and Bylaws of Fulton Financial Corporation, as amended - Incorporated by reference from Exhibit 3 of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. (2) Instruments defining the right of securities holders, including indentures: (a) Rights Agreement dated June 20, 1989, as amended and restated on April 27, 1999 between Fulton Financial Corporation and Fulton Bank - Incorporated by reference from Exhibit 1 of the Fulton Financial Corporation Current Report on Form 8-K dated April 27, 1999. (3) Material Contracts - Executive Compensation Agreements and Plans: (a) Severance Agreements entered into between Fulton Financial and: Rufus A. Fulton, Jr., as of April 17, 1984; R. Scott Smith, Jr., as of May 17, 1988; Richard J Ashby, Jr., as of May 17, 1988; and Charles J. Nugent, as of November 19, 1992 - Incorporated by reference from Exhibit 10(a) of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. (b) Incentive Stock Option Plan adopted September 19, 1995 - Incorporated by reference from Exhibit A of Fulton Financial Corporation's 1996 Proxy Statement. (b) Reports on Form 8-K: (1) Form 8-K dated January 16, 2003 disclosing the execution of a definitive Agreement and Plan of Merger with Premier Bancorp, Inc. (2) Form 8-K dated February 4, 2003 reporting a presentation made at an investor meeting to provide an overview of the Corporation's strategy and performance. (3) Form 8-K dated February 14, 2003 amending Form 8-K dated February 4, 2003 for additional investor presentation information. 22
(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:
(3) Articles of incorporation, as amended and restated, and Bylaws of Fulton Financial Corporation, as amended – Incorporated by reference from Exhibit 3 of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
(4) 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.
(10) Material Contracts - Executive Compensation Agreements and Plans:
(a) Severance Agreements entered into between Fulton Financial and: Rufus A. Fulton, Jr., as of April 17, 1984; R. Scott Smith, Jr., as of May 17, 1988; Richard J Ashby, Jr., as of May 17, 1988; and Charles J. Nugent, as of November 19, 1992 – Incorporated by reference from Exhibit 10(a) of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
(b) Incentive Stock Option Plan adopted September 19, 1995 - Incorporated by reference from Exhibit A of Fulton Financial Corporation’s 1996 Proxy Statement.
(b) Reports on Form 8-K:
(1) Form 8-K dated July 15, 2003 filing the Corporation’s press release of financial results for the quarter ended June 30, 2003.
(2) Form 8-K dated July 29, 2003 reporting a presentation at an investor meeting to provide an overview of the Corporation’s strategy and performance.
(3) Form 8-K dated August 4, 2003 reporting the consummation of the Premier Bancorp, Inc. acquisition.
(4) Form 8-K dated August 26, 2003 disclosing the execution of a definitive Agreement and Plan of Merger with Resource Bancshares Corporation.
(5) Form 8-K dated Sept 19, 2003 reporting a presentation at an investor meeting to provide an overview of the Corporation’s strategy and performance.
(6) Form 8-K dated October 22, 2003 filing the Corporation’s press release of financial results for the quarter ended September 30, 2003. FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FULTON FINANCIAL CORPORATION Date: May 14, 2003 /s/ Rufus A. Fulton, Jr. ------------------------- ----------------------------------------- Rufus A. Fulton, Jr. Chairman and Chief Executive Officer Date: May 14, 2003 /s/ Charles J. Nugent ------------------------- ----------------------------------------- Charles J. Nugent Senior Executive Vice President and Chief Financial Officer CERTIFICATION I, Rufus A. Fulton, Jr. certify that: 1. I have reviewed this quarterly report on Form 10-Q of Fulton Financial Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and 23c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Rufus A. Fulton, Jr. ------------------- ----------------------------------------- Rufus A. Fulton, Jr. Chairman and Chief Executive Officer 24CERTIFICATION I, Charles J. Nugent, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Fulton Financial Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Charles J. Nugent ----------------------- --------------------------------------- Charles J. Nugent Senior Executive Vice President and Chief Financial Officer 25
FULTON FINANCIAL CORPORATION
Date:November 14, 2003
/s/ Rufus A. Fulton, Jr.
Rufus A. Fulton, Jr.
Chairman and Chief Executive Officer
Date:November 14, 2003
/s/ Charles J. Nugent
Charles J. Nugent
Senior Executive Vice President and
Chief Financial Officer
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. 99.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| 3. | Articles of incorporation, as amended and restated, and Bylaws of Fulton Financial Corporation, as amended – Incorporated by reference from Exhibit 3 of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. |
| 4. | 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 – Incorporated by reference from Exhibit 10 (a) of the Fulton Financial Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. |
| (b) | Incentive Stock Option Plan adopted September 19, 1995 - Incorporated by reference from Exhibit A of Fulton Financial Corporation’s 1996 Proxy Statement. |
| 31 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.1 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32