UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JuneSeptember 30, 1998 , or
----------------------------------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- --------------------------- ----------
Commission File No. 0-10587
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FULTON FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2195389
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Penn Square, P.O. Box 4887 Lancaster, Pennsylvania 17604
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(Address of principal executive offices) (Zip Code)
(717) 291-2411
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_][ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value-59,953,701Value - 62,926,912 shares outstanding as of JulyOctober
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31, 1998.
- ----------------------------------------------------------------------------------------
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED JUNESEPTEMBER 30, 1998
INDEX
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Description Page
----------- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
(a) Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997..................................3
(b) Consolidated Statements of Income -
Three and six months ended June 30, 1998 and 1997...................4
(c) Consolidated Statements of Shareholders' Equity -
Six months ended June 30, 1998 and 1997.............................5
(d) Consolidated Statements of Cash Flows -
Six months ended June 30, 1998 and 1997.............................6
(e) Notes to Consolidated Financial Statements - June 30, 1998...........7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................17
SIGNATURES..............................................................18
Description Page
----------- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
(a) Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997........................................................3
(b) Consolidated Statements of Income -
Three and nine months ended September 30, 1998 and 1997.........................................4
(c) Consolidated Statements of Shareholders' Equity -
Nine months ended September 30, 1998 and 1997...................................................5
(d) Consolidated Statements of Cash Flows -
Nine months ended September 30, 1998 and 1997...................................................6
(e) Notes to Consolidated Financial Statements - September 30, 1998.................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................................10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..........................................................22
SIGNATURES.........................................................................................23
2
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per-share data)
JuneSeptember 30 December 31
1998 1997
----------------------------------------------------------------------
ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks ..............................................................$ 223,009224,741 $ 197,006208,289
Interest-bearing deposits with other banks ........................................... 2,063 1,2423,054 2,634
Mortgage loans held for sale ......................................................... 1,5605,134 1,946
Investment securities:
Held to maturity (Fair value: $251,102$223,326 in 1998 and $334,145$343,484 in 1997) ............ 250,951 333,351220,681 343,054
Available for sale .............................................................. 894,564 658,2431,070,912 724,194
Loans ................................................................................ 3,767,362 3,796,7063,982,079 3,971,612
Less: Allowance for loan losses ................................................ (56,555) (55,593)(58,730) (57,557)
Unearned income ....................................................... (9,930)(10,198) (9,968)
------------- ---------------------------- ---------------
Net Loans ................................................... 3,700,877 3,731,145
------------- -------------3,913,151 3,904,087
--------------- ---------------
Premises and equipment ............................................................... 70,987 69,61575,194 73,047
Accrued interest receivable .......................................................... 32,147 30,53933,915 32,336
Other assets ......................................................................... 77,681 88,302
------------- -------------86,027 88,067
--------------- ---------------
Total Assets ................................................$ 5,253,8395,632,809 $ 5,111,389
============= =============5,377,654
=============== ===============
LIABILITIES
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing .............................................................$ 668,293686,819 $ 631,784649,687
Interest-bearing ................................................................ 3,589,149 3,546,234
------------- -------------3,819,018 3,768,856
--------------- ---------------
Total Deposits .............................................. 4,257,442 4,178,018
------------- -------------4,505,837 4,418,543
--------------- ---------------
Short-term borrowings:
Securities sold under agreements to repurchase................................... 177,024 170,035196,871 178,726
Federal funds purchased.......................................................... 17,421 73,21125,006 63,914
Demand notes of U.S. Treasury ................................................... 5,6215,095 5,661
------------- ---------------------------- ---------------
Total Short-Term Borrowings ................................. 200,066 248,907
------------- -------------226,972 248,301
--------------- ---------------
Accrued interest payable ............................................................. 33,535 31,49138,429 33,227
Other liabilities .................................................................... 66,352 59,50075,096 60,047
Long-term debt ....................................................................... 128,779 50,045
------------- -------------187,705 53,045
--------------- ---------------
Total Liabilities ........................................... 4,686,174 4,567,961
------------- -------------5,034,039 4,813,163
--------------- ---------------
SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Common stock ($2.50 par)
Shares: Authorized 200,000,000
Issued 59,956,385 (59,907,64963,055,094 (62,577,052 in 1997)
Outstanding 59,956,385 (59,841,48862,946,912 (62,563,391 in 1997)............................ 149,891 119,816........................ 157,638 126,497
Capital surplus ...................................................................... 284,104 315,322294,119 326,402
Retained earnings .................................................................... 105,842 81,890122,723 84,634
Accumulated other comprehensive income................................................ 27,828 27,69927,003 28,257
Treasury stock, at cost (66,161(108,182 shares in 1998 and 66,161 shares in 1997)....................................... -............ (2,713) (1,299)
------------- ---------------------------- ---------------
Total Shareholders' Equity .................................. 567,665 543,428
------------- -------------598,770 564,491
--------------- ---------------
Total Liabilities and Shareholders' Equity...................$ 5,253,8395,632,809 $ 5,111,389
============= =============5,377,654
=============== ===============
- -------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
3
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per-share data)
Three Months Ended JuneSeptember 30 SixNine Months Ended JuneSeptember 30
--------------------------- ------------------------------------------------------------- --------------------------------
1998 1997 1998 1997
--------------------------- ------------------------------------------------------------- --------------------------------
INTEREST INCOME
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Loans, including fees ........................................................................... $ 80,78085,216 $ 77,31382,220 $ 161,303254,026 $ 151,647240,026
Investment securities:
Taxable .............................................. 13,353 12,274 26,131 23,944............................................... 15,904 13,621 43,798 38,997
Tax-exempt ........................................... 843 859 1,558 1,834............................................ 1,259 1,052 3,254 3,280
Dividends ............................................ 828 653 1,655 1,289............................................. 858 694 2,560 2,020
Federal funds sold ........................................ 759 712 965 803......................................... 319 537 1,515 1,449
Interest-bearing deposits with other banks ................ 21 54 74 104
--------- ---------- --------- ----------................. 40 73 154 219
-------------- ------------- -------------- --------------
Total Interest Income ........... 96,584 91,865 191,686 179,621............ 103,596 98,197 305,307 285,991
INTEREST EXPENSE
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Deposits .................................................. 37,900 35,630 75,425 69,709................................................... 40,731 39,256 120,630 112,556
Short-term borrowings ..................................... 1,960 2,656 4,296 4,924...................................... 2,262 2,768 6,772 7,829
Long-term debt ............................................ 1,901 994 3,121 1,959
--------- ---------- --------- ----------............................................. 1,932 1,019 5,137 3,190
-------------- ------------- -------------- --------------
Total Interest Expense ........... 41,761 39,280 82,842 76,592
--------- ---------- --------- ----------............ 44,925 43,043 132,539 123,575
-------------- ------------- -------------- --------------
Net Interest Income .............. 54,823 52,585 108,844 103,029............... 58,671 55,154 172,768 162,416
PROVISION FOR LOAN LOSSES ................................. 1,501 1,641 3,002 3,459
--------- ---------- --------- ----------.................................. 1,067 2,060 4,299 5,734
-------------- ------------- -------------- --------------
Net Interest Income After
Provision for Loan Losses . 53,322 50,944 105,842 99,570
--------- ---------- --------- ----------.. 57,604 53,094 168,469 156,682
-------------- ------------- -------------- --------------
OTHER INCOME
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Trust department .......................................... 3,129 2,626 6,096 5,282........................................... 3,189 2,409 9,322 7,695
Service charges on deposit accounts ....................... 4,792 4,299 9,215 8,397........................ 5,000 4,582 14,465 13,149
Other service charges and fees ............................ 2,909 3,153 5,672 5,647............................. 3,496 2,850 9,437 8,681
Gain on sale of mortgage loans ............................ 870 496 1,675 939............................. 707 600 2,382 1,539
Investment securities gains ............................... 4,613 622 7,995 2,776
--------- ---------- --------- ----------................................ 2,071 2,944 10,066 5,736
-------------- ------------- -------------- --------------
Total Other Income ............... 16,313 11,196 30,653 23,041................ 14,463 13,385 45,672 36,800
OTHER EXPENSES
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits ............................ 19,670 18,772 39,567 37,986............................. 20,975 20,125 62,349 59,528
Net occupancy expense ..................................... 3,096 2,941 6,127 5,979...................................... 3,303 3,205 9,914 9,609
Equipment expense ......................................... 2,267 2,278 4,626 4,507.......................................... 2,350 2,426 7,189 7,117
FDIC assessment expense ................................... 178 189 359 355.................................... 176 197 551 562
Special services .......................................... 2,515 1,768 4,572 3,604........................................... 2,800 1,906 7,719 5,742
Other ..................................................... 11,104 7,992 20,433 16,262
--------- ---------- --------- ----------...................................................... 9,594 10,796 31,148 28,016
-------------- ------------- -------------- --------------
Total Other Expenses ............. 38,830 33,940 75,684 68,693
--------- ---------- --------- ----------.............. 39,198 38,655 118,870 110,574
-------------- ------------- -------------- --------------
Income Before Income Taxes ....... 30,805 28,200 60,811 53,918........ 32,869 27,824 95,271 82,908
INCOME TAXES............................................... 9,886 9,066 19,292 16,746
--------- ---------- --------- ----------TAXES................................................ 10,519 8,516 30,169 25,544
-------------- ------------- -------------- --------------
Net Income ............................................... $ 20,91922,350 $ 19,13419,308 $ 41,51965,102 $ 37,172
========= ========== ========= ==========57,364
============== ============= ============== ==============
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA:
Net income (basic)................................................................................... $ 0.36 $ 0.31 $ 1.04 $ 0.92
Net income (diluted)........................................ $ 0.35 $ 0.320.30 $ 0.691.03 $ 0.62
Net income (diluted)....................................... $ 0.35 $ 0.32 $ 0.69 $ 0.620.91
Cash dividends ......................................................................................... $ 0.150 $ 0.1320.127 $ 0.2930.431 $ 0.2550.371
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
4
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 1998 AND 1997
Accumulated
Other
Comprehen-
Common Capital Retained sive Treasury
(Dollars in thousands, except per-share data) Stock Surplus Earnings Income Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997................................... $119,8161997.................................... $126,497 $326,402 $ 315,322 $ 81,890 $27,69984,634 $28,257 $(1,299) $543,428$564,491
Comprehensive income:
Net income................................................ 41,519 41,519income................................................. 65,102 $ 65,102
Other - unrealized loss on securities (net of taxes)....... (1,254) (1,254)
---------
Total comprehensive income............................ 63,848
---------
Stock split payable in the form of a
Stock dividend - 25% (11,985,361 shares).................. 29,963 (30,088) (125)
Stock issued (588,846 shares, including
130,154 shares of treasury stock).......................... 1,178 (2,195) 2,875 1,858
Acquisition of treasury stock (172,175 shares).................. (4,289) (4,289)
Cash dividends - $0.431 per share............................... (27,013) (27,013)
-------------------------------------------------------------------
Balance at September 30, 1998.................................. $157,638 $294,119 $122,723 $27,003 $(2,713) $598,770
===================================================================
Balance at December 31, 1996.................................... $117,035 $251,159 $122,385 $ 9,818 $ (103) $500,294
Comprehensive income:
Net income................................................. 57,364 57,364
Other - unrealized gain on securities (net of taxes)...... 129 129
----------....... 10,247 10,247
---------
Total comprehensive income........................... 41,648
----------
Stock split payable in the form of a
stock dividend - 25% (11,985,361 shares)................. 29,963 (30,088) (125)
Stock issued (159,271 shares, including
110,536 shares of treasury stock)......................... 112 (1,130) 2,411 1,393
Acquisition of treasury stock (44,375 shares).................. (1,112) (1,112)
Cash dividends - $0.293 per share.............................. (17,567) (17,567)
--------------------------------------------------------------------
Balance at June 30, 1998....................................... $149,891 $ 284,104 $105,842 $27,828 $ - $567,665
====================================================================
Balance at December 31, 1996................................... $110,380 $ 240,095 $121,578 $ 9,846 $ (103) $481,796
Comprehensive income:
Net income................................................ 37,172 37,172
Other - unrealized gain on securities (net of taxes)...... 4,193 4,193
----------
Total comprehensive income........................... 41,365
----------income............................ 67,611
---------
Stock dividends issued - 10% (4,494,568 shares)................................. 8,989 73,962 (83,046) (95)(83,049) (98)
Stock issued (161,526(226,057 shares).................................. 299 116 415................................... 409 751 1,160
Cash dividends - $0.255$0.371 per share.............................. (15,241) (15,241)
--------------------------------------------------------------------share............................... (23,204) (23,204)
-------------------------------------------------------------------
Balance at JuneSeptember 30, 1997....................................... $119,6681997................................... $126,433 $325,872 $ 314,173 $ 60,463 $14,03973,496 $20,065 $ (103) $508,240
====================================================================$ 545,763
===================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
(In thousands)
SixNine Months Ended
JuneSeptember 30
------------------------------------------------------------
1998 1997
------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income........................................................................$ 41,51965,102 $ 37,17257,364
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses ................................................... 3,002 3,4594,299 5,734
Depreciation and amortization of premises and equipment ..................... 4,476 4,1567,104 6,533
Net amortization of investment security premiums ............................ 100 31197 75
Investment security gains ................................................... (7,995) (2,776)(10,066) (5,736)
Net (increase) decrease in mortgage loans held for sale................................. 386 5,506sale...................... (3,188) 4,642
Amortization of intangible assets ........................................... 794 779
Decrease1,010 1,210
Increase in accrued interest receivable ..................................... (1,608) 989(1,579) (215)
Decrease (increase) in other assets .................................................... 9,773 (3,817)......................................... 2,012 (4,464)
Increase in accrued interest payable ........................................ 2,044 2,940
Increase5,202 7,978
(Decrease) increase in other liabilities................................................ 4,770 8,088
--------- ----------liabilities..................................... (3,700) 20,308
-------------- --------------
Total adjustments...................................................... 15,742 19,355
--------- ----------1,291 36,065
-------------- --------------
Net cash provided by operating activities .............................. 57,261 56,527
--------- ----------66,393 93,429
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale ............................. 16,747 59,52321,739 126,034
Proceeds from maturities of securities held to maturity .......................... 86,740 108,813127,923 169,155
Proceeds from maturities of securities available for sale ........................ 103,942 31,825156,286 62,272
Purchase of securities held to maturity .......................................... (4,341) (17,967)(5,541) (20,973)
Purchase of securities available for sale ........................................ (348,931) (205,896)(500,902) (384,139)
(Increase) decrease in short-term investments .................................... (821) 803(420) 3,697
Net decrease (increase)increase in loans ................................................. 27,266 (144,739)............................................................ (13,363) (282,677)
Purchase of premises and equipment................................................ (5,848) (5,207)
--------- ----------(9,251) (8,403)
-------------- --------------
Net cash used in investing activities .................................. (125,246) (172,845)
--------- ----------(223,529) (335,034)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits ...................................... 39,962 20,37251,207 10,639
Net increase in time deposits .................................................... 39,462 156,21636,087 281,108
Increase (decrease) in long-term debt........................................................ 78,734 6,326debt............................................. 134,660 (7,497)
Decrease in short-term borrowings ................................................ (48,841) (21,344)(21,329) (20,165)
Dividends paid ................................................................... (15,485) (14,137)(24,481) (21,837)
Net proceeds from issuance of common stock ....................................... 1,268 3201,733 5,262
Acquisition of treasury stock .................................................... (1,112)(4,289) -
--------- ------------------------ --------------
Net cash provided by financing activities............................... 93,988 147,753
--------- ----------173,588 247,510
-------------- --------------
Net Increase in Cash and Due From Banks .......................................... 26,003 31,43516,452 5,905
Cash and Due From Banks at Beginning of Period ................................... 197,006 203,523
--------- ----------208,289 211,024
-------------- --------------
Cash and Due From Banks at End of Period .........................................$ 223,009224,741 $ 234,958
========= ==========216,929
============== ==============
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest ....................................................................$ 80,798127,337 $ 73,115115,597
Income taxes ................................................................$ 15,25624,621 $ 13,05121,669
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and sixnine month periods ended
JuneSeptember 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
NOTE B - 5-for-4 Stock Split
The Corporation paid a 5-for-4 stock split in the form of a 25% stock dividend
on May 27, 1998. All share and per-share information has been restated to
reflect the effect of this stock split.
NOTE C - Net Income Per Share
The Corporation adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (Statement 128), on December 31, 1997. Statement 128
requires dual presentation of basic and diluted earnings per share on the face
of the income statement for all entities with complex capital structures. The
Corporation's basic net income per share is calculated as net income divided by
the weighted average number of shares outstanding. For diluted net income per
share, net income is divided by the weighted average number of shares
outstanding plus the incremental number of shares added as a result of
converting common stock equivalents, calculated using the treasury stock method.
The Corporation's common stock equivalents consist solely of outstanding stock
options.
A reconciliation of the weighted average shares outstanding used to calculate
basic net income per share and diluted net income per share follows (in
thousands):
Three months ended SixNine months ended
JuneSeptember 30 JuneSeptember 30
--------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
Weighted average shares outstanding (basic).............. 59,933 59,779 59,905 59,745............ 62,673 62,523 62,620 62,464
Impact of common stock equivalents....................... 530 464 516 430
-------------equivalents..................... 458 847 771 777
------------ ---------- ------------ ----------- ----------- ----------
Weighted average shares outstanding (diluted)............ 60,463 60,243 60,421 60,175
============= =========== ===========.......... 63,131 63,370 63,391 63,241
============ ========== ============ ===========
NOTE D - Mergers and Acquisitions
Ambassador Bank of the Commonwealth. - On September 11, 1998, the Corporation
completed its acquisition of Ambassador Bank of the Commonwealth (Ambassador), a
$275 million bank located in Allentown, Pennsylvania. As provided under the
terms of the merger agreement, each of the 1.9 million shares of Ambassador's
common stock were exchanged for 1.4 shares of the Corporation's common stock. In
addition, the 417,000 options and warrants to acquire Ambassador stock were
exchanged for approximately 409,000 shares of the Corporation's common stock.
The Corporation issued approximately 3.1 million shares of its common stock in
connection with the merger, which was accounted for as a pooling of interests.
As a result of the acquisition, Ambassador was merged with and into Lafayette
Bank, one of the Corporation's existing affiliate banks, which thereupon changed
its name to "Lafayette Ambassador Bank."
7
Keystone Heritage Group, Inc. - On March 27, 1998, the Corporation completed its
acquisition of Keystone Heritage Group, Inc. (Keystone Heritage), a $650 million
bank holding company located in Lebanon, Pennsylvania. As provided under the
terms of the merger agreement, each of the approximately 4.0 million shares of
Keystone Heritage's common stock was exchanged for 2.288 shares of the
Corporation's common stock. In addition, each of the 70,000 options to acquire
Keystone Heritage stock was converted to options to acquire the Corporation's
stock. The Corporation issued 9.1 million shares of its common stock in
connection with the merger, which was accounted for as a pooling of interests.
As a result ofIn order to effect the acquisition, Keystone Heritage was merged with and into
the Corporation. Its sole banking subsidiary, Lebanon Valley National Bank
(Lebanon Valley), was merged with and into Farmers Trust Bank, one of 7
the
Corporation's existing affiliate banks, which changed its name to become Lebanon"Lebanon
Valley Farmers Bank." Lebanon Valley's deposits, loans and branches located in
Lancaster and Dauphin Counties were transferred by Lebanon Valley Farmers Bank
to Fulton Bank as a result ofimmediately after the merger.merger was completed.
The following table sets forth selected unaudited financial data for the
Corporation and Keystone Heritage for the period January 1, 1998 through March
27, 1998:1998. Amounts for Fulton Financial Corporation have not been restated to
include Ambassador.
Fulton
Financial Keystone
FinancialCorporation Heritage
Corporation Group, Inc.
----------- --------------------------- -----------------
Net interest income........................income.................... $ 47,466 $ 6,555
Other income...............................income........................... 13,032 1,308
----------- --------------------------- -----------------
Total income...............................income........................... $ 60,498 $ 7,863
=========== =========================== =================
Net income.................................income............................. $ 19,066 $ 1,534
=========== =========================== =================
The effect of the mergerKeystone Heritage and Ambassador mergers on the Corporation's
previously reported revenues, net income and net income per share for the three
months ended JuneSeptember 30, 1997 follows:follows. Per-share amounts have been restated to
reflect the impact of the five for four stock split paid in May, 1998.
Fulton
Financial Keystone
FinancialCorporation Heritage Corporation Group, Inc.Ambassador Restated
----------- ----------- --------------------------- ----------------- ------------------ ---------------
Net interest income................. $ 46,049 $ 6,760 $ 2,345 $ 55,154
Other income........................ 11,409 1,795 181 13,385
--------------- --------------- --------------- ---------------
Total income........................ $ 45,65557,458 $ 6,9308,555 $ 52,585
Other income............................... 9,121 2,075 11,196
---------- ---------- ----------
Total income...............................2,526 $ 54,77666,539
=============== =============== =============== ===============
Net income.......................... $ 9,00516,558 $ 63,781
========== ========== ==========
Net income.................................2,256 $ 16,026494 $ 3,108 $ 19,134
========== ========== ==========19,308
=============== =============== =============== ===============
Net income per share (basic)....................... $ 0.320.33 $ 0.780.57 $ 0.32
========== ========== ==========0.29 $ 0.31
=============== =============== =============== ===============
Net income per share (diluted)................... $ 0.310.33 $ 0.780.57 $ 0.32
========== ========== ==========0.25 $ 0.30
=============== =============== =============== ===============
The effect of the mergermergers on the Corporation's previously reported revenues, net
income and net income per share for the sixnine months ended JuneSeptember 30, 1997
follows:follows. Per-share amounts have been restated to reflect the impact of the five
for four stock split paid in May, 1998.
8
Fulton
Financial Keystone
FinancialCorporation Heritage Corporation Group, Inc.Ambassador Restated
----------- ------------ ---------------------------- ----------------- ------------------ ---------------
Net interest income................. $ 135,526 $ 20,167 $ 6,723 $ 162,416
Other income........................ 30,838 5,643 319 36,800
--------------- --------------- --------------- ---------------
Total income........................ $ 89,477166,364 $ 13,55225,810 $ 103,029
Other income............................... 19,429 3,612 23,041
---------- ---------- -----------
Total income...............................7,042 $ 108,906199,216
=============== =============== =============== ===============
Net income.......................... $ 17,16448,284 $ 126,070
========== ========== ===========
Net income.................................7,700 $ 31,7261,380 $ 5,446 $ 37,172
========== ========== ===========57,364
=============== =============== =============== ===============
Net income per share (basic)....................... $ 0.630.95 $ 1.371.94 $ 0.62
========== ========== ===========0.82 $ 0.92
=============== =============== =============== ===============
Net income per share (diluted)................... $ 0.620.94 $ 1.361.94 $ 0.62
========== ========== ===========0.76 $ 0.91
=============== =============== =============== ===============
8
Ambassador Bank of the Commonwealth. - On January 26, 1998, the Corporation
entered into a merger agreement to acquire Ambassador Bank of the Commonwealth
(Ambassador) of Allentown, Pennsylvania. Ambassador is a $275 million bank,
which operates eight community banking offices in Lehigh and Northampton
counties.
Under the terms of the merger agreement, each of the 1.9 million shares of
Ambassador's common stock will be exchanged for 1.4 shares of the Corporation's
common stock. In addition, the 417,000 options and warrants to acquire
Ambassador stock will be exchanged for approximately 409,000 shares of the
Corporation's common stock. The acquisition has been approved by Ambassador
shareholders and is subject to approval by bank regulatory authorities. The
transaction is expected to be completed in the third quarter of 1998 and will be
accounted for as a pooling of interests. As a result of the acquisition,
Ambassador will be merged with and into Lafayette Bank, one of the Corporation's
existing affiliate banks.
NOTE E - Reporting Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (Statement 130), was issued in July, 1997. Statement 130 established
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The objective
of Statement 130 is to report a measure of all changes in equity that result
from economic events of the period other than transactions with owners.
Comprehensive income is the total of net income and all other nonowner changes
in equity. Statement 130 was effective for fiscal years beginning after December
15, 1997 and was adopted by the Corporation in the first quarter of 1998.
NOTE F - New Accounting Standards
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" (Statement
125), was issued in 1996 and was effective for 1997. SFAS No. 127 (Statement
127) was also issued in 1996 and amended Statement 125 by deferring for one year
the effective date for certain provisions of Statement 125. The Corporation
adopted the applicable provisions of Statement 125 on January 1, 1997 and the
remaining provisions on January 1, 1998. There was no material financial
statement impact.
Statement of Financial Accounting Standards No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (Statement 132), was issued in
February, 1998. Statement 132 revises the required disclosures by employers with
respect to pensions and other postretirement plans which were previously
addressed by Statements 87, 88 and 106. Statement 132 does not change the
measurement or recognition of expense of such plans, but requires additional
disclosures about changes in benefit obligations and fair values of plan assets.
Statement 132 is effective for years beginning after December 31, 1997. The
Corporation will adopt the new disclosure requirements in its financial
statements and footnotes for the year ending December 31, 1998.
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and for Hedging Activities" (Statement 133), was issued in July,
1998. Statement 133 replaces existing accounting practices with a single,
integrated accounting framework for derivatives and hedging activities. Under
Statement 133, every derivative is recorded in the balance sheet as either an
asset or liability measured at its fair value and changes in fair value are
recognized currently in earnings unless specific hedge accounting criteria are
met. Statement 133 is effective as of the beginning of fiscal years beginningending after
June 15, 1999. The Corporation does not anticipate that adoption of Statement
133 will have a material impact on its financial statements.
9
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
This discussion concerns Fulton Financial Corporation (the Corporation), a bank
holding company incorporated under the laws of the Commonwealth of Pennsylvania
in 1982, and its wholly-owned subsidiaries. This discussion and analysis should
be read in conjunction with the consolidated financial statements and other
financial information presented in this report.
The Corporation has made, and may continue to make, certain forward-looking
statements with respect to its management of net interest income and margin and
its progress in addressing Year 2000 issues. The Corporation cautions that these
forward-looking statements are subject to various assumptions, risks and
uncertainties. Because of the possibility of change 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, the Corporation's success in merger and acquisition integration
and the progress of the Corporation in its efforts to ensure Year 2000
compliance.
The Corporation's forward-looking statements are relevant only as of the date on
which such statements are made. By making any forward-looking statements, the
Corporation assumes no duty to update them to reflect new, changing or
unanticipated events or circumstances.
MERGER AND ACQUISITIONS
- -----------------------
Ambassador Bank of the Commonwealth. - On September 11, 1998, the Corporation
completed its acquisition of Ambassador Bank of the Commonwealth (Ambassador), a
$275 million bank located in Allentown, Pennsylvania. As provided under the
terms of the merger agreement, each of the 1.9 million shares of Ambassador's
common stock were exchanged for 1.4 shares of the Corporation's common stock. In
addition, the 417,000 options and warrants to acquire Ambassador stock were
exchanged for approximately 409,000 shares of the Corporation's common stock.
The Corporation issued approximately 3.1 million shares of its common stock in
connection with the merger, which was accounted for as a pooling of interests.
As a result of the acquisition, Ambassador was merged with and into Lafayette
Bank, one of the Corporation's existing affiliate banks, which thereupon changed
its name to "Lafayette Ambassador Bank."
Keystone Heritage Group, Inc. - On March 27, 1998, the Corporation completed its
acquisition of Keystone Heritage Group, Inc. (Keystone Heritage), a $650 million
bank holding company located in Lebanon, Pennsylvania. As provided under the
terms of the merger agreement, each of the approximately 4.0 million shares of
Keystone Heritage's common stock was exchanged for 2.288 shares of the
Corporation's common stock. In addition, each of the 70,000 options to acquire
Keystone Heritage stock was converted to options to purchase the Corporation's
stock. The Corporation issued 9.1 million shares of its common stock in
connection with the merger, which was accounted for as a pooling of interests.
As a result ofIn order to effect the acquisition, Keystone Heritage was merged with and into
the Corporation. Its sole banking subsidiary, Lebanon Valley National Bank
(Lebanon Valley), was merged with and into Farmers Trust Bank, one of the
Corporation's existing affiliate banks, which changed its name to become Lebanon"Lebanon
Valley Farmers Bank." Lebanon Valley's deposits, loans and branches located in
Lancaster and Dauphin Counties were transferred by Lebanon Valley Farmers Bank
to Fulton Bank as a result of the merger.
Ambassador Bank of the Commonwealth. - On January 26, 1998, the Corporation
entered into a merger agreement to acquire Ambassador Bank of the Commonwealth
(Ambassador) of Allentown, Pennsylvania. Ambassador is a $275 million bank,
which operates eight community banking offices in Lehigh and Northampton
counties.
Under the terms ofimmediately after the merger agreement, each of the 1.9 million shares of
Ambassador's common stock will be exchanged for 1.4 shares of the Corporation's
common stock. In addition, the 417,000 options and warrants to acquire
Ambassador stock will be exchanged for approximately 409,000 shares of the
Corporation's common stock. The acquisition has been approved by Ambassador
shareholders and iswas completed
10
subject to approval by bank regulatory authorities. The transaction is expected
to be completed in the third quarter of 1998 and will be accounted for as a
pooling of interests. As a result of the acquisition, Ambassador will be merged
with and into Lafayette Bank, one of the Corporation's existing affiliate banks.
RESULTS OF OPERATIONS
- ---------------------
Quarter ended JuneSeptember 30, 1998 versus Quarter ended JuneSeptember 30, 1997
- ------------------------------------------------------------------------------------------------------------------------------------------
Fulton Financial Corporation's net income for the secondthird quarter of 1998
increased $1.8$3.0 million, or 9.3%15.8%, in comparison to net income for the secondthird
quarter of 1997. SecondThird quarter net income of $20.9$22.4 million, or $0.36 per share
(basic) and $0.35 per share (basic and diluted)(diluted), represented a return on average assets
(ROA) of 1.61%1.59% and a return on average equity (ROE) of 14.89%14.91%. This compares to
1997 net income of $19.1$19.3 million, or $0.32$0.31 per share (1.59%(basic) and $0.30 per share
(diluted) (1.47% ROA and 15.44%14.49% ROE). Excluding the impact of unrealized gains
on investment securities, return on average equity was 15.70%15.66% in 1998 and 15.69%14.89%
in 1997.
The increase in net income in 1998 was a result of the moderate growth in both net
interest income and significantly higher other income, primarily due to investment
securities gains. Increases in income were offsetnon-interest income. In addition, non-interest expenses
increased by higher non-interest
expenses.only 1.4%.
Net Interest Income
- -------------------
Net interest income increased $2.2$3.5 million, or 4.3%6.4%, for the quarter. Overall,
this increase was a result of growth in the Corporation's balance sheet. The
following tables summarize the components of this increase as well as the
changes in average interest-earning assets and interest-bearing liabilities and
the average interest rates thereon. All dollar amounts are in thousands.
Change
--------------------------------------------------------
1998 1997 Dollar Percent
-------- -------- -------- ---------------------- --------------- --------------- --------------
Interest income ..................................... $ 96,584103,596 $ 91,86598,197 $ 4,719 5.1 %5,399 5.5%
Interest expense.................. 41,761 39,280 2,481 6.3
-------- -------- -------- --------expense................... 44,925 43,043 1,882 4.4
-------------- --------------- --------------- --------------
Net interest income...............income................ $ 54,82358,671 $ 52,58555,154 $ 2,238 4.3 %
======== ======== ======== ========3,517 6.4%
============== =============== =============== ==============
1998 1997 % Change
----------- ------------ -------------------------- --------------- --------------
Average interest-earning assets....................... $ 4,831,1645,176,043 $ 4,508,294 7.2 %4,860,201 6.5%
Yield on earning assets............................... 8.02 % 8.17 % (1.8 %)7.94% 8.02% (1.0%)
Average interest-bearing liabilities.................. $ 3,889,6644,195,699 $ 3,660,814 6.3 %3,972,186 5.6%
Cost of interest-bearing liabilities.................. 4.31 % 4.30 % 0.2 %4.25% 4.30% (1.2%)
Net interest margin (fully taxable equivalent)........ 4.64 % 4.76 % (2.5 %)4.64% 4.64% -
The 7.2%6.5% increase in average earning assets accounted for an interest income
increase of approximately $6.4 million. This was offset by a $1.7$1.0 million
reduction due to the 15eight basis point decline in yield.
The Corporation's average loan portfolio grew by approximately $206$146 million or
5.8%3.9%, mainly in commercial loans and mortgages. These increases have been offset
by reductions in residential mortgages due to refinances and sales of new loans
in the secondary market. Also contributing to the increase in average earning
assets was the growth of the Corporation's investment portfolio, which increased
10.2%$188 million, or 18.6%. The 15eight basis point decrease in the overall yield was
a result of a change in the earning assets mix to include a larger percentage 11
of
investment securities (which generally haveearn lower yields than loans), as well as
a six basis pointsmall decrease in the yield on the loan portfolio as a result of competitive
pressures.pressures and a declining interest rate environment.
The 6.3%5.6% increase in average interest-bearing liabilities resulted in a $2.4
million increase in interest expense. An additional $100,000 increaseThis was offset by a result of the minimal increasefive basis point
decrease in the overall cost of interest-bearing liabilities.liabilities, resulting in a
$500,000 decrease in interest expense. Interest-bearing deposits increased $187$181
million or 5.5%4.9%,
11
accounting for much of the increase. In addition, the Corporation's long-term
borrowings increased $66$70 million or 102% as $90105%. This increase was due to the
Corporation locking in $155 million was borrowed at
favorablein fixed rates. Since loan growth was funded mainly through deposit
increases, theserate advances from the Federal Home
Loan Bank to take advantage of lower interest rates ($90 million in March, 1998
and $65 million in September,1998). These borrowings have been used to pay off
short-term borrowings and to purchase additional investment securities.
Decreases in rates on deposit products have generally lagged the declines
experienced in the loan portfolio. This is a result of several factors,
including local competition. More significant is that much of the growth in the
Corporation's deposits has been in higher-cost certificates of deposit ($151
million increase). Although CD's cost more, the increase has resulted in new
customer relationships. This is evidenced by the $55 million or 9.4% increase
that the Corporation has realized in non-interest bearing deposits.
The factors noted above have resulted in a decrease in the Corporation's net interest margin from 4.76%for both quarterly periods was 4.64%. This
stable margin was a result of consistent growth in 1997 to 4.64%average interest earning
assets and interest bearing liabilities as well as consistent declines in 1998. Despite the decrease, this
margin would have placed the Corporation in the top half of its self-defined
peer group of 25 bank holding companies, based on the most recent available
information.yields
and costs.
Provision and Allowance for Loan Losses
- ---------------------------------------
The following table summarizes loans outstanding (including unearned income) as
of the dates shown:
June 30 December 31
1998 1997
------------ ------------
(in thousands)
Commercial, financial and agricultural............. $ 535,506 $ 518,034
Real estate - construction......................... 126,971 143,593
Real estate - mortgage............................. 2,364,349 2,407,915
Consumer .......................................... 686,067 671,171
Leasing and other.................................. 54,469 55,993
------------ ------------
Totals.......................................... $ 3,767,362 $ 3,796,706September 30 December 31
1998 1997
------------ ------------
(in thousands)
Commercial, financial and agricultural........ $ 538,845 $ 535,842
Real estate - construction.................... 131,058 150,470
Real estate - mortgage........................ 2,542,814 2,519,511
Consumer ..................................... 718,688 709,405
Leasing and other............................. 50,674 56,384
------------ ------------
Totals..................................... $ 3,982,079 $ 3,971,612
============ ============
12
The following table summarizes the activity in the Corporation's allowance for
loan losses:
Three Months Ended JuneSept. 30
----------------------------------------------------------------
1998 1997
----------- -------------------------- ---------------
(in thousands)
Loans outstanding at end of period................................period................................. $ 3,757,4323,971,881 $ 3,593,199
=========== ===========3,869,058
=============== ===============
Daily average balance of loans and leases.........................leases.......................... $ 3,773,3793,949,999 $ 3,567,373
=========== ===========3,803,506
=============== ===============
Balance of allowance for loan losses
at beginning of period.......................................period........................................ $ 56,05458,541 $ 53,84356,313
Loans charged-off:
Commercial, financial and agricultural........................ 340 817agricultural......................... 268 714
Real estate - mortgage........................................ 299 564
Consumer...................................................... 1,178 981mortgage......................................... 384 438
Consumer....................................................... 1,150 964
Leasing and other............................................. 7 24
----------- -----------other.............................................. 45 36
--------------- ---------------
Total loans charged-off....................................... 1,824 2,386
----------- -----------charged-off........................................ 1,847 2,152
--------------- ---------------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural........................ 269 1,301agricultural......................... 302 88
Real estate - mortgage........................................ 267 134
Consumer...................................................... 288 311mortgage......................................... 401 199
Consumer....................................................... 265 268
Leasing and other............................................. - -
----------- -----------other.............................................. 1 7
--------------- ---------------
Total recoveries.............................................. 824 1,746
----------- -----------recoveries............................................... 969 562
--------------- ---------------
Net loans charged-off............................................. 1,000 640charged-off.............................................. 878 1,590
Allowance purchased................................................ - 130
Provision for loan losses......................................... 1,501 1,641
----------- -----------losses.......................................... 1,067 2,060
--------------- ---------------
Balance at end of period..........................................period........................................... $ 56,55558,730 $ 54,844
=========== ===========56,913
=============== ===============
Net charge-offs to average loans (annualized)..................... 0.11% 0.07%
=========== ===========...................... 0.09% 0.17%
=============== ===============
Allowance for loan losses to loans outstanding.................... 1.51% 1.53%
=========== ===========outstanding..................... 1.48% 1.47%
=============== ===============
The provision for loan losses for the quarter ended JuneSeptember 30, 1998 was $1.5$1.1
million, a $140,000$993,000 or 8.5%48.2% decrease from $1.6$2.1 million for the same period of
1997. As shown in the preceding table, annualized net charge-offs as a
percentage of average loans outstanding was 0.11%were 0.09% for the secondthird quarter of 1998
as compared to 0.07%0.17% in the secondthird quarter of 1997. The decrease was realized
mainly in commercial loans, offset by a small increase was due mainly to lower
recoveriesin net charge-offs on
commercialconsumer loans. Although the charge-off percentage was higher
for 1998, the ratio is still consistent with that experienced by the Corporation
over the past several years. The allowance for loan losses as a percentage of gross loans
(net of unearned income) decreased slightly to 1.51%was 1.48% at JuneSeptember 30, 1998 from 1.53%and 1.47% at JuneSeptember
30, 1997.
The following table summarizes the Corporation's non-performing assets as of the
periods shown:
June
Sept. 30 Dec. 31
(Dollars in thousands) 1998 1997
---------------- ----------------
Nonaccrual loans................................ $ 21,958 $ 20,819
Loans 90 days past due and accruing............. 7,986 10,529
Other real estate owned......................... 1,230 1,537
---------------- ----------------
Total non-performing assets..................... $ 31,174 $ 32,885
================ ================
Non-performing assets/Total assets.............. 0.55% 0.61%
Non-performing assets/Gross loans............... 0.75% 0.81%
13
The decrease in thousands) 1998 1997
----------- ------------
Nonaccrual loans................................ $ 20,007 $ 20,074
Loans 90 days pastthe provision was due to lower charge-offs, improved asset
quality and accruing............. 8,304 9,963
Other real estate owned......................... 1,136 1,292
----------- ------------
Total non-performing assets..................... $ 29,447 $ 31,329
=========== ============
Non-performing assets/Total assets.............. 0.56 % 0.61 %
Non-performing assets/Gross loans............... 0.75 % 0.79 %
13
a lower growth rate in the loan portfolio. Since December 31, 1997,
the Corporation's total nonperforming assets decreased $1.9$1.7 million or 6.0%5.2%.
Management considers various factors in assessing the adequacy of the allowance
for loan losses and determining the provision for the period. Among these are
the mix and risk characteristics of loan types in the portfolio, charge-off
history, risk classification of significant credits, adequacy of collateral, the
amount of the allowance that is not specifically allocated to individual loans,
and the balance of the allowance relative to total and nonperforming loans. In
management's opinion, based on its consideration of these factors, the allowance
for loan losses of $56.6$58.7 million at JuneSeptember 30, 1998 iswas adequate.
Other Income
- ------------
Other income for the quarter ended JuneSeptember 30, 1998 was $16.3$14.5 million. This
was an increase of $5.1$1.1 million or 45.7%8.1% over the comparable period in 1997.
Of this
increase, $4.0 million was a result of higher investment security gains.
Management monitors the Corporation's available for sale securities and makes
periodic purchase and sale decisions based on current and expected market
conditions. In the second quarter of 1998, certain investments in stocks of
other financial institutions were sold due to management's assessment of the
valuation of these investments.
Excluding investment security gains, which decreased from $2.9 million in 1997
to $2.1 million in 1998, other income increased $1.1$2.0 million or 10.6%18.7%. Increases
were realized in all major categories of other income. Trust department income
($503,000,increased $780,000, or 19.2%32.4%, increase) and servicedue to additional emphasis on trust products,
including the introduction of investment brokerage services. Service charges on
deposit accounts ($493,000,increased $418,000, or 11.5%9.1%, increase) accounted for a
significant portion of this growth as a result of the continued emphasisgrowth in
transaction account balances. Other service charges and fees increased 646,000,
or 22.7%, due mainly to the introduction of investment management and trust services and an increaseATM surcharges in fee-based deposits.late 1997. Gains
on sales of mortgage loans increased $374,000$107,000 or 75.4%17.8% as relatively low
interest rates caused an increase in refinance volume.
Other service charges and fees were down $244,000 or 7.7% in comparison to 1997.
Excluding the impact of $618,000 in one-time gains on sales of credit card
portfolios and processing by Keystone Heritage Group, Inc. in the second quarter
of 1997, other service charges and fees increased $374,000 or 14.8%. This
increase was mainly a result of ATM convenience fees initiated in the third
quarter of 1997.
Other Expenses
- --------------
Total other expenses for the secondthird quarter of 1998 increased $4.9 million,$543,000, or 14.4%1.4%,
to $38.8$39.2 million from $33.9$38.7 million in the comparable period of 1997. This
moderate increase was mainly due to several non-recurring items recorded in the
third quarter of 1997, including $550,000 in merger-related professional fees
and $500,000 in expense reductions for the Corporation's corporate owned life
insurance plan as a result of changes in the plan. Excluding these items, other
expenses increased $1.6 million, or 4.1%.
Salaries and employee benefits increased $898,000$850,000 or 4.8%4.2% in comparison to the
secondthird quarter of 1997. This moderate increase was a result of normal merit increases and
an increase in the average number of full-time equivalent employees (FTE's) from
2,1992,342 in 1997 to 2,2272,377 in 1998 (a 1.3% increase).
Although the number of FTE's increased from 1997 as a result of the growth of
the Corporation, the amount has actually decreased slightly from 2,230 in the
first quarter.Corporation's growth.
Net occupancy expense increased $155,000$98,000, or 5.3%3.1% due to the growth of the branch
network.growth. Equipment
expense decreased $76,000 as a result of gains on sales of certain equipment.
Excluding these gains, equipment expense increased $348,000, or 14.3%, mainly
due to depreciation on check imaging and FDIC assessment expense were relatively flat.other new equipment. Special services
expense, which represents the cost of data processing, increased $747,000$894,000 or
42.3%46.9%. Much of this increase was due to the conversion of Lebanon Valley
National Bank to the Corporation's outside data processing servicer upon merging
with the Corporation in March, 1998. Additional increases in this expense are
attributable to the Corporation's conversion to a new mortgage processing system
and to growth. See also the discussion on Year 2000 at the end of this section.
Other expenses decreased $1.2 million or 11.1% in 1998 to $9.6 million, as
compared to $10.8 million for the same period in 1997. This decrease was mainly
due to the non-recurring items discussed above. Excluding these items, other
expense was flat.
Income Taxes
- ------------
Income tax expense for the quarter was $10.5 million as compared to $8.5 million
for the comparable period in 1997, a $2.0 million or 23.5% increase. The
effective tax rate was 32.0% for 1998 and 30.6% in 1997.
14
Nine months ended September 30, 1998 versus nine months ended September 30, 1997
- --------------------------------------------------------------------------------
Fulton Financial Corporation's net income for the first nine months of 1998
increased $7.7 million, or 13.5%, in comparison to net income for the first nine
months of 1997. Net income for the first nine months of 1998 was $65.1 million,
or $1.04 per share (basic) and $1.03 per share (diluted), representing a 1.59%
ROA and a 14.96% ROE. This compares to 1997 net income of $57.4 million, or
$0.92 per share (basic) and $0.91 per share (diluted) (1.51% ROA and 14.91%
ROE).
Net Interest Income
- -------------------
Net interest income increased $10.4 million, or 6.4%, for the first nine months
of 1998. Overall, this increase was a result of growth in the Corporation's
balance sheet. The following tables summarize the components of this increase as
well as the changes in average interest-earning assets and interest-bearing
liabilities and the average interest rates thereon. All dollar amounts are in
thousands.
Change
----------------------------------
1998 1997 Dollar Percent
-------------- --------------- --------------- --------------
Interest income ................... $ 305,307 $ 285,991 $ 19,316 6.8%
Interest expense................... 132,539 123,575 8,964 7.3
-------------- --------------- --------------- --------------
Net interest income................ $ 172,768 $ 162,416 $ 10,352 6.4%
============== =============== =============== ==============
1998 1997 % Change
--------------- --------------- --------------
Average interest-earning assets....................... $ 5,074,313 $ 4,775,069 6.3%
Yield on earning assets............................... 8.04% 8.09% (0.6%)
Average interest-bearing liabilities.................. $ 4,130,286 $ 3,871,974 6.8%
Cost of interest-bearing liabilities.................. 4.29% 4.27% 0.5%
Net interest margin (fully taxable equivalent)........ 4.64% 4.68% (0.9%)
The 6.8% increase in interest income was due primarily to the $299 million, or
6.3%, increase in average interest-earning assets, offset by the five basis
point decrease in yield. Average loans increased $236 million, or 6.4%,
accounting for the majority of the asset growth. Much of the increase in loans
was in commercial mortgages, offset by a decrease in residential mortgages due
to refinance activity. Average investment securities increased $120 million, or
12.3%, as a result of increases in funding exceeding net loan demand. The
average yield on earning assets decreased five basis points, reflecting the
change in the earning asset mix to a larger percentage of investment securities,
which generally earn a lower yield.
The 7.3% increase in interest expense was a result of a $258 million, or 6.8%,
increase in average interest-bearing liabilities as well as a two basis point
increase in the average cost. Average interest-bearing deposits increased $228
million or 6.4%. While the largest component of this increase was in
certificates of deposit with original maturities between one and two years ($120
million, or 33.8% increase), the Corporation also realized increases in certain
demand deposits, such as NOW accounts ($41.8 million or 9.6% increase). In
addition to deposit growth, the Corporation's average long-term borrowings
increased $50.2 million. See "Liquidity and Interest Rate Risk" below for
additional discussion of the Corporation's asset/liability management function.
15
Provision and Allowance for Loan Losses
- ---------------------------------------
The following table summarizes the activity in the Corporation's allowance for
loan losses:
Nine Months Ended Sept. 30
------------------------------------
1998 1997
--------------- ---------------
(in thousands)
Loans outstanding at end of period................................. $ 3,971,881 $ 3,869,058
=============== ===============
Daily average balance of loans and leases.......................... $ 3,953,779 $ 3,717,800
=============== ===============
Balance of allowance for loan losses
at beginning of period........................................ $ 57,557 $ 53,893
Loans charged-off:
Commercial, financial and agricultural......................... 1,110 1,989
Real estate - mortgage......................................... 885 1,126
Consumer....................................................... 3,412 2,887
Leasing and other.............................................. 72 61
--------------- ---------------
Total loans charged-off........................................ 5,479 6,063
--------------- ---------------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural......................... 737 1,779
Real estate - mortgage......................................... 729 456
Consumer....................................................... 885 976
Leasing and other.............................................. 2 8
--------------- ---------------
Total recoveries............................................... 2,353 3,219
--------------- ---------------
Net loans charged-off.............................................. 3,126 2,844
Allowance purchased................................................ - 130
Provision for loan losses.......................................... 4,299 5,734
--------------- ---------------
Balance at end of period........................................... $ 58,730 $ 56,913
=============== ===============
Net charge-offs to average loans (annualized)...................... 0.11% 0.10%
=============== ===============
Allowance for loan losses to loans outstanding..................... 1.48% 1.47%
=============== ===============
The provision for loan losses for the nine months ended September 30, 1998 was
$4.3 million, a $1.4 million or 25.0% decrease from $5.7 million for the same
period of 1997. As shown in the preceding table, annualized net charge-offs as a
percentage of average loans outstanding was 0.11% for the first nine months of
1998 as compared to 0.10% for the first nine months of 1997. The increase was
due mainly to lower recoveries on commercial loans. The decrease in the
provision was due to improved asset quality and a lower growth rate for the loan
portfolio, resulting in a consistent ratio of allowance for loan losses to loans
outstanding.
Other Income
- ------------
Other income for the nine months ended September 30, 1998 was $45.7 million.
This was an increase of $8.9 million or 24.1% over the comparable period in
1997. Of this increase, $4.3 million was a result of higher investment security
gains due to the sale of bank stock investments that, in management's opinion,
were fully valued.
Excluding investment security gains, other income increased $4.5 million or
14.5%. Trust department income ($1.6 million, or 21.1%, increase) and service
charges on deposit accounts ($1.3 million, or 10.0%, increase) accounted for
much of this growth. Gains on sales of mortgage loans increased $843,000, or
16
54.8% as the relatively low interest rates caused an increase in refinance
volume. Other service charges and fees increased $756,000, or 8.7%, mainly as a
result of ATM convenience fees offset by gains on sales of credit card servicing
in 1997.
Other Expenses
- --------------
Total other expenses for the first nine months of 1998 increased $8.3 million,
or 7.5%, to $118.9 million from $110.6 million in the comparable period of 1997.
Salaries and employee benefits increased $2.8 million or 4.7% in comparison to
1997. Adjusting 1997 for $600,000 in non-recurring expenses for post-employment
benefits results in a $3.4 million or 5.8% increase in salaries and benefits in
1998. Additional staff expenses were incurred to facilitate the conversion and
transition of Lebanon Valley. Average full-time equivalent (FTE) employees
increased from 2,296 in 1997 to 2,334 in 1998, resulting in approximately
$975,000 of additional expense. The remaining increase in salaries and benefits,
$2.4 million or 4.2%, is consistent with the Corporation's merit increase goals.
Net occupancy expense, equipment expense and FDIC assessment expense increased
less than 4.0% each, mainly as a result of growth. Special services expense
increased $2.0 million, or 34.4%. Of this increase, $200,000 was specific
one-time charges related to the conversion of Lebanon Valley to the
Corporation's data processing systems. Prior to the conversion, Lebanon Valley's
data processing was an in-house function. As a result of the conversion to the
Corporation's outsourced data processing servicer, additional normal processing
fees are now being incurred, which have totaled close to $200,000. Additional increases in
expense are attributable to the Corporation's conversion to a new mortgage
processing system and growth.
14
Other expenses increased $3.1 million or 38.9% in 1998 to $11.1 million, as
compared to $8.0 million for the same period in 1997. This increase was mainly
due to certain non-recurring items in 1998, including: $408,000 in
merger-related expenses; $496,000 in contributions to low income housing
projects and certain charitable organizations; and $200,000 in one-time charges
on Fulton Bank for supplies related to the Lebanon Valley conversion and certain
loss write-offs. In addition, in 1997, Keystone Heritage Group, Inc. recovered
$460,000 in legal fees from a prior period. Excluding the impact of these
non-recurring items, other expenses increased $1.5 million or 18.3%. Of this
remaining increase, approximately $350,000 was a result of an increase in the
cost of the Corporation's corporate-owned life insurance plan. The remaining
increase was due to growth.
Income Taxes
- ------------
Income tax expense for the quarter was $9.9 million as compared to $9.1 million
for the comparable period in 1997, an $820,000 or 9.0% increase. The effective
tax rate was 32.1% for both 1998 and 1997.
Six months ended June 30, 1998 versus six months ended June 30, 1997
- ----------------------------------------------------------------------
Fulton Financial Corporation's net income for the first six months of 1998
increased $4.3 million, or 11.7%, in comparison to net income for the first half
of 1997. First half net income of $41.5 million, or $0.69 per share (basic and
diluted), represented a return on average assets (ROA) of 1.63% and a return on
average equity (ROE) of 15.12%. This compares to 1997 net income of $37.2
million, or $0.62 per share (1.57% ROA and 15.22% ROE).
Net Interest Income
- -------------------
Net interest income increased $3.6 million, or 7.1%, for the first six months of
1998. Overall, this increase was a result of growth in the Corporation's balance
sheet. The following tables summarize the components of this increase as well as
the changes in average interest-earning assets and interest-bearing liabilities
and the average interest rates thereon. All dollar amounts are in thousands.
Change
---------------------------
1998 1997 Dollar Percent
--------- --------- -------- -------
Interest income .................. $ 191,686 $ 179,621 $ 12,065 6.7 %
Interest expense.................. 82,842 76,592 6,250 8.2
--------- --------- -------- -------
Net interest income............... $ 108,844 $ 103,029 $ 5,815 5.6 %
========= ========= ======== =======
1998 1997 % Change
---------- ----------- ----------
Average interest-earning assets....................... $ 4,782,603 $ 4,460,005 7.2 %
Yield on earning assets............................... 8.08 % 8.12 % (0.5 %)
Average interest-bearing liabilities.................. $ 3,863,965 $ 3,632,800 6.4 %
Cost of interest-bearing liabilities.................. 4.29 % 4.25 % 0.9 %
Net interest margin (fully taxable equivalent)........ 4.66 % 4.73 % (1.5 %)
The 6.7% increase in interest income was due primarily to the $323 million, or
7.2%, increase in average interest-earning assets, offset by a small increase in
yield. Average loans increased $246 million, or 7.0%, accounting for the
majority of the increase. Much of the increase in loans was in commercial
mortgages, offset by a decrease in residential mortgages due to refinance
activity. Investment securities increased $73 million, or 8.1%, as a result of
increases in funding exceeding net loan demand. The average yield on
15
earning assets decreased four basis points, reflecting the change in the earning
asset mix to a larger percentage of investment securities, which generally carry
a lower yield.
The 8.2% increase in interest expense was a result of a $231 million, or 6.4%,
increase in average interest-bearing liabilities as well as a four basis point
increase in the average cost. Average interest-bearing deposits increased $208
million or 6.2%. Most of this increase was in certificates of deposit with
original maturities of three years or less. In addition to deposit growth, the
Corporation's average long-term borrowings increased $43.9 million. See
"Liquidity and Interest Rate Risk" below for additional discussion of the
Corporation's asset/liability management function.
Provision and Allowance for Loan Losses
- ---------------------------------------
The following table summarizes the activity in the Corporation's allowance for
loan losses:
Six Months Ended June 30
----------------------------
1998 1997
----------- -----------
(in thousands)
Loans outstanding at end of period................................ $ 3,757,432 $ 3,593,199
=========== ===========
Daily average balance of loans and leases......................... $ 3,776,392 $ 3,530,127
=========== ===========
Balance of allowance for loan losses
at beginning of period....................................... $ 55,593 $ 52,528
Loans charged-off:
Commercial, financial and agricultural........................ 739 1,265
Real estate - mortgage........................................ 501 688
Consumer...................................................... 2,156 1,817
Leasing and other............................................. 27 25
----------- -----------
Total loans charged-off....................................... 3,423 3,795
----------- -----------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural........................ 435 1,688
Real estate - mortgage........................................ 328 257
Consumer...................................................... 619 706
Leasing and other............................................. 1 1
----------- -----------
Total recoveries.............................................. 1,383 2,652
----------- -----------
Net loans charged-off............................................. 2,040 1,143
Provision for loan losses......................................... 3,002 3,459
----------- -----------
Balance at end of period.......................................... $ 56,555 $ 54,844
=========== ===========
Net charge-offs to average loans (annualized)..................... 0.11% 0.06%
=========== ===========
Allowance for loan losses to loans outstanding.................... 1.51% 1.53%
=========== ===========
The provision for loan losses for the six months ended June 30, 1998 was $3.0
million, a $457,000 or 13.2% decrease from $3.5 million for the same period of
1997. As shown in the preceding table, net charge-offs as a percentage of
average loans outstanding was 0.11% for the second quarter of 1998 as compared
to 0.06% in the second quarter of 1997. The increase was due mainly to lower
recoveries on commercial loans. Although the charge-off percentage was higher
for 1998, the ratio is still consistent with that experienced by the Corporation
over the past several years.
16
Other Income
- ------------
Other income for the six months ended June 30, 1998 was $30.7 million. This was
an increase of $7.6 million or 33.0% over the comparable period in 1997. Of this
increase, $5.2 million was a result of higher investment security gains due to
the sale of bank stock investments that, in management's opinion, were fully
valued.
Excluding investment security gains, other income increased $2.4 million or
11.8%. Trust department income ($814,000, or 15.4%, increase) and service
charges on deposit accounts ($818,000, or 9.7%, increase) accounted for much of
this growth. Gains on sales of mortgage loans increased $736,000 or 78.4% as
relatively low interest rates caused an increase in refinance volume. Other
service charges and fees increased $643,000, or 12.8%, (excluding non-recurring
gains in 1997), mainly as a result of ATM convenience fees.
Other Expenses
- --------------
Total other expenses for the first six months of 1998 increased $7.0 million, or
10.2%, to $75.7 million from $68.9 million in the comparable period of 1997.
Salaries and employee benefits increased $1.6 million or 4.2% in comparison to
1997. Adjusting 1997 for $600,000 in non-recurring expenses for post-employment
benefits results in a $2.2 million or 5.8% increase in salaries and benefits in
1998. Additional staff expenses were incurred to facilitate the conversion and
transition of Lebanon Valley. Average full-time equivalent (FTE) employees
increased from 2,188 in 1997 to 2,228 in 1998, resulting in approximately
$680,000 of additional expense. The number of FTE's has been declining since
January as Lebanon Valley employees have been absorbed into the Corporation. The
remaining increase in salaries and benefits, $1.5 million or 4.0%, is consistent
with the Corporation's merit increase goals.
Net occupancy expense, equipment expense and FDIC assessment expense increased
less than 3.0% each, mainly as a result of growth. Special services expense
increased $968,000 or 26.9%. Of this increase, $200,000 was specific one-time
charges related to the conversion of Lebanon Valley to the Corporation's data
processing systems. Prior to the conversion, Lebanon Valley's data processing
was an in-house function. As a result of the conversion to the Corporation's
outsourced data processing servicer, additional normal processing fees are now
being incurred, which have totaled close to $200,000.$400,000.
Additional increases in expense are attributable to the Corporation's conversion
to a new mortgage processing system and growth.
Other expenses increased $4.2$3.1 million or 25.6%11.2% in 1998 to $20.4$31.1 million as
compared to $16.3$28.0 million for the same period in 1997. Most of this increase iswas
a result of non-recurring items. In 1998, these included: $1.3$1.4 million in
merger-related expenses; $496,000professional fees; $375,000 in contributions to low income housing
projects and certain
charitable organizations; $200,000$260,000 in one-time charges on Fulton Bank for
supplies related to the Lebanon Valley conversion and certain loss write-offs;
and a $150,000 loss on the sale of a consumer loan portfolio. In 1997,
non-recurring items included:included a Keystone Heritage Group, Inc. recovery of $460,000 in legal
fees from a prior period; and $620,000 in legal expense
accruals.period. Excluding the impact of these non-recurring items,
other expenses increased $2.1$523,000 million or 13.3%1.8%. Of this remaining increase, approximately
$650,000 was a result of an increase in the cost of the Corporation's
corporate-owned life insurance plan. The remaining increase was due to growth.
Income Taxes
- ------------
Income tax expense for the first sixnine months of 1998 was $19.3$30.2 million as
compared to $16.7$25.5 million for the comparable period in 1997, a $2.5$4.6 million or
15.2%18.1% increase. The effective tax rate for 1998 was 31.7% as compared to 31.1%30.8%
for 1997.
17
FINANCIAL CONDITION
- -------------------
At JuneSeptember 30, 1998, the Corporation had total assets of $5.3$5.6 billion,
reflecting an increase of $142$255 million, or 2.8%4.7%, over December 31, 1997.
Investment securities accounted for an increase of $154$224 million, offset by a net decline inwhile the loan
portfolio of $29increased by $10 million.
The flat loan portfolio decrease was a result of
increased competition and a net runoff of residential mortgage loans due to
refinance activity.
The net decrease in loans and a $79$87 million increase in deposits provided excess
funds to the Corporation during the firstthird quarter of 1998. In addition, in
March, 1998, the
Corporation has borrowed $90$155 million in long-term fixed-rate advances from the
Federal Home Loan Bank. This borrowing wasThese borrowings were done to take advantage of the
relatively low interest rate environment and to adjust the interest rate
sensitivity of the Corporation's liabilities. With the net
decrease in loans, theseThese borrowed funds were used to
eliminatereduce the Corporation's federal funds purchased balance, which was $73.2from $63.9 million at
December 31, 1997.
Remaining1997 to $25.0 million at September 30, 1998. Additional funds
provided by borrowings and deposit growth were used to purchase investment
securities.securities, which increased $224 million or 21%.
17
Liquidity and Interest Rate Risk
- --------------------------------
Interest rate risk creates exposure in two primary areas. First, changes in
rates have an impact on the Corporation's liquidity position and could affect
its ability to meet obligations and continue to grow. Secondly, movements in
interest rates can create fluctuations in the Corporation's net income.
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. This committee's primary responsibility is to address the liquidity and
net income risks noted above.
The goals of the Corporation's asset/liability management function are to ensure
adequate liquidity and to maintain an appropriate balance between the relative
rate sensitivity of interest-earning assets and interest-bearing liabilities.
The Corporation must maintain a sufficient level of liquid assets to meet the
ongoing cash flow requirements of customers, who, as depositors, may want to
withdraw funds or who, as borrowers, need credit availability.
Adequate liquidity is provided by cash, short-term investments, securities
available for sale and scheduled payments and maturities of loans receivable and
securities held to maturity. Liquidity is also provided by deposits and short
and long-term borrowings.
In order to manage the risk that changes in interest rates could have a
significant impact on net income, the Corporation, through its ALCO function,
relies on certain analytical tools, including "static gap" analyses and net
interest income forecasting. As required by banking regulators, the Corporation
also employs certain interest sensitivity, income volatility and market value of
equity analyses.
Static gap illustrates the expected repricing periods for all rate-sensitive
assets and liabilities and shows the difference (or gap) for each period.
Despite the fact that static gap only addresses rate risk at a point in time and
is not as sophisticated as certain modeling and forecasting methods, it remains
a popular tool in the industry and for the Corporation.
Interest rate sensitivity varies widely with different types of interest-earning
assets and interest-bearing liabilities. At the short end of the asset spectrum
are overnight Federal funds, on which rates change daily, and loans, whose rates
float with the prime rate or a similar index. At the other end are long-term
investment securities and fixed-rate loans. On the liability side, jumbo time
deposits and short-term borrowings are much more interest rate sensitive than
passbook savings and FHLB advances.
18
While the interest rate sensitivity gap (the difference between repricing
opportunities for interest-earning assets and interest-bearing liabilities) must
be managed over all time periods, the Corporation focuses on the 6-month period
as the key interval affecting net interest income. This shorter period is
monitored because a large percentage of the Corporation's interest-earning
assets and interest-bearing liabilities are subject to repricing within this
period. In addition, short-term interest rate swings can be more pronounced and
provide a shorter time for reaction or strategy adjustment.
The Corporation's policy provides for the six-month gap position to be
maintained between 0.85 and 1.15. The Corporation was positioned within this
range throughout the first sixnine months of 1998.
Capital Resources
- -----------------
Shareholders' equity increased $24.2$34.3 million or 4.5%6.1% during the first sixnine
months of 1998. This increase was a result of net income for the quarter --nine months,
offset by the normal quarterly dividendcash dividends to shareholders -- and an increase in the value of
the Corporation's available for sale investment securities.shareholders.
Current capital guidelines measure the adequacy of a bank holding company's
capital by taking into consideration the differences in risk associated with
holding various types of assets as well as exposure to off-balance sheet
commitments. The guidelines call for a minimum risk-based Tier I capital
percentage of
18
4.0% and a minimum risk-based total capital of 8.0%. Tier I capital includes
common shareholders' equity less goodwill and non-qualified intangible assets.
Total capital includes all Tier I capital components plus the allowance for loan
losses.
The Corporation is also subject to a "leverage capital" requirement, which
compares capital (using the definition of Tier I capital) to total balance sheet
assets and is intended to supplement the risk based capital ratios in measuring
capital adequacy. The minimum acceptable leverage capital ratio is 3%3.0% for
institutions which are highly-rated in terms of safety and soundness and which
are not experiencing or anticipating any significant growth. Other institutions
are expected to maintain capital levels at least one or two percent above the
minimum.
As of JuneSeptember 30, 1998, the Corporation and each of its subsidiaries met the
minimum capital requirements. In addition, the Corporation and each of its
subsidiaries' capital ratios exceeded the amounts required to be considered
"well-capitalized" as defined in the regulations.
The Corporation's total and Tier I risk-based capital ratios have generally
placed the Corporation near the middle of its self-defined peer group over the
past year. The Corporation's ratio of Tier 1 capital to average assets, however,
has generally placed it in the top quartile in comparison to its peers.
In March, 1997, the Board of Directors approved a Plan to repurchase up to
100,000 shares of the Corporation's common stock through March 31, 1998. OnIn
April, 21, 1998, the Board of Directors approved a plan to repurchase up to 250,000
shares of the Corporation' sCorporation's common stock through October 31, 1998. Treasury
stock acquired under these plans is used for the Corporation's Employee Stock
Purchase Plan, Incentive Stock Option Plan and other benefit plans. The
Corporation purchased 77,50044,375 shares under the plan which expired on March 31,
1998. Through JuneSeptember 30, 1998, no127,800 shares had been repurchased under the
new plan. In October, 1998, the Board of Directors approved an extension of the
250,000 share repurchase plan through March 31, 1999.
19
YEAR 2000
- ---------
The Corporation's business, operations and financial condition may be affected
by the "Year 2000 Problem" where certain computer and other electronic
information processing systems may not be able to recognize dates after 1999. A
financial institution's ability to process financial data such as deposits,
loans
19
and trust accounts through its various data processing systems is the most
obvious area of exposure to the Year 2000 Problem. In addition, a financial
institution's ability to collect payments on loans could be impacted if
borrowers are unable to make payments as a result of Year 2000 deficiencies.
Furthermore, financial institutions could be affected by the Year 2000 readiness
of business customers, vendors and correspondents, customer perception of the
problem, and regulatory influences, among other things.
Specific guidelines are in place forThe Corporation has formed committees at each subsidiary bank and at the
Corporation to substantially completeidentify, evaluate and manage the work tasksrisks related to the Year 2000
Problem. A comprehensive plan adopted by the Board of Directors of the
Corporation establishes a five step process - awareness, assessment, renovation,
validation and implementation - to address the Year 2000 Problem. The plan
establishes priorities for eachaddressing the Year 2000 Problem, with systems
classified as being most mission critical receiving the highest priority
treatment. The primary focus of these steps. Awarenessthe plan is on assuring that information
technology systems will be operable, but it also addresses non-information
technology issues such as embedded technology in security and other systems.
The awareness and assessment phases of the plan have been completed;completed. The
renovation and validation phases are in process and system changes and testing
will be substantially completed by December 31, 1998, and March 31, 1999,
respectively. All mission critical systems, internal and external, should be
complete and implementation should be substantially complete by June 30, 1999,
and all contingency planning should be substantially complete by September 30,
1999. The Corporation has formed committeesfourth quarter of 1999 -- October 1 through December 31 -- will be
used to identify, evaluate and managere-inspect all processes, beginning with the risks
related to themost critical, for
continued assurance that contingency planning adequately addresses potential
disruptions.
Federal bank regulatory agencies have issued Year 2000 Problem, including the preparation of a comprehensive
plan adopted by the Board of Directorsproject guidelines for
financial institutions from time to time and have also conducted examinations of
the Corporation which establishes a
five step process - awareness, assessment, renovation, validation and implementation -its banks and commented on the Corporation's plans to
address the Year 2000 Problem. The Corporation has used such guidance to
establish Year 2000 work tasks for each phase.
Through September 30, the Corporation has incurred approximately $820,000 in
expenses related to the Year 2000. In addition, capital expenditures to replace
non-compliant hardware, software and other equipment have totaled approximately
$3.0 million. Through 1999, the Corporation anticipates incurring an additional
$1.7 million in expenses and $2.2 million in capital expenditures.
While these costs are related to the Year 2000 problem, they also represent
significant improvements to the technology infrastructure for Fulton Financial
Corporation and its bank subsidiaries. Improvements at Fulton Bank include
migrating to a new branch automation solution and new data processing solutions
for the bank's investment management and trust services department and leasing
department. At Hagerstown Trust Company, they include a new personal computing
and local area network solution and changing the check processing solution to
the same system used at all other subsidiary banks. Across the entire
Corporation, local area networks have been upgraded as required and the first
phase for a wide area telecommunications network has been installed to support
the investment management and trust services data processing system and the
branch automation system. Each subsidiary bank also has upgraded their telephone
systems as needed.
Since third-party service providers perform most major data processing functions
of the Corporation, are performed by third-party service
providers, the Corporation does not anticipate that it will incur any
material costs to address the Year 2000 Problem.Problem other than those discussed
above. The Corporation expects, at this time, that the Year 2000 Problem should
have no material adverse effect on the products and services it offers or on
competitive conditions; however, further testing with mission critical
third-party service providers will be necessary to validate the readiness
20
of these providers for this change. Similarly, the Corporation believes that the
Year 2000 Problem should have no material adverse effect on the Corporation's
business, operations or financial condition, but until it has completed its
surveybased on initial surveys of its
major business loan customers and other actions designed to evaluate the risks
associated with the Year 2000 Problem, however, it cannot rule out the
possibility that the Year 2000 Problem might have such an effect.
Federal bank regulators have initiated a series of examinations of all financial
institutions to assess their progress in addressing the Year 2000 Problem and
have indicated that institutions which have not adequately addressed the issue
will be subject to various sanctions, including denial of, or delay in acting
on, regulatory applications. The Corporation believes that it has made
sufficient progress on the Year 2000 Problem to minimize the risklikelihood of
regulatory sanctions.
2021
PART II -- OTHER INFORMATION
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits -- The following is a list of the exhibits required by
Item 601 of Regulation S-K and filed as part of this report:
(1) Articles of incorporation as amended on April 13, 1990 and
Bylaws of Fulton Financial Corporation as amended on April 17,
1990 - Incorporated by reference from Exhibits 19(a) and 19(b)
of the Fulton Financial Corporation Quarterly Report on Form
10-Q for the quarter ended March 31, 1990.
(2) Instruments defining the right of securities holders,
including indentures:
(a) Rights Agreement dated June 20, 1989 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 June 21, 1989.
(3) Material Contracts - Executive Compensation Agreements and
Plans:
(a) Severance Agreements entered into as of April 17, 1984 and
as of May 17, 1988 between Fulton Financial Corporation
and the following executive officers: Robert D. Garner,
Rufus A. Fulton, Jr., James K. Sperry
and R. Scott Smith, Jr. -
Incorporated by reference from Exhibit 28(a) of the Fulton
Financial Corporation Quarterly Report on Form 10-Q for
the quarter ended March 31, 1990.
(b) Incentive Stock Option Plan adopted September 19, 1995 -
Incorporated by reference from Exhibit A of Fulton
Financial Corporation's 1996 Proxy Statement.
(c) Severance Agreement entered into as of November 19, 1992
between Fulton Financial Corporation and Charles J.
Nugent, Executive Vice President and Chief Financial
Officer, incorporated by reference from Exhibit 10(c) to
the Fulton Financial Corporation Annual Report on Form
10-K for the year ended December 31, 1992.
(4) Financial Data Schedule - JuneSeptember 30, 1998
(5) Financial Data Schedule - JuneSeptember 30, 1997 (restated).
(b) Reports on Form 8-K:
(1) Form 8-K dated January 30,September 18, 1998, reporting execution of a
Merger Agreement between Fulton Financial Corporation and
Ambassador Bank of the Commonwealth.
(2) Form 8-K dated March 31, 1998 (as amended by Form 8-K/A
dated May 21, 1998) reporting consummation of
the merger of Fulton Financial Corporation and Keystone Heritage Group,
Inc.
(3) Form 8-K dated May 18, 1998 reporting 30 day Income
Statement for post-merger combined operationsAmbassador Bank
of Fulton
Financial Corporation and Keystone Heritage Group, Inc.
21the Commonwealth.
22
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FULTON FINANCIAL CORPORATION
Date: AugustNovember 10, 1998 /s/ Rufus A. Fulton, Jr.
-------------------- -------------------------------------------------- ---------------------------------------
Rufus A. Fulton, Jr.
President and Chief Executive Officer
Date: AugustNovember 10, 1998 /s/ Beth Ann L. Chivinski
--------------------- ------------------------------
Beth Ann L. Chivinski
SeniorCharles J. Nugent
---------------------- ---------------------------------------
Charles J. Nugent
Executive Vice President-Controller
(Chief Accounting Officer)
22President and
Chief Financial Officer
23
EXHIBIT INDEX
Exhibits Required Pursuant
to Item 601 of Regulation S-K
-----------------------------
3. Articles of Incorporation as amended on April 30, 1990, and Bylaws of
Fulton Financial Corporation as amended on April 17, 1990 -
Incorporated by reference from Exhibits 19(a) and 19(b) of the Fulton
Financial Corporation Quarterly Report on Form 10-Q for the quarter
ended March 31, 1990.
4. Instruments defining the rights of security holders, including
indentures.
(a) Rights Agreement dated June 20, 1989 between Fulton Financial
Corporation and Fulton Bank-Bank - Incorporated by reference to
Exhibit 1 of the Fulton Financial Corporation Current Report on
Form 8-K dated June 21, 1989.
10. Material Contracts
(a) Severance Agreements entered into as of April 17, 1984 and as of
May 17, 1988 between Fulton Financial Corporation and the
following executive officers: Robert D. Garner, Rufus A. Fulton,
Jr., James K. Sperry and R. Scott Smith, Jr. - Incorporated by reference from
Exhibit 28(a) of the Fulton Financial Corporation Quarterly
Report on Form 10-Q for the quarter ended March 31, 1990.
(b) Incentive Stock Option Plan adopted September 19, 1995 -
Incorporated by reference from Exhibit A of Fulton Financial
Corporation's 1996 Proxy Statement.
(c) Severance Agreement entered into as of November 19, 1992 between
Fulton Financial Corporation and Charles J. Nugent, Executive
Vice President and Chief Financial Officer, filed as Exhibit
10(c) to the Fulton Financial Corporation Annual Report on Form
10-K for the year ended December 31, 1992.
27. Financial data schedule - JuneSeptember 30, 1998.
27.1 Financial data schedule - JuneSeptember 30, 1997 (restated).
2324