UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20459

 


 

FORM 10-Q

 


 

(Mark One)

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

 

For the quarterly period ended JuneSeptember 30, 2004,

or

 

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

 

For the transition period from            to            

 

Commission File No. 0-10587

 


 

FULTON FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 


 

PENNSYLVANIA 23-2195389

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One Penn Square, P.O. Box 4887

Lancaster, Pennsylvania

 17604
(Address of principal executive offices) (Zip Code)

 

(717) 291-2411

(Registrant’s 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  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    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 – 121,640,000120,957,000 shares outstanding as of July 31,October 29, 2004.

 



FULTON FINANCIAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED JUNESEPTEMBER 30, 2004

 

INDEX

 

Description


  Page

PART I.FINANCIAL INFORMATION

   

Item 1.Financial Statements (Unaudited):

   

(a)Consolidated Balance Sheets - JuneSeptember 30, 2004 and December 31, 2003

  3

(b)Consolidated Statements of Income - Three and sixnine months ended JuneSeptember 30, 2004 and 2003

  4

(c)Consolidated Statements of Shareholders’ Equity - SixNine months ended JuneSeptember 30, 2004 and 2003

  5

(d)Consolidated Statements of Cash Flows - SixNine months ended JuneSeptember 30, 2004 and 2003

  6

(e)Notes to Consolidated Financial Statements – JuneSeptember 30, 2004

  7

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

  13

Item 3.Quantitative and Qualitative Disclosures about Market Risk

  3433

Item 4.Controls and Procedures

37

PART II.OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

  38
PART II.OTHER INFORMATION

Item 2.6.Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity SecuritiesExhibits

  39

Item 6.Exhibits and Reports on Form 8-KSignatures

  40

SignaturesExhibit Index

  41

Exhibit IndexCertifications

  42
Certifications43

2


Item 1. Financial Statements

 

FULTON FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands, except per-share data)

 

  

June 30

2004


 December 31
2003


   September 30
2004


 December 31
2003


 

ASSETS

      

Cash and due from banks

  $335,176  $300,966   $305,695  $300,966 

Interest-bearing deposits with other banks

   7,021   4,559    12,566   4,559 

Mortgage loans held for sale

   144,050   32,761    150,452   32,761 

Investment securities:

      

Held to maturity (Fair value: $21,307 in 2004 and $23,739 in 2003)

   20,898   22,993 

Held to maturity (Fair value: $20,093 in 2004 and $23,739 in 2003)

   19,587   22,993 

Available for sale

   2,468,133   2,904,157    2,324,099   2,904,157 

Loans, net of unearned income

   7,042,311   6,159,994    7,213,162   6,159,994 

Less: Allowance for loan losses

   (86,539)  (77,700)   (86,827)  (77,700)
  


 


  


 


Net Loans

   6,955,772   6,082,294    7,126,335   6,082,294 
  


 


  


 


Premises and equipment

   130,721   120,777    130,874   120,777 

Accrued interest receivable

   35,701   34,407    38,651   34,407 

Goodwill

   276,592   127,202    280,128   127,202 

Other assets

   182,357   137,172    180,429   137,172 
  


 


  


 


Total Assets

  $10,556,421  $9,767,288   $10,568,816  $9,767,288 
  


 


  


 


LIABILITIES

      

Deposits:

      

Noninterest-bearing

  $1,414,770  $1,262,214   $1,427,008  $1,262,214 

Interest-bearing

   6,016,218   5,489,569    6,033,062   5,489,569 
  


 


  


 


Total Deposits

   7,430,988   6,751,783    7,460,070   6,751,783 

Short-term borrowings:

      

Federal funds purchased

   774,128   933,000    662,509   933,000 

Other short-term borrowings

   467,394   463,711    525,955   463,711 
  


 


  


 


Total Short-Term Borrowings

   1,241,522   1,396,711    1,188,464   1,396,711 

Accrued interest payable

   25,273   24,579    27,603   24,579 

Other liabilities

   96,270   78,549    97,875   78,549 

Federal Home Loan Bank Advances and long-term debt

   654,886   568,730    666,781   568,730 
  


 


  


 


Total Liabilities

   9,448,939   8,820,352    9,440,793   8,820,352 
  


 


  


 


SHAREHOLDERS’ EQUITY

      

Common stock, $2.50 par value, 400 million shares authorized, 128.5 million shares issued in 2004 and 119.5 million shares issued in 2003

   321,277   284,480    321,256   284,480 

Additional paid in capital

   892,022   633,588    889,616   633,588 

Retained earnings

   38,885   117,373    57,106   117,373 

Accumulated other comprehensive (loss) income, net

   (25,747)  12,267    (2,072)  12,267 

Treasury stock, 6.6 million shares in 2004 and 5.8 million shares in 2003

   (118,955)  (100,772)

Treasury stock, 7.5 million shares in 2004 and 5.8 million shares in 2003

   (137,883)  (100,772)
  


 


  


 


Total Shareholders’ Equity

   1,107,482   946,936    1,128,023   946,936 
  


 


  


 


Total Liabilities and Shareholders’ Equity

  $10,556,421  $9,767,288   $10,568,816  $9,767,288 
  


 


  


 


 

See Notes to Consolidated Financial Statements

3


FULTON FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in thousands, except per-share data)

 

  Three months ended
June 30


  

Six months ended

June 30


  Three months ended
September 30


  Nine months ended
September 30


  2004

  2003

  2004

  2003

  2004

  2003

  2004

  2003

INTEREST INCOME

                        

Loans, including fees

  $96,859  $84,541  $185,325  $169,653  $103,033  $85,159  $288,358  $254,812

Investment securities:

                        

Taxable

   19,652   18,390   41,388   39,124   18,247   16,512   59,635   55,636

Tax-exempt

   2,540   2,526   5,073   5,046   2,407   2,740   7,480   7,786

Dividends

   992   1,153   1,944   2,301   1,035   904   2,979   3,205

Other interest income

   1,981   556   2,230   1,226   2,225   592   4,455   1,818
  

  

  

  

  

  

  

  

Total Interest Income

   122,024   107,166   235,960   217,350   126,947   105,907   362,907   323,257

INTEREST EXPENSE

                        

Deposits

   22,345   24,000   42,695   49,707   22,644   22,773   65,339   72,480

Short-term borrowings

   3,135   1,692   6,462   3,445   3,840   1,515   10,302   4,960

Long-term debt

   7,838   7,104   15,130   14,190   7,962   7,840   23,092   22,030
  

  

  

  

  

  

  

  

Total Interest Expense

   33,318   32,796   64,287   67,342   34,446   32,128   98,733   99,470
  

  

  

  

  

  

  

  

Net Interest Income

   88,706   74,370   171,673   150,008   92,501   73,779   264,174   223,787

PROVISION FOR LOAN LOSSES

   800   2,490   2,540   5,325   1,125   2,190   3,665   7,515
  

  

  

  

  

  

  

  

Net Interest Income AfterProvision for Loan Losses

   87,906   71,880   169,133   144,683   91,376   71,589   260,509   216,272
  

  

  

  

  

  

  

  

OTHER INCOME

                        

Investment management and trust services

   8,637   8,809   17,282   17,152   8,650   8,527   25,932   25,679

Service charges on deposit accounts

   9,929   9,502   19,434   18,718   10,182   9,810   29,616   28,527

Other service charges and fees

   4,970   4,708   9,996   9,294   5,367   4,782   15,363   14,076

Mortgage banking income

   6,417   5,841   8,473   11,792   6,092   6,100   14,565   17,892

Investment securities gains

   5,349   4,809   11,177   7,038   3,336   6,990   14,513   14,028

Other

   1,721   865   2,904   2,205   1,720   1,304   4,624   3,510
  

  

  

  

  

  

  

  

Total Other Income

   37,023   34,534   69,266   66,199   35,347   37,513   104,613   103,712
  

  

  

  

  

  

  

  

OTHER EXPENSES

                        

Salaries and employee benefits

   42,195   34,494   79,158   67,814   42,464   35,516   121,622   103,330

Net occupancy expense

   5,859   4,807   11,377   9,887   6,159   4,982   17,536   14,869

Equipment expense

   2,749   2,588   5,390   5,268   2,705   2,618   8,095   7,886

Data processing

   2,868   2,776   5,687   5,640   2,915   2,864   8,602   8,504

Advertising

   1,914   1,787   3,442   3,019   1,631   1,570   5,073   4,589

Intangible amortization

   1,356   360   2,347   719   1,233   622   3,580   1,341

Other

   13,957   11,253   25,974   21,600   13,581   11,378   39,555   32,978
  

  

  

  

  

  

  

  

Total Other Expenses

   70,898   58,065   133,375   113,947   70,688   59,550   204,063   173,497
  

  

  

  

  

  

  

  

Income Before Income Taxes

   54,031   48,349   105,024   96,935   56,035   49,552   161,059   146,487

INCOME TAXES

   16,167   14,287   31,314   28,830   16,915   15,170   48,229   44,000
  

  

  

  

  

  

  

  

Net Income

  $37,864  $34,062  $73,710  $68,105  $39,120  $34,382  $112,830  $102,487
  

  

  

  

  

  

  

  

PER-SHARE DATA:

                        

Net income (basic)

  $0.31  $0.31  $0.63  $0.61  $0.32  $0.30  $0.95  $0.92

Net income (diluted)

   0.31   0.31   0.62   0.61   0.32   0.30   0.94   0.91

Cash dividends

   0.165   0.152   0.317   0.288   0.165   0.152   0.482   0.441

 

See Notes to Consolidated Financial Statements

4


FULTON FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2004 AND 2003

(Dollars in thousands, except per-share data)

 

 Number of
Shares
Outstanding


 Common
Stock


 Additional
Paid-In
Capital


 Retained
Earnings


 Accumulated
Other
Comprehensive
Income (Loss)


 Treasury
Stock


 Total

   Number of
Shares
Outstanding


 Common
Stock


  Additional
Paid-in
Capital


 Retained
Earnings


 Accumulated
Other
Comprehensive
Income (Loss)


 Treasury
Stock


 Total

 

Balance at December 31, 2003

 113,668,000  $284,480 $633,588  $117,373  $12,267  $(100,772) $946,936   113,668,000  $284,480  $633,588  $117,373  $12,267  $(100,772) $946,936 

Comprehensive Income:

       

Net Income

  73,710   73,710        112,830   112,830 

Other - unrealized loss on securities (net of $16.6 million tax effect)

  (30,749)  (30,749)

Less - reclassification adjustment for gains included in net income (net of $3.9 million tax expense)

  (7,265)  (7,265)
 

Other - unrealized loss on securities (net of $2.6 million tax effect)

       (4,906)  (4,906)

Less - reclassification adjustment for gains included in net income (net of $5.1 million tax expense)

       (9,433)  (9,433)
 


      


Total comprehensive income

  35,696        98,491 
 


      


Stock dividend - 5%

    15,278   100,247   (115,615)  (90)

Stock issued (all treasury)

  926,000     (8,584)  16,742   8,158 

Stock issued for acquisition of

      

Resource Bankshares Corporation

  9,030,000   21,498   164,365   185,863 

Acquisition of treasury stock

  (2,621,000)     (53,853)  (53,853)

Cash dividends - $0.482 per share

       (57,482)  (57,482)
       


 


Stock dividend - 5%

  15,299  100,226   (115,615)  (90)

Stock issued

 659,000   (6,157)  11,756   5,599 

Stock issued for acquisition of Resource Bancshares Corporation

 9,030,000   21,498  164,365   185,863 

Acquisition of treasury stock

 (1,476,000)  (29,939)  (29,939)

Cash dividends - $0.317 per share

  (36,583)  (36,583)
 

 

 


 


 


 


 


Balance at June 30, 2004

 121,881,000  $321,277 $892,022  $38,885  $(25,747) $(118,955) $1,107,482 

Balance at September 30, 2004

  121,003,000  $321,256  $889,616  $57,106  $(2,072) $(137,883) $1,128,023 
 

 

 


 


 


 


 


  

 

  


 


 


 


 


Balance at December 31, 2002

 111,470,000  $259,943 $481,028  $138,501  $34,801  $(50,531) $863,742   111,470,000  $259,943  $481,028  $138,501  $34,801  $(50,531) $863,742 

Comprehensive Income:

       

Net Income

  68,105   68,105        102,487   102,487 

Other - net unrealized loss on securities (net of $2.3 million tax effect)

  (4,297)  (4,297)

Less - reclassification adjustment for gains included in net income (net of $2.5 million tax expense)

  (4,575)  (4,575)

Other - net unrealized loss on securities (net of $11.4 million tax effect)

       (21,114)  (21,114)

Less - reclassification adjustment for gains included in net income (net of $4.9 million tax expense)

       (9,118)  (9,118)
 


      


Total comprehensive income

  59,233        72,255 
 


      


Stock dividend - 5%

    12,998   79,491   (92,526)  (37)

Stock issued (all treasury)

  538,000     (3,433)  8,912   5,479 

Stock issued for acquisition of

      

Premier Bancorp, Inc.

  4,847,000   12,021   79,848   (3,692)  88,177 

Acquisition of treasury stock

  (2,865,000)     (52,692)  (52,692)

Cash dividends - $0.441 per share

       (49,448)  (49,448)
       


 


Stock dividend - 5%

  12,998  79,491   (92,526)  (37)

Stock issued

 397,000   (2,432)  6,461   4,029 

Acquisition of treasury stock

 (1,240,000)  (21,319)  (21,319)

Cash dividends - $0.288 per share

  (31,989)  (31,989)

Balance at September 30, 2003

  113,990,000  $284,962  $636,934  $99,014  $4,569  $(98,003) $927,476 
 

 

 


 


 


 


 


  

 

  


 


 


 


 


Balance at June 30, 2003

 110,627,000  $272,941 $558,087  $82,091  $25,929  $(65,389) $873,659 
 

 

 


 


 


 


 


 

See Notes to Consolidated Financial Statements

5


FULTON FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

  

Six months ended

June 30


 

(dollars in thousands)


  

Nine months ended

September 30


 
  2004

 2003

   2004

 2003

 

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net Income

  $73,710  $68,105   $112,830  $102,487 

Adjustments to reconcile net income to net cash provided by operating activities:

      

Provision for loan losses

   2,540   5,325    3,665   7,515 

Depreciation and amortization of premises and equipment

   6,177   6,232    9,297   9,349 

Net amortization of investment security premiums

   5,942   9,195    8,187   16,155 

Investment securities gains

   (11,177)  (7,038)   (14,513)  (14,028)

Net (increase) decrease in mortgage loans held for sale

   (18,769)  10,601    (23,145)  18,020 

Amortization of intangible assets

   2,347   719    3,580   1,341 

(Increase) decrease in accrued interest receivable

   (1,294)  3,558    (4,244)  4,142 

Decrease in other assets

   5,861   32 

(Increase) decrease in other assets

   (6,836)  3,552 

Decrease in accrued interest payable

   (2,481)  (3,318)   (151)  (3,855)

Increase (decrease) in other liabilities

   5,643   (6,713)   4,976   (6,759)
  


 


  


 


Total adjustments

   (5,211)  18,593    (19,184)  35,432 
  


 


  


 


Net cash provided by operating activities

   68,499   86,698    93,646   137,919 
  


 


  


 


CASH FLOWS FROM INVESTING ACTIVITIES:

      

Proceeds from sales of securities available for sale

   179,971   295,665    217,577   442,369 

Proceeds from maturities of securities held to maturity

   5,279   9,404    7,579   14,557 

Proceeds from maturities of securities available for sale

   457,086   777,870    643,176   1,257,386 

Purchase of securities held to maturity

   (3,699)  (7,375)   (4,694)  (7,331)

Purchase of securities available for sale

   (133,005)  (1,152,114)   (174,278)  (1,877,724)

Decrease in short-term investments

   2,760   2,162 

(Increase) decrease in short-term investments

   (2,785)  16,293 

Net increase in loans

   (256,901)  (79,337)   (418,447)  (164,583)

Net cash paid for acquisitions

   (768)  —   

Net cash (paid) acquired from acquisitions

   (6,404)  17,222 

Net purchase of premises and equipment

   (5,966)  (4,149)   (9,122)  (2,745)
  


 


  


 


Net cash provided by (used in) investing activities

   244,757   (157,874)   252,602   (304,556)
  


 


  


 


CASH FLOWS FROM FINANCING ACTIVITIES:

      

Net increase in demand and savings deposits

   203,212   282,544    267,629   340,745 

Net decrease in time deposits

   (122,396)  (91,049)   (157,731)  (206,456)

Decrease in long-term debt

   (34,376)  (1,099)   (22,481)  (5,240)

Decrease in short-term borrowings

   (266,384)  (32,199)

(Decrease) increase in short-term borrowings

   (328,345)  150,410 

Dividends paid

   (34,762)  (30,350)   (54,896)  (47,213)

Net proceeds from issuance of common stock

   5,599   4,029    8,158   5,479 

Acquisition of treasury stock

   (29,939)  (21,319)   (53,853)  (52,692)
  


 


  


 


Net cash (used in) provided by financing activities

   (279,046)  110,557    (341,519)  185,033 
  


 


  


 


Net Increase in Cash and Due From Banks

   34,210   39,381    4,729   18,396 

Cash and Due From Banks at Beginning of Period

   300,966   314,857    300,966   314,857 
  


 


  


 


Cash and Due From Banks at End of Period

�� $335,176  $354,238   $305,695  $333,253 
  


 


  


 


Supplemental Disclosures of Cash Flow Information

      

Cash paid during period for:

      

Interest

  $66,768  $70,660   $98,884  $103,325 

Income taxes

   25,841   27,645    40,151   37,851 
   

 

See Notes to Consolidated Financial Statements

6


FULTON FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE A – Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-monthnine-month periods ended JuneSeptember 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

 

NOTE B – Net Income Per Share

 

The Corporation’s basic net income per share is calculated as net income divided by the weighted average number of shares outstanding. For diluted net income per share, net income is divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation’s common stock equivalents consist solely of outstanding stock options.

 

A reconciliation of the weighted average shares outstanding used to calculate basic net income per share and diluted net income per share follows:

 

  Three months ended
June 30


  Six months ended
June 30


  Three months ended
September 30


  Nine months ended
September 30


  2004

  2003

  2004

  2003

  2004

  2003

  2004

  2003

  (in thousands)  (in thousands)

Weighted average shares outstanding (basic)

  122,118  110,709  117,904  110,962  121,496  113,249  119,110  111,733

Impact of common stock equivalents

  1,367  778  1,468  763  1,216  919  1,188  814
  
  
  
  
  
  
  
  

Weighted average shares outstanding (diluted)

  123,485  111,487  119,372  111,725  122,712  114,168  120,298  112,547
  
  
  
  
  
  
  
  

 

NOTE C – Stock Dividend

 

The Corporation paid a 5% stock dividend on June 4, 2004. All share and per-share information has been restated to reflect the impact of this stock dividend.

 

NOTE D – Disclosures about Segments of an Enterprise and Related Information

 

The Corporation does not have any operating segments which require disclosure of additional information. While the Corporation owns twelve separate banks, each engages in similar activities and provides similar products and services. The Corporation’s non-banking activities are immaterial and therefore, separate information has not been disclosed.

 

NOTE E – Stock-Based Compensation

 

In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (Statement 148). Statement 148 clarifies the accounting for options issued in prior periods when a company elects to transition from Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) accounting to Statement 123, “Accounting for Stock-Based Compensation” (Statement 123) accounting. It also requires additional disclosures with respect to accounting for stock-based compensation. Finally, Statement No. 148 amends Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information.

7


The Corporation has elected to continue application of APB 25 and related interpretations in accounting for its stock-based employee compensation plans and, accordingly, no compensation expense is reflected in net income. Had compensation cost for these plans been recorded consistent with the fair value provisions of Statements 123 and 148, the Corporation’s net income and net income per share would have been reduced to the following pro-forma amounts:

 

  Three months ended
June 30


  Six months ended
June 30


  Three months ended
September 30


  Nine months ended
September 30


  2004

  2003

  2004

  2003

  2004

  2003

  2004

  2003

  (in thousands except per-share data)  (dollars in thousands except per-share data)

Net income as reported

  $37,864  $34,062  $73,710  $68,105  $39,120  $34,382  $112,830  $102,487

Stock based employee compensation expense under the fair value method, net of tax

   62   59   132   124   3,111   1,634   3,243   1,758
  

  

  

  

  

  

  

  

Pro-forma net income

  $37,802  $34,003  $73,578  $67,981  $36,009  $32,748  $109,587  $100,729
  

  

  

  

  

  

  

  

Net income per share (basic)

  $0.31  $0.31  $0.63  $0.61  $0.32  $0.30  $0.95  $0.92

Pro-forma net income per share (basic)

   0.31   0.31   0.62   0.61   0.30   0.29   0.92   0.90

Net income per share (diluted)

  $0.31  $0.31  $0.62  $0.61  $0.32  $0.30  $0.94  $0.91

Pro-forma net income per share (diluted)

   0.31   0.31   0.62   0.61   0.29   0.29   0.91   0.90

 

On April 22, 2004, the Corporation’s shareholders approved the “Fulton Financial Corporation 2004 Stock Option and Compensation Plan,” (the Plan) which reserved 13.9 million shares of the Corporation’s stock for future issuance as options or restricted stock awards. The total number of options eligible for grant in any calendar year is determined based on the Corporation’s stock performance relative to its peer group. The exercise price of options to be granted under the Plan is the market value of the Corporation’s stock on the grant date. Specific individual grants of options and restricted stock are at the discretion of the Executive Compensation Committee of the Board of Directors. Under the Plan, the Corporation granted 1.0 million options on July 1, 2004.

 

NOTE F – Employee Benefit Plans

 

The Corporation maintains a defined benefit pension plan (Pension Plan) for certain employees. Contributions to the Pension Plan are actuarially determined and funded annually. Pension Plan assets are invested in money markets, fixed income securities, including corporate bonds, U.S. Treasury securities and common trust funds, and equity securities, including common stocks and common stock mutual funds. The Pension Plan has been closed to new participants, but existing participants continue to accrue benefits according to the terms of the plan. The Corporation expects to contribute approximatelycontributed $2.6 million to the Pension Plan in 2004.

 

The Corporation currently provides medical and life insurance benefits under a post-retirement benefits plan to certain retired full-time employees who were employees of the Corporation prior to January 1, 1998. Full-time employees may become eligible for these discretionary benefits if they reach retirement while working for the Corporation. Benefits are based on a graduated scale for years of service after attaining the age of 40.

8


The net periodic benefit cost for the Corporation’s Pension Plan and post-retirement benefits plan, as determined by consulting actuaries, consisted of the following components:

 

  Pension Plan

   Pension Plan

 
  Three months ended
June 30


 Six months ended
June 30


   Three months ended
September 30


 Nine months ended
September 30


 
  2004

 2003

 2004

 2003

   2004

 2003

 2004

 2003

 
  (in thousands)   (in thousands) 

Service cost

  $577  $545  $1,154  $1,089   $577  $545  $1,730  $1,634 

Interest cost

   776   738   1,551   1,476    776   738   2,327   2,213 

Expected return on plan assets

   (750)  (658)  (1,500)  (1,316)   (750)  (658)  (2,249)  (1,973)

Net amortization and deferral

   166   132   332   264    166   132   498   395 
  


 


 


 


  


 


 


 


Net periodic benefit cost

  $769  $757  $1,537  $1,513   $769  $757  $2,306  $2,269 
  


 


 


 


  


 


 


 


  Post-Retirement Plan

   Post-Retirement Plan

 
  Three months ended
June 30


 Six months ended
June 30


   Three months ended
September 30


 Nine months ended
September 30


 
  2004

 2003

 2004

 2003

   2004

 2003

 2004

 2003

 
  (in thousands)   (in thousands) 

Service cost

  $94  $70  $192  $141   $94  $70  $287  $211 

Interest cost

   155   112   316   223    155   112   473   335 

Expected return on plan assets

   (1)  (1)  (3)  (1)   (1)  (1)  (4)  (2)

Net amortization and deferral

   (116)  (72)  (236)  (144)   (116)  (72)  (353)  (215)
  


 


 


 


  


 


 


 


Net periodic benefit cost

  $132  $109  $269  $219   $132  $109  $403  $329 
  


 


 


 


  


 


 


 


 

NOTE G – New Accounting Standards

Variable Interest Entities: In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities – An Interpretation of ARB No. 51”, which was revised in December 2003 (FIN-46). FIN-46 provides guidance on when to consolidate certain Variable Interest Entities (VIE’s) in the financial statements of the Corporation. VIE’s are entities in which equity investors do not have a controlling financial interest or do not have sufficient equity at risk for the entity to finance activities without additional financial support from other parties. Under FIN-46, a company must consolidate a VIE if the company has a variable interest that will absorb a majority of the VIE’s losses, if they occur, and/or receive a majority of the VIE’s residual returns, if they occur.

The provisions of FIN-46 which relate to the Corporation’s investments in low and moderate income partnerships (LIH Investments) were effective as of December 31, 2003 for LIH Investments made by the Corporation after January 31, 2003 and March 31, 2004 for all others. Based on its review, the Corporation concluded that none of its LIH Investments met the criteria for consolidation and, as such, did not consolidate any LIH Investments as of June 30, 2004 or December 31, 2003.

At June 30, 2004 and December 31, 2003, the Corporation’s LIH Investments totaled $45.9 million and $40.0 million, respectively. The net income tax benefit associated with these investments was $1.1 million and $1.0 million for the three months ended June 30, 2004 and 2003, respectively, and $2.2 million and $2.0 million for the six months ended June 30, 2004 and June 30, 2003, respectively.

 

Accounting for Certain Loans or Debt Securities Acquired in a Transfer: In December 2003, the Accounting Standards Executive Committee issued Statement of Position 03-3 (SOP 03-3), “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”. SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer, including business combinations, if those differences are attributable, at least in part, to credit quality.

 

9


SOP 03-3 is effective for loans or debt securities acquired in fiscal years beginning after December 15, 2004. The Corporation intends to adopt the provisions of SOP 03-3 effective January 1, 2005, and does not expect the initial implementation to have a material effect on the Corporation’s consolidated financial statements.

 

Application of Accounting Principles to Loan Commitments: In March 2004, the SEC staffSecurities and Exchange Commission issued Staff Accounting Bulletin No. 105 (SAB 105), “Application of Accounting Principles to Loan Commitments”. SAB 105 provides specific guidance on fair value measurement of mortgage loan commitments that are accounted for as derivatives. SAB 105 must be applied to mortgage loan commitments that are accounted for as derivatives entered into after March 31, 2004. The adoption of SAB 105 did not have a material effect on the Corporation’s consolidated financial statements.

 

Post-Retirement Benefits: In May 2004, the FASB issued FASB Staff Position 106-2 (FSP 106-2), “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the Act). FSP 106-2 provides guidance on the accounting for the effects of the Act for employers that sponsor postretirement health care plans that provide prescription drug benefits. FSP 106-2 became effective on July 1, 2004 for the Corporation and, based on management’s review of the benefits provided under its post-retirement plans, the enactment of the act did not constitute a significant event. As such, the impact of the Act on its post-retirement plan will be recognized on the next measurement date of the plan, which is December 31, 2004. Management does not anticipate that there will be a material impact on its financial condition or results of operations as a result of adopting the provisions of FSP 106-2.

Other Than Temporary Impairment: In the second quarter of 2004, the Emerging Issues Task Force (EITF) released EITF Issue 03-01, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (EITF 03-01), which provides guidance for evaluating whether an investment is other-than-temporarily impaired and requires certain disclosures with respect to these investments.

In September 2004, the FASB delayed the effective date of the measurement and recognition guidance of EITF 03-01 from the third calendar quarter of 2004 to a date to be determined upon the issuance of a final FASB Staff Position. The Corporation continues to apply the measurement and recognition criteria of existing authoritative literature in evaluating its investments for other than temporary impairment. Management does not expect EITF 03-01 to have a material impact on its financial condition or results of operations.

NOTE H – Acquisitions

 

On June 15, 2004, the Corporation entered into a merger agreement to acquire First Washington FinancialCorp (First Washington), of Windsor, New Jersey. First Washington is a $483$486 million financialbank holding company whose primary subsidiary is First Washington State Bank, which operates sixteen community-banking offices in Mercer, Monmouth, and Ocean Counties in New Jersey.

 

Under the terms of the merger agreement, each of the approximately 4.04.2 million shares of First Washington’s common stock will be exchanged for 1.35 shares of the Corporation’s common stock. In addition, each of the options to acquire First Washington’s stock will be converted to options to purchase the Corporation’s stock. The acquisition has been approved by First Washington’s shareholders, and is subject to approval by bank regulatory authorities and First Washington’s shareholders, andauthorities. The acquisition is expected to be completed on or before April 15, 2005.December 31, 2004. As a result of the acquisition, First Washington will be merged into the Corporation and First Washington State Bank will become a wholly owned subsidiary.

 

The acquisition will be accounted for as a purchase. Purchase accounting requires the Corporation to allocate the total purchase price of the acquisition to the assets acquired and liabilities assumed, based on their respective fair values at the acquisition date, with any remaining acquisition cost being recorded as goodwill. Resulting goodwill balances are then subject to an impairment review on at least an annual basis. The results of First Washington’s operations will be included in the Corporation’s financial statements prospectively from the date of the acquisition.

 

The total purchase price is estimated to be approximately $124.0 million, which includes the value of the Corporation’s stock to be issued, First Washington’s options to be converted and certain acquisition related costs. The net assets of First Washington as of JuneSeptember 30, 2004 were $33.8$37.0 million and accordingly, the purchase price exceeds the carrying value of the net assets by $90.2$87.0 million as of this date. The total purchase price will be allocated to the net assets acquired as of the merger effective date, based on fair market values at that date. The Corporation expects to record a core deposit intangible asset and goodwill as a result of the acquisition accounting.

 

In August 2004, the Corporation acquired Penn Business Credit, Inc. (PBC), a finance company with approximately $10 million of commercial loans located in Bala Cynwyd, PA. The Corporation paid approximately $6.1 million in cash and recorded $4.4 million in goodwill, representing the excess of the purchase price over the fair value of the net assets acquired. PBC became a wholly owned subsidiary of Fulton Bank, the Corporation’s largest subsidiary.

On April 1, 2004, the Corporation acquired all of the outstanding common stock of Resource Bankshares Corporation (Resource), an $885 million financial holding company, and its primary subsidiary, Resource Bank. The total purchase price was $196.0$195.7 million, including $185.9 million in stock issued, $7.1 million in Resource stock purchased for cash and $3.0$2.7 million of direct acquisition costs. The Corporation issued 1.54 shares of its stock for each of the 5.9 million shares of Resource outstanding on the acquisition date. The purchase price was determined based on the value of the Corporation’s stock on the date when the final terms of the acquisition were agreed to and announced.

 

10


Resource Bank is located in Virginia Beach, Virginia, and operates six community-banking offices in Newport News, Chesapeake, Herndon, Virginia Beach, and Richmond, Virginia and 14 loan production and residential mortgage offices in Virginia, North Carolina, Maryland and Florida.

 

The acquisition was accounted for as a purchase and the Corporation’s results of operations include Resource from the date of acquisition. The following is a summary of the preliminary purchase price allocation based on estimated fair values on the acquisition date. These preliminary amounts may be revised when final fair values are determined (in thousands):

 

Cash and due from banks

  $11,497  $11,497

Other earning assets

   5,222   5,222

Mortgage loans held for sale

   92,519   94,546

Investment securities available for sale

   125,473   125,473

Loans, net

   619,118   619,118

Premises and equipment

   10,155   10,272

Core deposit intangible asset

   1,450   1,450

Goodwill

   147,260   146,377

Other assets

   30,490   28,859
  

  

Total assets acquired

   1,043,184   1,042,814
  

  

Deposits

   598,389   598,389

Short-term borrowings

   111,195   111,195

Long-term debt

   120,532   120,532

Other liabilities

   17,038   17,006
  

  

Total liabilities assumed

   847,154   847,122
  

  

Net assets acquired

  $196,030  $195,692
  

  

 

On August 1, 2003, the Corporation acquired all of the outstanding common stock of Premier Bancorp, Inc. (Premier), a $600 million financial holding company, and its wholly-owned subsidiary, Premier Bank. The total purchase price was $92.0 million, including $2.1 million of direct acquisition costs. The Corporation issued 1.477 shares of its stock for each of the 3.4 million shares of Premier outstanding on the acquisition date. The purchase price was determined based on the value of the Corporation’s stock on the date when the final terms of the acquisition were agreed to and announced.

 

Premier Bank is located in Doylestown, Pennsylvania and the eight community banking offices in Bucks, Northampton and Montgomery Counties, Pennsylvania acquired by the Corporation in this transaction complement its existing retail banking network. The acquisition was accounted for as a purchase and the Corporation’s results of operations include Premier from the date of the acquisition.

11


The following table summarizes unaudited pro-forma information assuming the acquisitions of Resource and Premier had occurred on January 1, 2004 and 2003. This pro-forma information includes certain adjustments, including amortization related to fair value adjustments recorded in purchase accounting (in thousands, except per-share information):

 

  Three months ended
June 30


  

Six months ended

June 30


  

Three months ended

September 30


  

Nine months ended

September 30


  2004

  2003

  2004

  2003

  2004

  2003

  2004

  2003

  (in thousands)  (dollars in thousands)

Net interest income

  $88,706  $84,879  $179,018  $170,310  $92,501  $81,929  $271,519  $252,239

Other income

   37,023   41,165   73,974   78,391   35,347   43,922   109,321   122,313

Net income

   37,864   37,787   74,621   75,281   39,120   35,115   113,741   110,120

Per Share:

                        

Net income (basic)

  $0.31  $0.30  $0.61  $0.60  $0.32  $0.28  $0.92  $0.89

Net income (diluted)

   0.31   0.30   0.60   0.60   0.32   0.28   0.91   0.87

 

Note I – Derivative Financial Instruments – Interest Rate Swaps

 

Through the acquisition of Resource, the Corporation acquired interest rate swaps, which are being used to hedge certain long term fixed rate certificate of deposit liabilities held at Resource Bank. As of JuneSeptember 30, 2004 Resource Bank had utilized interest rate swaps with a notional amount of $210$230 million as a hedge against these liabilities. The terms of the certificates of deposit and the interest rate swaps mirror each other and are committed to simultaneously. Under the terms of the swap agreements, Resource Bank is the fixed rate receiver and the floating rate payer (generally tied to the three month London Interbank Offering Rate, or LIBOR, a common index used for setting rates between financial institutions). The combination of the interest rate swaps and the issuance of the certificates of deposit generates long term floating rate funding for the Corporation. Both the interest rate swap and the certificate of deposit are recorded at fair value, with changes in fair value included in the Consolidated Statements of Income as interest expense. Risk management results indicate that the hedges were 99.16%98.5% effective as of JuneSeptember 30, 2004 resulting in an adjustment to interest expense to reflect hedge ineffectiveness of $32,000$39,000 for the second quarterthree months ended September 2004 and $71,000 since the date of 2004.acquisition.

 

NOTE J – Financial Instruments With Off-Balance Sheet Risk

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. Those financial instruments include commitments to extend credit and letters of credit, which involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Corporation’s Consolidated Balance Sheets. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the outstanding amount of those instruments.

The outstanding amounts of commitments to extend credit and letters of credit were as follows:

   September 30

   2004

  2003

   (in thousands)

Commitments to extend credit

  3,308,678  2,457,668

Standby letters of credit

  594,694  465,015

Commercial letters of credit

  20,842  20,160

NOTE K – Reclassifications

 

Certain amounts in the 2003 consolidated financial statements and notes have been reclassified to conform to the 2004 presentation.

12


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

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) concerns Fulton Financial Corporation (the Corporation), a financial holding company incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly-ownedwholly owned subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes presented in this report.

 

FORWARD LOOKING STATEMENTS

 

The Corporation has made, and may continue to make, certain forward-looking statements with respect to its acquisition and growth strategies, management of net interest income and margin, the ability to realize gains on equity investments, allowance and provision for loan losses, expected levels of certain non-interest expenses and the liquidity position of the Corporation and Parent Company. The Corporation cautions that these forward-looking statements are subject to various assumptions, risks and uncertainties. Because of the possibility of changes in these assumptions, risks and uncertainties, actual results could differ materially from forward-looking statements.

 

In addition to the factors identified herein, the following could cause actual results to differ materially from such forward-looking statements: pricing pressures on loan and deposit products, actions of bank and non-bank competitors, changes in local and national economic conditions, changes in regulatory requirements and regulatory oversight of the Corporation, actions of the Federal Reserve Board (FRB) and the Corporation’s success in merger and acquisition integration.

 

The Corporation’s forward-looking statements are relevant only as of the date on which such statements are made. By making any forward-looking statements, the Corporation assumes no duty to update them to reflect new, changing or unanticipated events or circumstances.

 

RESULTS OF OPERATIONS

 

Overview

 

As a financial institution with a focus on traditional banking activities, Fulton Financial Corporation generates the majority of its revenue through net interest income, or the difference between interest income earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and maintaining or increasing the net interest margin, which is net interest income as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various services and products offered to its customers and through sales of assets, such as loans or investments. Offsetting these revenue sources are provisions for credit losses on loans, administrativeother operating expenses and income taxes.

 

The Corporation’s net income for the secondthird quarter of 2004 increased $3.8$4.7 million, or 11.2%13.8%, from $34.1$34.4 million in 2003 to $37.9$39.1 million in 2004. Although net income increased from period to period, dilutedDiluted net income per share remained the same dueincreased $0.02, or 6.7%, from $0.30 in 2003 to an$0.32 in 2004. The percentage increase in net income per share was lower than the net income increase as the average number of shares outstanding shares issued, mainly forincreased as a result of acquisitions. The Corporation realized annualized returns on average assets of 1.44%1.48% and average equity of 13.82%14.12% during the secondthird quarter of 2004. The annualized return on average tangible average equity, which is net income divided by average shareholder’sshareholders’ equity, excluding intangible assets, was 17.84%.19.37% for the quarter.

 

The increase in net income compared to the secondthird quarter of 2003 resulted from a $14.3an $18.7 million increase in net interest income, a $2.5$1.5 million increase in other income (excluding security gains) and a $1.7$1.1 million decrease in the provision for loan losses, offset by a $12.8$3.7 million decrease in security gains, an $11.1 million

increase in other expenses and a $1.9$1.7 million increase in income taxes. Net interest income growth resulted from increases in average earning assets, largely due to the acquisitions

13


of Premier Bank (Premier) in August 2003 and Resource Bank (Resource) in April 2004 (see “Acquisitions” below). While theThe net interest margin decreasedincreased 7.2% compared to the secondthird quarter of 2003, it has remained fairly stable forcompounding the last three calendar quarters (3.73% forimpact of the second quarter of 2004, 3.79% for the first quarter of 2004, and 3.73% for the fourth quarter of 2003).earning asset growth.

 

The following summarizes some of the more significant factors that influenced the Corporation’s secondthird quarter 2004 results.

 

Interest Rates - Short-termThe Federal Reserve raised short-term interest rates remained low throughoutthree times since June, 2004, resulting in a 75 basis point increase in both the second quarter and the first six months of 2004, with the average overnight borrowing rate, or Federal funds rate (from 1.00% to 1.75%) and the average prime lending rate, at 1.00% and(from 4.00%, respectively, both historic lows. Over the past year, the low short-term to 4.75%). While interest rates, in general, remained relatively low, these increases had a negativepositive impact on the Corporation’s net interest incomemargin and earnings as floating rate assets immediately adjusted to higher rates. This increase in loan rates was coupled with slower repricing of deposits, increasing the net interest margin, as reducing the rates paid on deposits became exceedingly difficult. As a result, average rates on earning assets decreased more than the average rates paid on liabilities, causing the decrease in net interest margin in 2004 compared to 2003.margin.

 

Longer-term interest rates, including residential mortgage rates, while remainingThe relatively low during 2004, were higher than the historic lows reached during 2003. As a result, mortgage loan refinance activity slowed, resulting in lower mortgage sale gains.

Generally low rates, however, continued todeposit rate environment also had an impact on the Corporation’s deposit composition as funds from maturing time deposits werecontinued to be deposited in core demand and savings accounts as many customers were reluctantdemonstrated a reluctance to lock into the relatively low rates being offered on time deposit products.

 

On June 30,Residential mortgage rates also trended higher during 2004 than the Federal Reserve raisedhistoric lows reached during 2003. Although these increases were not as pronounced as the Federal funds rate from 1.00% to 1.25% and75 basis point increase in short-term rates, mortgage loan refinance activity slowed, resulting in lower mortgage sale gains. In addition, the Corporation raised its prime-lending rate from 4.00% to 4.25%. unprecedented volume of mortgage refinancing in the past three years has left a highly saturated market for this type of product.

In a rising rate environment, the Corporation expects improvements in net interest income, as discussed in the “Market Risk” section of Management’s Discussion. Increasing long-term rates, however, may continue to have a detrimental impact on mortgage loan origination volumes and related gains on sales of mortgage loans.

 

Earning Assets -The Corporation experienced significantCorporation’s earning assetassets increased significantly, both as a result of acquisitions and strong internal loan growth. This growth duealso contributed to the acquisition of Premier and Resource. In addition, the Corporation purchased a $165 million agricultural loan portfolio in December 2003. Internal growth in average earning assets was $418.0 million, or 5.3%, from the second quarter of 2003 to the second quarter of 2004. The growth in earning assets, both internal and through acquisitions, caused a significant increase in net interest income. With improving regional economic conditions and with the slowdown of mortgage loan refinancings, the Corporation is optimistic that internal loan growth in the short-term will continue to be positive.

 

Asset Quality -Asset quality refers to the underlying credit characteristics of borrowers and the likelihood that defaults on contractual payments will result in charge-offs of account balances. Asset quality is generally a function of economic conditions, but can be managed through conservative underwriting and sound collection policies and procedures.

 

The Corporation continues to maintain excellent asset quality, attributable to its credit culture and underwriting policies. Asset quality measures such as non-performing assets to total assets and net charge-offs to average loans improved in comparison to 2003, resulting in a lower provision for loan losses in the secondthird quarter and first sixnine months of 2004. While overall asset quality has remained strong, deterioration in quality of one or several significant accounts could have a detrimental impact and result in losses that may not be foreseeable based on current information. In addition, rising interest rates could increase the total payments of borrowers and could have a negative impact on theirthe ability of some to pay according to the terms of their loans.

 

Equity MarketsIn recent months, the broader equity markets have leveled off from the increases they experienced in the preceding 12 months. As noted in the “Market Risk” section of Management’s

14


Discussion, equity valuations can have an impact on the Corporation’s financial performance. In particular, bank stocks account for a significant portion of the Corporation’s equity investment portfolio. Gains on sales

of these equities have been a recurring component of the Corporation’s earnings for many years, including 2004, with total gains of $5.3$3.3 million for the secondthird quarter and $11.2$11.4 million for the first six months.nine months of 2004. If this portfolio does not continue to perform, this component of earnings could contract.

 

Acquisitions -The Corporation completed the acquisitions of two banks in the past year. In August 2003, the Corporation acquired Premier Bank ofBancorp, Inc. (Premier), a $600 million bank holding company located in Doylestown, Pennsylvania, became a wholly owned subsidiary and strengthened the Corporation’sstrengthening its presence in eastern Pennsylvania markets. In April 2004, the Corporation completed its acquisition of Resource Bankshares Corporation, (Resource), an $885 million financial holding company located in Virginia Beach, Virginia. This is the Corporation’s first acquisition in Virginia, allowing it to enter a new geographic market. Results for 2004 in comparison to 2003 were dramatically impacted by these acquisitions.

 

On June 15,14, 2004, the Corporation entered into a merger agreement to acquire First Washington FinancialCorp (First Washington), of Windsor, New Jersey. First Washington is a $483$486 million financialbank holding company whose primary subsidiary is First Washington State Bank, which operates sixteen community-banking offices in Mercer, Monmouth, and Ocean Counties in New Jersey.

 

Under the terms of the merger agreement, each of the approximately 4.04.2 million shares of First Washington’s common stock will be exchanged for 1.35 shares of the Corporation’s common stock. In addition, each of the options to acquire First Washington’s stock will be converted to options to purchase the Corporation’s stock. The acquisition had been approved by First Washington’s shareholders and is subject to approval by bank regulatory authorities and First Washington’s shareholders, andauthorities. The acquisition is expected to be completed on or before April 15, 2005.December 31, 2004. As a result of the acquisition, First Washington will be merged into the Corporation and First Washington State Bank will become a wholly owned subsidiary.

The acquisition will be accounted for as a purchase. Purchase accounting requires the Corporation to allocate the total purchase price of the acquisition to the assets acquired and liabilities assumed, based on their respective fair values at the acquisition date, with any remaining acquisition cost being recorded as goodwill. Resulting goodwill balances are then subject to an impairment review on at least an annual basis. The results of First Washington’s operations will be included in the Corporation’s financial statements prospectively from the date of the acquisition.

The total purchase price is estimated to be approximately $124.0 million, which includes the value of the Corporation’s stock to be issued, First Washington’s options to be converted and certain acquisition related costs. The net assets of First Washington as of June 30, 2004 were $33.8 million and accordingly, the purchase price exceeds the carrying value of the net assets by $90.2 million as of this date. The total purchase price will be allocated to the net assets acquired as of the merger effective date, based on fair market values at that date. The Corporation expects to record a core deposit intangible asset and goodwill as a result of the acquisition accounting.

 

Acquisitions have long been a supplement to the Corporation’s internal growth. These recent and pending acquisitions provide opportunityopportunities for additional growth, as they will allow the Corporation’s existing products and services to be sold in new markets. The Corporation’s acquisition strategy focuses on high growth areas with strong market demographics and targets organizations that have a comparable corporate culture, strong performance and good asset quality, among other factors. Under its “super-community” banking philosophy, acquired organizations generally retain their status as separate legal entities, unless consolidation with an existing affiliate bank is practical. Back office functions are generally consolidated to maximize efficiencies.

 

Merger and acquisition activity in the financial services industry has become very competitive and the prices paid for certain acquisitions have increased recently. While the Corporation has been an active acquirer, management is committed to basing its pricing on rational economic models. Management will continue to focus on generating growth in the most cost-effective manner.

 

15


Quarter ended JuneSeptember 30, 2004 versus quarter ended JuneSeptember 30, 2003

 

Net Interest Income

 

Net interest income increased $14.3$18.7 million, to $88.7$92.5 million in 2004 from $74.4$73.8 million in 2003. This increase was due primarily to both average balance growth, with total earning assets increasing 24.6%16.2%, offset by the impact of the low interest rate environment. The Corporation’s average prime lending rate decreased from 4.25% in the second quarter of 2003 to 4.00% in the second quarter of 2004 as a result of FRB actions. This reduction inand an already low interest rate environment negatively impacted the Corporation’simproving net interest margin as average yields on earning-assets decreased further than the average cost of deposits.

margin. The average yield on earning assets decreased 46increased 17 basis points (an 8.4 % decline) during the period(a 3.4% increase) over 2003 while the cost of interest-bearing liabilities decreased 4215 basis points (a 20.1%7.9% decline). This resulted in an 18a 26 basis point decreaseincrease in net interest margin compared to the same period in 2003. The Corporation continues to manage its asset/liability position and interest rate risk through the methods discussed in the “Market Risk” section of Management’s Discussion.

16


The following table provides a comparative average balance sheet and net interest income analysis for the secondthird quarter of 2004 as compared to the same period in 2003 (dollars in thousands):

 

  Three months ended June 30, 2004

 Three months ended June 30, 2003

   Three months ended September 30, 2004

 Three months ended September 30, 2003

 
  Average
Balance


 Interest

  Yield/
Rate (1)


 Average
Balance


 Interest

  Yield/
Rate (1)


   Average
Balance


 Interest

  

Yield/

Rate (1)


 Average
Balance


 Interest

  Yield/
Rate (1)


 

ASSETS

                  

Interest-earning assets:

                  

Loans and leases

  $6,946,626  $96,859  5.61% $5,384,692  $84,541  6.30%  $7,159,211  $103,033  5.73% $5,683,795  $85,159  5.94%

Taxable investment securities

   2,299,834   19,652  3.44%  2,044,602   18,390  3.61%   2,037,040   18,247  3.56%  2,218,352   16,512  2.95%

Tax-exempt investment securitites

   272,891   2,540  3.74%  251,813   2,526  4.02%

Tax-exempt investment securities

   262,962   2,407  3.64%  287,297   2,740  3.78%

Equity securities

   137,528   992  2.90%  128,378   1,153  3.60%   138,264   1,035  2.98%  128,064   904  2.80%
  


 

  

 


 

  

  


 

  

 


 

  

Total investment securities

   2,710,253   23,184  3.44%  2,424,793   22,069  3.65%   2,438,266   21,689  3.54%  2,633,713   20,156  3.04%

Short-term investments

   122,375   1,981  6.51%  40,526   556  5.50%   126,089   2,225  7.02%  51,398   592  4.57%
  


 

  

 


 

  

  


 

  

 


 

  

Total interest-earning assets

   9,779,254   122,024  5.02%  7,850,011   107,166  5.48%   9,723,566   126,947  5.19%  8,368,906   105,907  5.02%

Noninterest-earning assets:

                  

Cash and due from banks

   332,653      278,657        326,204      302,248     

Premises and equipment

   130,737      121,811        130,776      125,835     

Other assets

   447,700      245,293        453,196      296,300     

Less: Allowance for loan losses

   (86,800)     (72,787)       (87,148)     (76,746)    
  


    


      


    


    

Total Assets

  $10,603,544     $8,422,985       $10,546,594     $9,016,543     
  


    


    
  


    


    

LIABILITIES AND EQUITY

                  

Interest-bearing liabilities:

                  

Demand deposits

  $1,362,761  $1,634  0.48% $1,085,855  $1,496  0.55%  $1,399,005  $1,863  0.53% $1,213,594  $1,426  0.47%

Savings deposits

   1,857,175   2,637  0.57%  1,596,578   2,744  0.69%   1,868,650   2,972  0.63%  1,709,803   2,468  0.57%

Time deposits

   2,841,569   18,074  2.56%  2,461,038   19,760  3.22%   2,764,597   17,809  2.56%  2,522,767   18,879  2.97%
  


 

  

 


 

  

  


 

  

 


 

  

Total interest-bearing deposits

   6,061,505   22,345  1.48%  5,143,471   24,000  1.87%   6,032,252   22,644  1.49%  5,446,164   22,773  1.66%

Short-term borrowings

   1,282,657   3,135  0.98%  596,312   1,692  1.14%   1,208,379   3,840  1.26%  695,550   1,515  0.86%

Long-term debt

   656,803   7,838  4.80%  540,413   7,104  5.27%   654,969   7,962  4.84%  595,466   7,840  5.22%
  


 

  

 


 

  

  


 

  

 


 

  

Total interest-bearing liabilities

   8,000,965   33,318  1.67%  6,280,196   32,796  2.09%   7,895,600   34,446  1.74%  6,737,180   32,128  1.89%

Noninterest-bearing liabilities:

                  

Demand deposits

   1,386,770      1,181,072        1,429,259      1,258,183     

Other

   114,219      96,381        119,551      98,594     
  


    


      


    


    

Total Liabilities

   9,501,954      7,557,649        9,444,410      8,093,957     

Shareholders’ equity

   1,101,590      865,336        1,102,184      922,586     
  


    


      


    


    

Total Liabilities and Shareholders’ Equity

  $10,603,544     $8,422,985       $10,546,594     $9,016,543     
  


    


      


    


    

Net interest income

   $88,706   $74,370      $92,501   $73,779   
   

   

      

   

   

Net interest margin (FTE)

     3.73%   3.91%     3.88%   3.62%
     

   

     

   


(1)Yields on tax-exempt securities are not fully taxable equivalent (FTE).

17


The following table summarizes the changes in interest income and expense due to changes in average balances (volume) and changes in rates:

 

  

2004 vs. 2003

Increase (decrease) due

To change in


   

2004 vs. 2003

Increase (decrease) due

To change in


 
  Volume

  Rate

 Net

   Volume

 Rate

 Net

 
  (in thousands)   (in thousands) 

Interest income on:

         

Loans and leases

  $24,301  $(11,983) $12,318   $21,131  $(3,257) $17,874 

Taxable investment securities

   2,254   (992)  1,262    (1,438)  3,173   1,735 

Tax-exempt investment securities

   207   (193)  14    (230)  (103)  (333)

Equity securities

   81   (242)  (161)   73   58   131 

Short-term investments

   1,118   307   1,425    1,192   441   1,633 
  

  


 


  


 


 


Total interest-earning assets

  $27,961  $(13,103) $14,858   $20,728  $312  $21,040 
  

  


 


  


 


 


Interest expense on:

         

Demand deposits

  $379  $1,114  $1,493   $231  $206  $437 

Savings deposits

   446   1,953   2,399    235   269   504 

Time deposits

   3,033   (8,580)  (5,547)   1,671   (2,741)  (1,070)

Short-term borrowings

   1,939   (496)  1,443    1,423   902   2,325 

Long-term debt

   1,513   (779)  734    732   (610)  122 
  

  


 


  


 


 


Total interest-bearing liabilities

  $7,310  $(6,788) $522   $4,292  $(1,974) $2,318 
  

  


 


  


 


 


 

Interest income increased $14.9$21.0 million, or 13.9%19.9%, mainly due to the Premier and Resource acquisitions, which added approximately $17.6$14.7 million ofto this increase in interest income. Total interest earning assets increased $1.9$1.3 billion, or 24.6%16.2%, resulting in a $28.0$20.7 million increase in interest income. Approximately $1.4$1.0 billion of this earning asset increase was a result of the Premier and Resource acquisitions. The increase in interest income was almost entirely attributable to growth in average interest-earning assets was partially offset by the 46 basis point decrease in average yields on earning assets, which accounted for a $13.1 million decline in interest income.assets.

 

Average interest-earning assets increased mainly due to an increase in both the loan andloans partially offset by a decrease in investment categories.securities. The Corporation’s average loan portfolio increased $1.6$1.5 billion, or 29.0%26.0%, with approximately $980.0$750.0 million of the increase due to the Premier and Resource acquisitions. The following summarizes the growth in average loans by category:

 

  

Three months ended

June 30


  Increase (decrease)

   Three months ended
September 30


  Increase (decrease)

 
  2004

  2003

  $

 %

   2004

  2003

  $

 %

 
  (dollars in thousands)   (dollars in thousands) 

Commercial - industrial and financial

  $1,776,940  $1,530,772  $246,168  16.1%  $1,824,842  $1,502,673  $322,169  21.4%

Commercial - agricultural

   331,575   191,205   140,370  73.4%   320,544   193,465   127,079  65.7%

Real estate - commercial mortgage

   2,216,617   1,581,197   635,420  40.2%   2,276,774   1,803,085   473,689  26.3%

Real estate - commercial construction

   312,312   207,791   104,521  50.3%   318,959   243,242   75,717  31.1%

Real estate - residential mortgage

   519,353   499,561   19,792  4.0%   531,973   498,536   33,437  6.7%

Real estate - residential construction

   241,053   46,015   195,038  423.9%   258,946   48,041   210,905  439.0%

Real estate - home equity

   959,267   726,469   232,798  32.0%   1,027,252   789,342   237,910  30.1%

Consumer

   517,226   526,779   (9,553) (1.8)%   529,479   536,961   (7,482) (1.4%)

Leasing and other

   72,283   74,903   (2,620) (3.5)%   70,442   68,450   1,992  2.9%
  

  

  


 

  

  

  


 

Total

  $6,946,626  $5,384,692  $1,561,934  29.0%  $7,159,211  $5,683,795  $1,475,416  26.0%
  

  

  


 

  

  

  


 

18


Loan growth wascontinued to be particularly strong in the commercial and commercial mortgage categories. Even factoring out the loans added by the Premier and Resource acquisitions, and the agricultural loan portfolio purchase in December 2003, these categories grew in excess of 8%12%. The significant growth in the commercial - agricultural category reflects the purchase of a $165 million portfolio in December 2003. Residential mortgage and construction loans also increased $214.8$244.3 million, or 39.4%, primarily due to $267.0reflecting the $275.0 million added by Resource, offset by a reduction of $52.2$30.7 million in average loans due to refinance activity. The Corporation generally sells newly originated fixed rate mortgages in the secondary market to promote liquidity and manage interest rate risk. Home equity loans increased significantly$237.9 million due to promotional efforts and customers using home equity loans as a cost-effective refinance alternative. OtherConsumer loans (including consumer, leasing and other) decreased slightly, reflecting customers’ repayment of these loans with tax-advantaged residential mortgage or home equity loans. The Premier and Resource acquisitions did not significantly impact home equity or other loans.

 

The average yield on loans during the secondthird quarter of 2004 was 5.61%5.73%, a 6921 basis point, or 11.0%3.5%, decline from 2003. This reflects the 25 basis point reductionimpact of customers continuing to favor adjustable rate loans, which in the Corporation’s average prime lendingcurrent interest rate as well as higherenvironment carry a lower rate than normal prepayments received on fixed rate commercialloans. If the recent trend of increasing rates continues however, these adjustable rates will reprice to higher rates and commercial mortgage loans.will contribute to an increase in interest income.

 

Average investment securities increased $285.5decreased $195.4 million, or 11.8%, mainly due to7.4%. Excluding the balances added byimpact of the Premier and Resource acquisitions.acquisitions, this decrease was $332.7 million, or 13.2%. The Corporation sold approximately $220 million of securities during 2004 and did not reinvest the majority of the proceeds in order to mitigate the portfolio’s interest rate risk in anticipation of increasing rates. The average yield on investment securities declined 21increased 50 basis points from 3.65%3.04% in 2003 to 3.44%3.54% in 2004. This 5.8% decreaseincrease was primarily due to both the relatively short maturitydisproportionately high level of the portfolio as well as prepayments experienced on mortgage-backed securities.securities received in 2003 and the correspondingly higher level of premium amortization. Total premium amortization was $2.3 million in 2004 compared to $6.8 million in 2003.

 

Interest expense increased $522,000,$2.3 million, or 1.6%7.2%, to $33.3$34.4 million in the firstthird quarter of 2004 from $32.8$32.1 million in the firstthird quarter of 2003. Interest expense increased $7.3$4.3 million due to an increase in average balance growth, with Premier and Resource adding approximately $5.2$3.9 million to this volume-related increase. Interest expense decreased $6.8approximately $2.0 million as a result of the 4215 basis point decrease in the cost of total interest-bearing liabilities. The cost of interest-bearing deposits declined 20.9%17 basis points, or 10.2%, from 1.87%1.66% in 2003 to 1.48%1.49% in 2004. This reduction was due to both the impact of declining short-term interest rates and the continuing shiftdecrease in the compositioncost of deposits from higher-rate time deposits, which tends to lower-rate demand and savings deposits. Customers continued to exhibit an unwillingness to invest in certificates of deposit atlag the rates available, instead keeping their funds in demand and savings products.general interest rate environment decreases.

 

The following table summarizes the growth in average deposits by category:

 

  

Three months ended

June 30


  Increase

   Three months ended
September 30


  Increase

 
  2004

  2003

  $

  %

   2004

  2003

  $

  %

 
  (dollars in thousands)   (dollars in thousands) 

Noninterest-bearing demand

  $1,386,770  $1,181,072  $205,698  17.4%  $1,429,259  $1,258,183  $171,076  13.6%

Interest-bearing demand

   1,362,761   1,085,855   276,906  25.5%   1,399,005   1,213,594   185,411  15.3%

Savings and money market

   1,857,175   1,596,578   260,597  16.3%   1,868,650   1,709,803   158,847  9.3%

Time deposits

   2,841,569   2,461,038   380,531  15.5%   2,764,597   2,522,767   241,830  9.6%
  

  

  

  

  

  

  

  

Total

  $7,448,275  $6,324,543  $1,123,732  17.8%  $7,461,511  $6,704,347  $757,164  11.3%
  

  

  

  

  

  

  

  

The acquisitions of Premier and Resource added $992.9approximately $593.4 million to the increase in the total average balance of deposits in 2004.deposits. If those balances were factored out, the deposit categories would show the following increases (decreases) – noninterest-bearing demand, 11.1%9.6%, interest-bearing demand, 10.6%10.9%, savings and money market, 8.5%6.1%, and time deposits, (10.2)(7.5)%.

 

19


Other borrowings increased significantly from 2003, with average short-term borrowings increasing $686.3$512.8 million, or 115.1%73.7%, to $1.3$1.2 billion. and average long-term debt increasing $116.4$59.5 million, or 21.5%10.0%, to $656.8$655.0 million. Approximately $197.7$241.8 million of the increase in short-term borrowings resulted from the Premier and Resource acquisitions, with the remaining increase due to certain limited strategies to managerepresenting the Corporation’s gap position and to take advantagefunding requirement for loan growth in excess of low wholesale funding rates.deposit growth. In addition, customer cash management accounts, which are included in short-term borrowings, grew $79.7$35.1 million, or 25.7%9.2%, to reach $390.2$415.6 million in 2004. The increase in average long-term debt was mainly due to the acquisitions of Premier and Resource.

 

Provision and Allowance for Loan Losses

 

The following table summarizes loans outstanding (net of unearned income) as of the dates shown:

 

  

June 30

2004


  December 31
2003


  

June 30

2003


  September 30
2004


  December 31
2003


  September 30
2003


  (in thousands)  (in thousands)

Commercial -industrial and financial

  $1,818,570  $1,594,452  $1,521,626

Commercial - industrial and financial

  $1,848,058  $1,594,451  $1,526,952

Commercial - agricultural

   324,465   354,517   191,902   316,323   354,517   196,761

Real estate - commercial mortgage

   2,240,228   1,992,649   1,596,368   2,284,755   1,992,650   1,932,735

Real estate - commercial construction

   314,902   264,129   225,395   327,985   264,129   255,966

Real estate - residential mortgage

   504,320   434,568   457,620   528,421   434,568   447,025

Real estate - residential construction

   245,963   42,979   45,073   252,338   42,979   53,156

Real estate - home equity

   1,004,532   890,044   759,055   1,053,333   890,044   827,303

Consumer

   522,576   516,586   523,197   529,413   516,587   537,512

Leasing and other

   66,755   70,069   71,162   72,536   70,069   67,378
  

  

  

  

  

  

Total Loans

  $7,042,311  $6,159,993  $5,391,398  $7,213,162  $6,159,994  $5,844,788
  

  

  

  

  

  

20


The following table summarizes the activity in the Corporation’s allowance for loan losses:

 

  

Three months ended

June 30


   

Three months ended

September 30


 
  2004

 2003

   2004

 2003

 
  (dollars in thousands)   (dollars in thousands) 
Loans outstanding at end of period (net of unearned)  $7,042,311  $5,391,398   $7,213,162  $5,844,788 
  


 


  


 


Daily average balance of loans and leases  $6,946,626  $5,384,692   $7,159,211  $5,683,795 
  


 


  


 


Balance at beginning of period  $78,271  $71,786   $86,539  $72,240 
Loans charged-off:      

Commercial, financial and agricultural

   511   1,127    832   1,606 

Real estate

   260   659    166   131 

Consumer

   808   1,109    933   987 

Leasing and other

   48   67    125   130 
  


 


  


 


Total loans charged-off

   1,627   2,962    2,056   2,854 
  


 


  


 


Recoveries of loans previously charged-off:      

Commercial, financial and agricultural

   575   224    548   150 

Real estate

   172   156    181   181 

Consumer

   412   509    278   461 

Leasing and other

   24   37    12   15 
  


 


  


 


Total recoveries

   1,183   926    1,019   807 
  


 


  


 


Net loans charged-off

   444   2,036    1,037   2,047 

Provision for loan losses

   800   2,490    1,125   2,190 
Allowance purchased (Resource)   7,912   —   

Allowance purchased

   200   5,474 
  


 


  


 


Balance at end of period  $86,539  $72,240   $86,827  $77,857 
  


 


  


 


Net charge-offs to average loans (annualized)   0.03%  0.15%   0.06%  0.14%
  


 


  


 


Allowance for loan losses to loans outstanding   1.23%  1.34%   1.20%  1.33%
  


 


  


 


21


The following table summarizes the Corporation’s non-performing assets as of the indicated dates:

 

  June 30
2004


 Dec 31
2003


 June 30
2003


   

September 30

2004


 

December 31

2003


 September 30
2003


 
  (dollars in thousands)   (dollars in thousands) 

Non-accrual loans

  $21,961  $22,422  $26,811   $23,422  $22,422  $27,155 

Loans 90 days past due and accruing

   9,314   9,609   11,266    10,962   9,609   10,286 

Other real estate owned (OREO)

   1,119   585   808    1,325   585   952 
  


 


 


  


 


 


Total non-performing assets

  $32,394   32,616   38,885   $35,709  $32,616  $38,393 
  


 


 


  


 


 


   

Non-accrual loans/Total loans

   0.31%  0.36%  0.50%   0.32%  0.36%  0.46%

Non-performing assets/Total assets

   0.31%  0.33%  0.45%   0.34%  0.33%  0.41%

Allowance/Non-performing loans

   277%  243%  190%   253%  243%  208%

 

The provision for loan losses for the secondthird quarter of 2004 totaled $800,000,$1.1 million, a decrease of $1.7$1.1 million, or 67.9%48.6%, from the same period in 2003. Net charge-offs totaled $444,000,$1.0 million, or 0.03%0.06% of average loans on an annualized basis, during the secondthird quarter of 2004, a $1.6$1.0 million improvement over $2.0 million, or 0.15%, in net charge-offs0.14% of average loans, for the secondthird quarter of 2003. The provision for loan losses for the three month period ended September 30, 2004 was more than adequate to cover net chargeoffs experienced during the period. Non-performing assets decreased to $32.4$35.7 million, or 0.31%0.34% of total assets, at JuneSeptember 30, 2004, from $38.9$38.4 million, or 0.45%0.41% of total assets, at JuneSeptember 30, 2003.

 

The acquisition of Resource in April 2004 increased the allowance balance by $7.9 million. Management believes that the allowance balance of $86.5$86.8 million at JuneSeptember 30, 2004 is sufficient to cover losses inherent in the loan portfolio on that date and is appropriate based on applicable accounting standards.

 

Other Income

 

The following table details the components of other income:

 

  Three months ended
June 30


  Increase (decrease)

   Three months ended
September 30


  Increase (decrease)

 
  2004

  2003

  $

 %

   2004

  2003

  $

 %

 
  (in thousands)   (dollars in thousands) 

Investment management and trust services

  $8,637  $8,809  $(172) -2.0%  $8,650  $8,527  $123  1.4%

Service charges on deposit accounts

   9,929   9,502   427  4.5%   10,182   9,810   372  3.8%

Other service charges and fees

   4,970   4,708   262  5.6%   5,367   4,782   585  12.2%

Mortgage banking income

   6,417   5,841   576  9.9%   6,092   6,100   (8) (0.1)%

Investment securities gains

   5,349   4,809   540  11.2%   3,336   6,990   (3,654) (52.3)%

Other

   1,721   865   856  99.0%   1,720   1,304   416  31.9%
  

  

  


 

  

  

  


 

Total

  $37,023  $34,534  $2,489  7.2%  $35,347  $37,513  $(2,166) (5.8)%
  

  

  


 

  

  

  


 

Other income for the quarter ended JuneSeptember 30, 2004 was $37.0$35.3 million, an increasea decrease of $2.5$2.2 million, or 7.2%5.8%, over the comparable period in 2003. Excluding investment securities gains, which increaseddecreased from $4.8$7.0 million in 2003 to $5.3$3.3 million in 2004, other income increased $1.9$1.5 million, or 6.6%4.9%. TheThis net increase in other income resulted from the Resource acquisition, which added $4.9$5.2 million to the total. This wasother income, partially offset by an internal decrease of $2.4$3.7 million, mainly in mortgage banking income.

 

22


Mortgage banking income increased $576,000, or 9.9%, with $3.9was virtually unchanged from the third quarter of 2003 as an increase of $4.0 million added by Resource was entirely offset by a $3.3 million decrease in the Corporation’s existing mortgage banking business as a result ofdue to a significant increasedecrease in interest rates. The national monthly average interest rate for fixed rate mortgage loans increased from 5.24% at the end of June 2003 to 6.25% at the end of June 2004.refinance activity.

 

Service charges on deposits increased $427,000,$372,000, or 4.5%3.8%, primarily due to the increase in demand and savings accounts. Other service charges and fees increased $585,000, or 12.2%, mainly from increases in letter of credit fees and merchant credit card fees. Other income increased $856,000, mainly$416,000, or 31.9%, with $1.0 million increase due to title insurance fees addedthe addition of Resource, partially offset by Resourcedecreases in gains on sales of fixed assets and increased earnings on the Corporation’s life insurance investments.

 

Investment securities gains increased $540,000,decreased $3.7 million, or 11.2%52.3%. Investment securities gains during the secondthird quarter of 2004 consisted almost entirely of realized gains of $3.3 million on the sale of equity securities. Investment securities gains during the third quarter of 2003 consisted of net realized gains of $4.4 million on the sale of equity securities and $2.0$2.6 million on the sale of available for sale debt securities. Investment securities gains during the second quarter of 2003 consisted of realized gains of $4.8 million on the sale of equity securities.

 

Other Expenses

 

The following table details the components of other expenses:

 

  Three months ended
June 30


  Increase

   Three months ended
September 30


  Increase

 
  2004

  2003

  $

  %

   2004

  2003

  $

  %

 
  (in thousands)   (dollars in thousands) 

Salaries and employee benefits

  $42,195  $34,494  $7,701  22.3%  $42,464  $35,516  $6,948  19.6%

Net occupancy expense

   5,859   4,807   1,052  21.9%   6,159   4,982   1,177  23.6%

Equipment expense

   2,749   2,588   161  6.2%   2,705   2,618   87  3.3%

Data processing

   2,868   2,776   92  3.3%   2,915   2,864   51  1.8%

Advertising

   1,914   1,787   127  7.1%   1,631   1,570   61  3.9%

Intangible amortization

   1,356   360   996  276.7%   1,233   622   611  98.2%

Other

   13,957   11,253   2,704  24.0%   13,581   11,378   2,203  19.4%
  

  

  

  

  

  

  

  

Total

  $70,898  $58,065  $12,833  22.1%  $70,688  $59,550  $11,138  18.7%
  

  

  

  

  

  

  

  

 

Total other expenses for the secondthird quarter of 2004 were $70.9$70.7 million, representing an increase of $12.8$11.1 million, or 22.1%18.7%, from 2003. Approximately $10.6$8.3 million of the increase was due to the Premier and Resource acquisitions.acquisition. The remaining $2.2$2.8 million, or 3.8%4.8%, increase was due primarily to normal increases in salaries and to the continuing increase in the cost of health insurance.

 

Salaries and employee benefits increased $7.7$6.9 million, or 22.3%19.6%, in comparison to the secondthird quarter of 2003. The salary and payroll tax expense component increased $5.8$4.7 million, or 20.4%15.8%, with approximately $4.9$4.1 million of the increase due to the Premier and Resource acquisitions.Resource. The remaining $900,000$600,000 was driven by normal salary increases for existing employees. The employee benefits component of the expense increased $1.9$2.3 million, or 30.8%38.9%, with Premier and Resource adding approximately $870,000.$700,000. The remaining increase resulted mainly from a $1.1$1.3 million increase in health insurance costs.

Net occupancy expense increased $1.1$1.2 million, or 21.9%23.6%, over the secondthird quarter of 2003 with Premier and Resource adding approximately $900,000.$700,000. The remaining increase resulted from increases in rent expense, real estate taxes and repairs and maintenance expenses. Equipment expense increased $161,000,$87,000, or 6.2%3.3%, due to a $486,000$366,000 increase from the acquisitionsResource acquisition offset by a reduction in depreciation expense as certain equipment became fully depreciated during 2003.depreciated. The 3.3%$51,000, or 1.8%, increase in data processing expense resulted from a $294,000$234,000 increase from the acquisitions,Resource acquisition, offset by a decrease of $203,000, or 7.3%, due to favorable renegotiations of certain contracts for data processing services.

 

23


Advertising expense increased $127,000,$61,000, or 7.1%3.9%, with $319,000$229,000 added by Premier and Resource, offset by a $192,000 decrease due to the timing of promotional campaigns and expenditures. Intangible amortization expense increased $996,000,$611,000, or 276.7%98.2%, with $408,000as a result of acquisitions. Other expense increased $2.2 million, or 19.4%, to $13.6 million, mainly due to the Premier and Resource acquisitions. The remaining increase was primarily due to the purchase of the agriculture loans in December 2003. Other expense increased $2.7 million, or 24.0%, to $14.0 million, almost entirely due to the Premier and Resource acquisitions.acquisition.

 

Income Taxes

 

Income tax expense for the secondthird quarter of 2004 was $16.2$16.9 million, a $1.9$1.7 million, or 13.2%11.5%, increase from $14.3$15.2 million in 2003. The Corporation’s effective tax rate was approximately 29.9%30.2% in 2004, compared to 29.5%30.6% in 2003. The effective rate is lower than the federal statutory rate of 35% due mainly to investments in tax-free municipal securities and federal tax credits from investments in low and moderate income housing partnerships.

 

SixNine months ended JuneSeptember 30, 2004 versus sixnine months ended JuneSeptember 30, 2003

 

Fulton Financial Corporation’s net income for the first sixnine months of 2004 increased $5.6$10.3 million, or 8.2%10.1%, from $102.5 million in comparison2003 to net income for the first six months of 2003.$112.8 million in 2004. Diluted net income per share increased $0.01,$0.03, or 1.6%3.3%, to $0.62,$0.94, compared to $0.61$0.91 for the same period in 2003. Net income for the first six months of 2004 of $73.7 million representedThe Corporation realized an annualized return on average assets of 1.46%1.47% and an annualized return on average equity of 14.45%14.34%. The annualized return on average tangible equity, which is net income divided by average shareholder’sshareholders’ equity, excluding average intangible assets, was 17.89%18.38%.

 

The increase in net income compared to the first sixnine months of 2003 resulted from a $21.7$40.4 million increase in net interest income, a $4.1 million$500,000 increase in investment securities gains, a $400,000 increase in other income and a $2.8$3.9 million decrease in loan loss provision, offset by a $1.1 million decrease in other income, a $19.4$30.6 million increase in other expenses and a $2.5$4.2 million increase in income taxes.

 

Net Interest Income

 

Net interest income increased $21.7$40.4 million, from $150.0$223.8 million in 2003 to $171.7$264.2 million in 2004. This increase was due primarily to average balance growth, with total average earning assets increasing $1.6$1.5 billion, or 20.6%19.0%, and was offset by the impact of the lowchanges in the interest rate environment. TheWhile the Corporation’s average prime lending rate decreased from 4.25%was approximately 4.15% during both 2004 and 2003, during 2003 rates were falling compared to 2004 where rates were rising. The impact of repricing on fixed rate balances will lag the trends in the first six months of 2003 to 4.00% in the first six months of 2004 as a result of FRB actions. This reduction in an already lowgeneral interest rate environment negatively impacted the Corporation’s net interest margin as average yields on earning-assets decreased further than the average cost of deposits.environment.

 

The average yield on earning assets decreased 5731 basis points (a 10.1 %5.7% decline) during the period while the cost of interest-bearing liabilities decreased 4937 basis points (a 22.6%17.9% decline). This resultedThe percentage of total interest-bearing funding increased slightly resulting in a 23six basis point decrease in net interest margin compared to the same period in 2003. The Corporation continues to manage its asset/liability position and interest rate risk through the methods discussed in the “Market Risk” section of Management’s Discussion.

24


The following table provides a comparative average balance sheet and net interest income analysis for the first sixnine months of 2004 as compared to the same period in 2003 (dollars in thousands):

 

  Six months ended June 30, 2004

 Six months ended June 30, 2003

   Nine months ended September 30, 2004

 Nine months ended September 30, 2003

 
  Average
Balance


 Interest

  Yield/
Rate (1)


 Average
Balance


 Interest

  Yield/
Rate (1)


   Average
Balance


 Interest

  

Yield/

Rate (1)


 Average
Balance


 Interest

  

Yield/

Rate (1)


 

ASSETS

                  

Interest-earning assets:

                  

Loans and leases

  $6,567,307  $185,325  5.67% $5,365,939  $169,653  6.38%  $6,766,049  $288,358  5.69% $5,473,055  $254,812  6.22%

Taxable investment securities

   2,351,126   41,388  3.54%  2,002,056   39,124  3.94%   2,245,667   59,635  3.55%  2,074,940   55,636  3.58%

Tax-exempt investment securitites

   274,517   5,073  3.72%  246,526   5,046  4.13%

Tax-exempt investment securities

   270,637   7,480  3.69%  260,266   7,786  4.00%

Equity securities

   134,540   1,944  2.91%  130,825   2,301  3.55%   135,791   2,979  2.93%  129,895   3,205  3.30%
  


 

  

 


 

  

  


 

  

 


 

  

Total investment securities

   2,760,183   48,405  3.53%  2,379,407   46,471  3.94%   2,652,095   70,094  3.53%  2,465,101   66,627  3.61%

Short-term investments

   70,664   2,230  6.35%  47,720   1,226  5.18%   89,274   4,455  6.67%  48,977   1,818  4.96%
  


 

  

 


 

  

  


 

  

 


 

  

Total interest-earning assets

   9,398,154   235,960  5.05%  7,793,066   217,350  5.62%   9,507,418   362,907  5.10%  7,987,133   323,257  5.41%

Noninterest-earning assets:

                  

Cash and due from banks

   316,721      268,164        319,905      279,633     

Premises and equipment

   126,083      122,589        127,660      123,681     

Other assets

   381,827      241,731        405,788      260,150     

Less: Allowance for loan losses

   (82,766)     (72,879)       (84,237)     (74,182)    
  


    


      


    


    

Total Assets

  $10,140,019     $8,352,671       $10,276,534     $8,576,415     
  


    


      


    


    

LIABILITIES AND EQUITY

                  

Interest-bearing liabilities:

                  

Demand deposits

  $1,315,716  $2,989  0.46% $1,067,839  $3,119  0.59%  $1,343,681  $4,852  0.48% $1,116,959  $4,545  0.54%

Savings deposits

   1,808,639   5,143  0.57%  1,566,393   5,623  0.72%   1,828,788   8,115  0.59%  1,614,721   8,090  0.67%

Time deposits

   2,636,657   34,563  2.64%  2,486,483   40,965  3.32%   2,679,615   52,372  2.61%  2,498,711   59,845  3.20%
  


 

  

 


 

  

  


 

  

 


 

  

Total interest-bearing deposits

   5,761,012   42,695  1.49%  5,120,715   49,707  1.96%   5,852,084   65,339  1.49%  5,230,391   72,480  1.85%

Short-term borrowings

   1,313,970   6,462  0.99%  603,838   3,445  1.15%   1,278,517   10,302  1.08%  634,745   4,960  1.04%

Long-term debt

   613,439   15,130  4.96%  540,659   14,190  5.29%   627,384   23,092  4.92%  559,128   22,030  5.27%
  


 

  

 


 

  

  


 

  

 


 

  

Total interest-bearing liabilities

   7,688,421   64,287  1.68%  6,265,212   67,342  2.17%   7,757,985   98,733  1.70%  6,424,264   99,470  2.07%

Noninterest-bearing liabilities:

                  

Demand deposits

   1,322,155      1,126,432        1,358,118      1,170,831     

Other

   103,785      96,036        109,078      96,920     
  


    


      


    


    

Total Liabilities

   9,114,361      7,487,680        9,225,181      7,692,015     

Shareholders’ equity

   1,025,658      864,991        1,051,353      884,400     
  


    


      


    


    

Total Liabilities and Shareholders’ Equity

  $10,140,019     $8,352,671       $10,276,534     $8,576,415     
  


    


      


    


    

Net interest income

   $171,673   $150,008      $264,174   $223,787   
   

   

      

   

   

Net interest margin (FTE)

     3.76%   3.99%     3.80%   3.86%
     

   

     

   


(1)Yields on tax-exempt securities are not fully taxable equivalent (FTE).

25


The following table summarizes the changes in interest income and expense due to changes in average balances (volume) and changes in rates:

 

  

2004 vs. 2003

Increase (decrease) due

To change in


   

2004 vs. 2003

Increase (decrease) due

To change in


 
  Volume

  Rate

 Net

   Volume

  Rate

 Net

 
  (in thousands)   (in thousands) 

Interest income on:

            

Loans and leases

  $38,462  $(22,790) $15,672   $56,733  $(23,187) $33,546 

Taxable investment securities

   6,920   (4,656)  2,264    4,588   (589)  3,999 

Tax-exempt investment securities

   583   (556)  27    306   (612)  (306)

Equity securities

   67   (424)  (357)   142   (368)  (226)

Short-term investments

   593   411   1,004    1,861   776   2,637 
  

  


 


  

  


 


Total interest-earning assets

  $46,625  $(28,015) $18,610   $63,630  $(23,980) $39,650 
  

  


 


  

  


 


Interest expense on:

            

Demand deposits

  $732  $(862) $(130)  $861  $(554) $307 

Savings deposits

   881   (1,361)  (480)   1,014   (989)  25 

Time deposits

   2,516   (8,918)  (6,402)   4,144   (11,617)  (7,473)

Short-term borrowings

   4,075   (1,058)  3,017    5,188   154   5,342 

Long-term debt

   1,945   (1,005)  940    2,594   (1,532)  1,062 
  

  


 


  

  


 


Total interest-bearing liabilities

  $10,149  $(13,204) $(3,055)  $13,801  $(14,538) $(737)
  

  


 


  

  


 


 

Interest income increased $18.6$39.7 million, or 8.6%12.3%, mainly due to the Premier and Resource acquisitions, which added $24.0approximately $38.3 million ofto the increase in interest income. Total average earning assets increased $1.6$1.5 billion, or 20.6%19.0%, resulting in a $46.6$63.6 million increase in interest income. Approximately $961.6$915 million of the increase in average earning assets was the result of Premier and Resource. The increase in interest income attributable to growth in average interest-earning assets was partially offset by the 5731 basis point decrease in average yields on earning assets, which accounted for a $28.0$24.0 million decline in interest income.

 

Average interest-earning assets increased in both the loan and investment categories. The Corporation’s average loan portfolio increased $1.2$1.3 billion, or 22.4%23.6%, with approximately $623$665.1 million of the increase due to the Premier and Resource.

26Resource acquisitions.


The following summarizes the growth in average loans by category:

 

  

Six months ended

June 30


  Increase (decrease)

   Nine months ended
September 30


  Increase (decrease)

 
  2004

  2003

  $

 %

   2004

  2003

  $

 %

 
  (dollars in thousands)   (dollars in thousands) 

Commercial - industrial and financial

  $1,691,552  $1,515,492  $176,060  11.6%  $1,736,307  $1,511,172  $225,135  14.9%

Commercial - agricultural

   340,386   190,876   149,510  78.3%   333,724   191,749   141,975  74.0%

Real estate - commercial mortgage

   2,115,053   1,568,848   546,205  34.8%   2,169,353   1,647,785   521,568  31.7%

Real estate - commercial construction

   283,068   205,200   77,868  37.9%   295,119   218,020   77,099  35.4%

Real estate - residential mortgage

   480,601   518,700   (38,099) (7.3)%   497,850   511,905   (14,055) (2.7)%

Real estate - residential construction

   142,258   44,188   98,070  221.9%   181,438   45,486   135,952  298.9%

Real estate - home equity

   928,917   716,477   212,440  29.7%   961,935   741,032   220,903  29.8%

Consumer

   515,086   531,296   (16,210) (3.1)%   519,919   533,205   (13,286) (2.5)%

Leasing and other

   70,386   74,862   (4,476) (6.0)%   70,404   72,701   (2,297) (3.2)%
  

  

  


 

  

  

  


 

Total

  $6,567,307  $5,365,939  $1,201,368  22.4%  $6,766,049  $5,473,055  $1,292,994  23.6%
  

  

  


 

  

  

  


 

 

Loan growth was particularly strong in the commercial and commercial mortgage categories. Even factoring out the loans added by the Premier and Resource acquisitions, and the agricultural loan portfolio purchase, these categories grew in excess of 8.0%10%. The significant growth in the commercial - agricultural category reflects the purchase of a portfolio in December 2003. Residential mortgage and construction loans also increased $60.0$121.9 million, or 10.7%21.9%, primarily due to $133.3$180.9 million added by Resource, offset by a reduction of $73.3$59.0 million in average loans due to the refinance activity that occurred over the past year. The Corporation generally sells newly originated fixed rate mortgages in the secondary market to promote liquidity and manage interest rate risk. Home equity loans increased significantly due to promotional efforts and customers using home equity loans as a cost-effective refinance alternative. Other loans (including consumer,Consumer, leasing and other)other loans decreased slightly, reflecting customer’s repayment of these loans with tax-advantaged residential mortgage or home equity loans.

 

The average yield on loans during the first sixnine months of 2004 was 5.67%5.69%, a 7153 basis point, or 11.1%8.5%, decline from 2003. This reflectsMuch of the 25 basis point reductionrecent loan growth has been experienced in the Corporation’s average prime lendingfloating rate as well as highercategories, which tend to carry lower interest rates than normal prepayments received on fixed rate commercial and commercial mortgage loans.fixed-rate products.

 

Average investment securities increased $380.8$187.0 million, or 16.0%7.6%, mainly due to the balances added by the Premier and Resource acquisitions. The average yield on investment securities declined 41 basis pointsslightly from 3.94%3.61% in 2003 to 3.53% in 2004. This 10.4% decrease was due to both the relatively short maturity of the portfolio as well as prepayments experienced on mortgage-backed securities.

 

Interest expense decreased $3.1 million,$737,000, or 4.6%0.7%, to $64.3$98.7 million in 2004 from $67.3$99.5 million in 2003. Interest expense increased $10.1$13.8 million due to an increase in average balances, with Premier and Resource adding approximately $7.1$10.2 million to this volume-related increase. Interest expense decreased $13.2$14.5 million, mainly as a result of a 4937 basis point decrease in the cost of total interest-bearing liabilities. The cost of interest-bearing deposits declined 24.0%19.5%, from 1.96%1.85% in 2003 to 1.49% in 2004. This reduction was due to both the impact of declining short-termthe interest rates andrate environment as well as the continuing shift in the composition of deposits from higher-rate time deposits to lower-rate demand and savings deposits. Customers continued to exhibit an unwillingness to invest in certificates of deposit at the rates available, instead keeping their funds in demand and savings products.

27


The following table summarizes the growth in average deposits by category:

 

  

Six months ended

June 30


  Increase

   Nine months ended September
30


  Increase

 
  2004

  2003

  $

  %

   2004

  2003

  $

  %

 
  (dollars in thousands)   (dollars in thousands) 

Noninterest-bearing demand

  $1,322,155  $1,126,432  $195,723  17.4%  $1,358,118  $1,170,831  $187,287  16.0%

Interest-bearing demand

   1,315,716   1,067,839   247,877  23.2%   1,343,681   1,116,959   226,722  20.3%

Savings and money market

   1,808,639   1,566,393   242,246  15.5%   1,828,788   1,614,721   214,067  13.3%

Time deposits

   2,636,657   2,486,483   150,174  6.0%   2,679,615   2,498,711   180,904  7.2%
  

  

  

  

  

  

  

  

Total

  $7,083,167  $6,247,147  $836,020  13.4%  $7,210,202  $6,401,222  $808,980  12.6%
  

  

  

  

  

  

  

  

 

The acquisitions of Premier and Resource added $709.4$615.0 million to the increase in the total average balance of deposits in 2004. If those balances were factored out, the deposit categories would show the following increases (decreases) – non-interest-bearing demand, 12.5%11.7%, interest bearing demand, 10.4%12.1%, savings and money market, 8.8%8.5%, and time deposits, (10.6)(8.5)%.

 

Other borrowings increased significantly from 2003. Average short-term borrowings increased $710.1$643.8 million, or 117.6%101.4%, to $1.3 billion in 2004, while average long-term debt increased $72.8$68.3 million, or 13.5%12.2%, to $613.4$627.4 million in 2004. Approximately $127.6$164.6 million of the increase in short-term borrowings resulted from the Premier and Resource acquisitions, with the remaining increase duerequired to certain limited strategies to manage the Corporation’s gap position and to take advantagefund loan growth in excess of low wholesale funding rates.deposit growth. In addition, customer cash management accounts, which are included in short-term borrowings, grew $83.5$67.2 million, or 27.4%20.3%, to reach $388.9$397.9 million in 2004. Average long-term debt increased mainly as a result of the acquisitions of Premier and Resource, which added $80.6$81.8 million to the total average balance.

28increase.


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


   

Nine months ended

September 30


 
  2004

 2003

   2004

 2003

 
  (dollars in thousands)   (dollars in thousands) 

Loans outstanding at end of period (net of unearned)

  $7,042,311  $5,391,398   $7,213,162  $5,844,788 
  


 


  


 


Daily average balance of loans and leases

  $6,567,307  $5,365,939   $6,766,049  $5,473,055 
  


 


  


 


Balance at beginning of period

  $77,700  $71,920   $77,700  $71,920 

Loans charged-off:

      

Commercial, financial and agricultural

   2,212   2,936    2,321   4,542 

Real estate

   327   1,303    1,134   1,434 

Consumer

   1,595   2,445    2,528   3,432 

Leasing and other

   181   227    306   357 
  


 


  


 


Total loans charged-off

   4,315   6,911    6,289   9,765 
  


 


  


 


Recoveries of loans previously charged-off:

      

Commercial, financial and agricultural

   1,483   534    1,640   684 

Real estate

   251   371    741   552 

Consumer

   911   952    1,189   1,413 

Leasing and other

   57   49    69   64 
  


 


  


 


Total recoveries

   2,702   1,906    3,639   2,713 
  


 


  


 


Net loans charged-off

   1,613   5,005    2,650   7,052 

Provision for loan losses

   2,540   5,325    3,665   7,515 

Allowance purchased (Resource)

   7,912   —   

Allowance purchased

   8,112   5,474 
  


 


  


 


Balance at end of period

  $86,539  $72,240   $86,827  $77,857 
  


 


  


 


Net charge-offs to average loans (annualized)

   0.05%  0.19%   0.05%  0.17%
  


 


  


 


Allowance for loan losses to loans outstanding

   1.23%  1.34%   1.20%  1.33%
  


 


  


 


 

The provision for loan losses for the first sixnine months of 2004 totaled $2.5$3.7 million, a decrease of $2.8$3.9 million, or 52.3%51.2%, from the same period in 2003. Net charge-offs totaled $1.6$2.7 million, or 0.05% of average loans on an annualized basis, during the first sixnine months of 2004, a $3.4$4.4 million improvement over the $5.0$7.1 million, or 0.19%, in net charge-offs0.17% of average loans, for the same period in 2003. The provision for loan losses for the nine month period ended September 30, 2004 was more than adequate to cover net chargeoffs experienced during the period. Non-performing assets decreased to $32.4$35.7 million, or 0.31%0.34% of total assets, at JuneSeptember 30, 2004, from $38.9$38.4 million, or 0.45%0.41% of total assets, at JuneSeptember 30, 2003.

 

29


The acquisition of Resource in April 2004 increased the allowance balance by $7.9 million. Management believes that the allowance balance of $86.5$86.8 million at JuneSeptember 30, 2004 is sufficient to cover losses inherent in the loan portfolio on that date and is appropriate based on applicable accounting standards.

Other Income

 

The following table details the components of other income:

 

  

Six months ended

June 30


  Increase (decrease)

   Nine months ended
September 30


  Increase (decrease)

 
  2004

  2003

  $

 %

   2004

  2003

  $

 %

 
  (in thousands)   (dollars in thousands) 

Investment management and trust services

  $17,282  $17,152  $130  0.8%  $25,932  $25,679  $253  1.0%

Service charges on deposit accounts

   19,434   18,718   716  3.8%   29,616   28,527   1,089  3.8%

Other service charges and fees

   9,996   9,294   702  7.6%   15,363   14,076   1,287  9.1%

Mortgage banking income

   8,473   11,792   (3,319) -28.1%   14,565   17,892   (3,327) (18.6)%

Investment securities gains

   11,177   7,038   4,139  58.8%   14,513   14,028   485  3.5%

Other

   2,904   2,205   699  31.7%   4,624   3,510   1,114  31.7%
  

  

  


 

  

  

  


 

Total

  $69,266  $66,199  $3,067  4.6%  $104,613  $103,712  $901  0.9%
  

  

  


 

  

  

  


 

 

Other income for the sixnine months ended JuneSeptember 30, 2004 was $69.3$104.6 million, an increase of $3.1 million,$901,000, or 4.6%0.9%, over the comparable period in 2003. Excluding investment securities gains, which increased from $7.0$14.0 million in 2003 to $11.2$14.5 million in 2004, other income decreased $1.1 million, or 1.8%. Premier andincreased $416,000. The Resource acquisition, which added $5.5$10.1 million to other income, which was offset by aan internal decrease of $6.6$9.7 million, mainly in mortgage banking income.

 

Mortgage banking income decreased $3.3 million, the net of $3.9$7.8 million added by Resource and a $7.2an $11.1 million decrease in the Corporation’sCorporations’ existing mortgage banking business as a result ofbusiness. This decrease resulted from a significant reduction in the demand for mortgage refinancing. During the past three years (including the nine month period ended September 30, 2003) unprecedented volumes of mortgage refinances resulted from historically low interest rates, leaving a heavily saturated market for this type of product.

Service charges on deposits increased $1.1 million, or 3.8%, primarily due to the increase in interest rates.demand and savings accounts. Other service charges and fees increased $1.3 million, or 9.1%, mainly due to increases in letter of credit fees, merchant credit card fees and certain branch fees. Other income increased $1.1million, or 31.7%, with $1.8 million contributed by Resource. The national monthly average interest rate forresulting decrease was due mainly to gains on sales of fixed rate mortgage loans increased from 5.24% on June 30, 2003 to 6.25% at June 30 2004.assets that occurred in 2003.

 

Investment securities gains increased $4.1 million,$485,000, or 58.8%3.5%. Investment securities gains during the first sixnine months of 2004 consisted of net realized gains of $8.1$11.4 million on the sale of equity securities and $3.0$3.1 million on the sale of available for sale debt securities. Investment securities gains during the first sixnine months of 2003 consisted of net realized gains of $7.1$8.3 million on the sale of equity securities and $3.2$5.7 million on the sale of available for sale debt securities. TheIncluded in net gains in 2003 were offset by $3.3 million of losses recognized for equity securities exhibiting other than temporary impairment.

30


Other Expenses

 

The following table details the components of other expenses:

 

  

Six months ended

June 30


  Increase

   

Nine months ended

September 30


  

Increase


 
  2004

  2003

  $

  %

   2004

  2003

  $

  %

 
  (in thousands)           (dollars in thousands) 

Salaries and employee benefits

  $79,158  $67,814  $11,344  16.7%  $121,622  $103,330  $18,292  17.7%

Net occupancy expense

   11,377   9,887   1,490  15.1%   17,536   14,869   2,667  17.9%

Equipment expense

   5,390   5,268   122  2.3%   8,095   7,886   209  2.7%

Data processing

   5,687   5,640   47  0.8%   8,602   8,504   98  1.2%

Advertising

   3,442   3,019   423  14.0%   5,073   4,589   484  10.5%

Intangible amortization

   2,347   719   1,628  226.4%   3,580   1,341   2,239  167.0%

Other

   25,974   21,600   4,374  20.3%   39,555   32,978   6,577  19.9%
  

  

  

  

  

  

  

  

Total

  $133,375  $113,947  $19,428  17.1%  $204,063  $173,497  $30,566  17.6%
  

  

  

  

  

  

  

  

 

Total other expenses for the first sixnine months of 2004 were $133.4$204.1 million, representing an increase of $19.4$30.6 million, or 17.1%17.6%, from 2003. Approximately $13.6$22.7 million of the increase was due to the Premier and Resource acquisitions. The remaining $5.8$7.9 million was due primarily to normal increases in salaries, the continuing increase in the cost of health insurance and an increase in intangible amortization expense.

 

Salaries and employee benefits increased $11.3$18.3 million, or 16.7%17.7%, in comparison to the first sixnine months of 2003. The salary and payroll tax expense component increased $8.1$12.8 million, or 14.6%15.0%. Approximately $6.1$10.2 million of the increase was due to the Premier and Resource acquisitions, with the remaining $2.0$2.6 million driven by normal salary increases. The employee benefits component of the expense increased $3.2$5.5 million, or 26.9%30.8%, with Premier and Resource adding approximately $1.1$1.9 million and the remaining increase resulting from rising health insurance costs.costs and other benefit related expenses.

 

Net occupancy expense increased $1.5$2.7 million, or 15.1%17.9%, over the first sixnine months of 2003, with Premier and Resource adding approximately $1.2 million.$1.9 million, while the remaining increase resulted from growth in the Corporations’ branch network. Equipment expense increased $122,000,$209,000, or 2.3%2.7%, due to a $597,000$942,000 increase from the acquisitions, offset by a $747,000 reduction in depreciation expense as certain equipment became fully depreciated during 2003.depreciated. The 0.8%, or $98,000, increase in data processing expense resulted from a $351,000$530,000 increase from the acquisitions, partially offset by a decrease of $304,000decreases due to favorable renegotiations of certain contracts for data processing services.

 

Advertising expense increased $423,000,$484,000, or 14.0%10.5%, almost entirely due to Premier and Resource. Intangible amortization increased $1.6$2.2 million, or 226.4%167.0%, with $835,000as result of the increase attributable to amortization of intangible assets recorded in the Premier and Resource acquisitions and the remaining increase coming from the purchase of the agriculture loan portfolio in December 2003.acquisitions. Other expense increased $4.4$6.6 million, or 20.3%19.9%, mainlypartially due to $3.3$3.5 million of expense added by PremierResource and Resource.$2.2 million added by Premier.

 

Income Taxes

 

Income tax expense for the first sixnine months of 2004 was $31.3$48.2 million, a $2.5$4.2 million, or 8.6%9.6%, increase from $28.8$44.0 million in 2003. The Corporation’s effective tax rate was approximately 29.8%29.9% in 2004, compared to 29.7%30.0% in 2003. The effective rate is lower than the federal statutory rate of 35% due mainly to investments in tax-free municipal securities and federal tax credits from investments in low and moderate income housing partnerships.

31


FINANCIAL CONDITION

 

The changes in the Corporation’s consolidated balance sheet from December 31, 2003 to JuneSeptember 30, 2004 were largely due to the acquisition of Resource in April 2004. The table in Note H to the Consolidated Financial Statements summarizes the balances of Resource that were added to the Corporation on the acquisition date.

 

Total assets of the Corporation increased $789.1$801.5 million, or 8.1%8.2%, to $10.6 billion at JuneSeptember 30, 2004, compared to $9.8 billion at December 31, 2003. Included in total assets as of September 30, 2004 was $1.1 million due to the acquisition of Resource. Investment securities decreased $438.1$583.5 million, or 15.0%19.9%. The Resource acquisition added $125.5$118.3 million, resulting in an internala net decrease of $563.6$701.8 million, or 19.3%24.0%, as proceeds from maturities were generally not reinvested.reinvested and approximately $220 million of investments were sold for asset-liability management purposes. Loans outstanding, net of unearned income, increased $882.3 million,$1.1 billion, or 14.3%17.1%, during the period. Approximately $619.1$683.4 million of this increase was due to the Resource acquisition. The remaining increase was due to increases in commercial loans, commercial mortgages, residential mortgages and home equity loans, offset by a decline in consumer and other loans.

 

Cash and due from banks increased $34.2$4.7 million, or 11.4%1.6%, during the period. Due to the nature of these accounts, daily balances can fluctuate up or down in the normal course of business. Mortgage loans held for sale increased $111.3$117.7 million, with Resource adding $92.5$109.1 million to this increase.

 

Deposits increased $679.2$708.3 million, or 10.1%10.5%, from December 31, 2003, with Resource adding $598.4$570.6 million to this increase. Noninterest-bearing deposits increased $152.6$164.8 million, or 12.1%13.1%, interest-bearing demand deposits increased $101.1 million, or 7.8%, and interest-bearingsavings and money market deposits increased $526.6$138.1 million, or 9.6%7.9%. Time deposits increased $340.6$304.3 million, with the Resource acquisition adding $462.0$419.5 million. The remaining net decrease of $122.9$115.2 million reflects customerscustomers’ continued hesitation to invest in time deposits in this relatively low interest rate environment.

 

Short-term borrowings, which consist mainly of Federal funds purchased, other short-term borrowings and customer cash management accounts, decreased $155.2$208.2 million, or 11.1%14.9%, during the first sixnine months of 2004. Federal funds purchased decreased $158.9Resource added $205.0 million or 17.0%, with Resource adding $111.2to the ending balance. The net decrease of $413.2 million Long-term debt increased by $86.2 million, or 15.1%, with Resource adding $120.5 million. The resulting decreases in bothrepresents repayments of short-term borrowings and long-term debt were due to proceedsmade from maturing investment securities being used to repay these borrowingssecurities.

 

Capital Resources

 

Total shareholders’ equity increased $160.6$181.1 million, or 17.0%19.1%, during the first sixnine months of 2004. Increases due to net income of $73.7$112.8 million, $5.6$8.2 million in stock issuances and $185.9 million from stock issued for the Resource acquisition were offset by $38.0$14.0 million in unrealized losses on securities, $36.6$57.5 million in cash dividends to shareholders and $29.9$53.9 million in stock repurchases. The $38.0$14.0 million in net unrealized net losses on investment securities iswas attributable mainly to mortgage-backed securities. As a result of rising interest rates for mortgage loans, the estimated fair values of such investments has decreased over the past sixnine months.

 

The Corporation had a stock repurchase plan that was originally approved by the Board of Directors in December 2002 and which terminatedended in June 2004. During the first six months of 2004, approximately 1.26 million shares were purchased under this plan. On June 15, 2004 a new stock repurchase plan was approved by the Board of Directors, which allows the corporation to repurchase up to 4.0 million shares through December 31, 2004. During JuneThrough September 30, 2004, 221,0001.37 million shares were purchased under the new plan. As of JuneSeptember 30, 2004, there were approximately 3.82.63 million authorized shares remaining that could be repurchased under this program.

32


The Corporation and its subsidiary banks are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that could have a material effect on the Corporation’s financial statements. The regulations require that banks maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and Tier I capital to average assets (as defined). As of JuneSeptember 30, 2004, the Corporation and each of its bank subsidiaries met the minimum requirements. In addition, the Corporation and each of its bank subsidiaries’ capital ratios exceeded the amounts required to be considered “well-capitalized” as defined in the regulations. The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements as of the dates indicated:

 

        Regulatory Minimum

   

September 30,

2004


  

December 31,

2003


  Regulatory Minimum

 
  

June 30,

2004


  December 31,
2003


  Capital
Adequacy


 Well-
Capitalized


    Capital
Adequacy


 

Well-

Capitalized


 

Total Capital (to Risk Weighted Assets)

  12.22  12.70  8.0% 10.0%  12.00  12.70  8.0% 10.0%

Tier I Capital to (Risk Weighted Assets)

  11.07  11.50  4.0% 6.0%  10.86  11.50  4.0% 6.0%

Tier I Capital (to Average Assets)

  8.39  8.80  3.0% 5.0%  8.35  8.80  3.0% 5.0%

 

Liquidity

 

The Corporation must maintain a sufficient level of liquid assets to meet the cash needs of its customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity is provided on a continuous basis through scheduled and unscheduled principal and interest payments on outstanding loans and investments and through the availability of deposits and borrowings. In addition, the Corporation can borrow on a secured basis from the Federal Home Loan Bank to meet short-term liquidity needs.

 

The Corporation’s sources and uses of cash were discussed in general terms in the net interest income section of Management’s Discussion. The Consolidated Statements of Cash Flows provide additional information. The Corporation generated $68.5$94.0 million in cash from operating activities during the first sixnine months of 2004, mainly due to net income. Investing activities resulted in a net cash inflow of $244.8$252.2 million during the first sixnine months of 2004, as sales and maturities of investment securities exceeded purchases and net loan originations. This compares to a net cash outflow of $157.9$304.6 million in 2003, when purchases of investment securities and net loan originations exceeded sales and maturities. Finally, financing activities resulted in a net outflow of $279.0$341.5 million as excess funds were used to pay down borrowings.

 

Liquidity must also be managed at the Fulton Financial Corporation Parent Company (Parent Company) level. For safety and soundness reasons, banking regulations limit the amount of cash that can be transferred from subsidiary banks to the Parent Company in the form of loans and dividends. Generally, these limitations are based on the subsidiary banks’ regulatory capital levels and their net income. The Parent Company hashad historically been able to meet its cash needs through normal, allowable dividends and loans.

 

On July 12, 2004, the Parent Company entered into a borrowing arrangement with another financial institution. Under the terms of the agreement the Parent Company can borrow up to $50 million (may be

increased to $100 million upon request) under a revolving line of credit with interest currently calculated at one-month LIBOR (London Interbank

33


Offering Rate) plus 0.625%. This borrowing arrangement supplements the liquidity available from subsidiaries through dividends and borrowings and provides some flexibility in Parent Company cash management. As of September 30, 2004, $8.5 million had been borrowed under this line.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by financial institutions include interest rate risk, equity market price risk, foreign currency risk and commodity price risk. Due to the nature of its operations, only equity market price risk and interest rate risk are significant to the Corporation.

 

Equity Market Price Risk

 

Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Corporation. The Corporation’s equity investments consist primarily of common stocks of publicly traded financial institutions (cost basis of approximately $71.7$61.1 million and fair value of $78.5$66.5 million at JuneSeptember 30, 2004). The Corporation’s financial institutions stock portfolio had gross unrealized gains of approximately $8.1$6.5 million at JuneSeptember 30, 2004.

 

Although the carrying value of equity investments accounted for less than 1.0% of the Corporation’s total assets, the unrealized gains on the portfolio represent a potential source of revenue. The Corporation has a history of periodically realizing gains from this portfolio and, if values were to decline significantly, this revenue source could be lost.

 

Management continuously monitors the fair value of its equity investments and evaluates current market conditions and operating results of the companies. Periodic sale and purchase decisions are made based on this monitoring process. None of the Corporation’s equity securities are classified as trading. Future cash flows from these investments are not provided in the table on page 3635 as such investments do not have maturity dates.

 

The Corporation evaluates, based on current accounting guidance, whether any decreases in values of its equity investments constitute “other than temporary” impairment that would require a write-down through a charge to earnings. Based on the results of such evaluations, no charges were recorded during the first sixnine months of 2004. Write-downs of $3.3 million were recorded during calendar year 2003. Subsequent to these write-downs, the values of these securities improved and $1.9 million of realized gains were recognized upon sale while those remaining in the Corporation’s portfolio have increased in value by $900,000. Additional impairment charges may be necessary depending upon the performance of the equity markets in general and the performance of individual investments held by the Corporation.

 

In addition to its equity portfolio, the Corporation’s investment management and trust services revenue could be impacted by fluctuations in the securities markets. A portion of the Corporation’s trust revenue is based on the value of the underlying investment portfolios. If securities markets contract, the Corporation’s revenue could be negatively impacted. In addition, the ability of the Corporation to sell its equities brokerage services is dependent, in part, upon consumers’ level of confidence in the outlook for rising securities prices.

34


Interest Rate Risk

 

Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the Corporation’s liquidity position and could affect its ability to meet obligations and continue to grow. Second, movements in interest rates can create fluctuations in the Corporation’s net income and changes in the economic value of its equity.

 

The Corporation employs various management techniques to minimize its exposure to interest rate risk. An Asset/Liability Management Committee (ALCO), consisting of key financial and senior management personnel, meets on a weekly basis. The ALCO is responsible for reviewing the interest rate sensitivity position of the Corporation, approving asset and liability management policies, and overseeing the formulation and implementation of strategies regarding balance sheet positions and earnings. The primary goal of asset/liability management is to address the liquidity and net income risks noted above.

35


The following table provides information about the Corporation’s interest rate sensitive financial instruments. The table provides expected cash flows and weighted average rates for each significant interest rate sensitive financial instrument, by expected maturity period. None of the Corporation’s financial instruments are classified as trading.

 

 Expected Maturity Period

      Expected Maturity Period

 

Total


  

Estimated

Fair Value


 <1 Year

 1-2 Years

 2-3 Years

 3-4 Years

 4-5 Years

 >5 Years

 Total

 Estimated
Fair Value


  <1 Year

 1-2 Years

 2-3 Years

 3-4 Years

 4-5 Years

 >5 Years

 

Fixed rate loans (1)

 $709,267  $481,386  $397,359  $287,450  $168,482  $350,678  $2,394,622  $2,385,111  $709,643  $467,879  $399,415  $269,887  $161,576  $323,643  $2,332,043  $2,391,433

Average rate(2)

  6.16%  6.24%  6.15%  6.09%  6.25%  6.41%  6.20%    5.99%  6.17%  6.12%  6.06%  6.30%  6.37%  6.13% 

Floating rate loans

  1,416,180   503,658   415,638   344,016   287,202   1,680,995   4,647,689   4,657,393

Floating rate loans (8)

   1,226,474   610,074   509,308   424,353   368,517   1,742,393   4,881,119   4,877,339

Average rate

  5.09%  5.58%  5.62%  5.69%  5.41%  5.19%  5.29%    5.52%  5.63%  5.60%  5.64%  5.30%  5.27%  5.45% 

Fixed rate investments (3)

  520,240   301,820   249,569   337,602   288,242   612,671   2,310,144   2,438,737   558,712   328,711   279,863   418,665   171,833   440,777   2,198,561   2,186,586

Average rate

  3.25%  3.67%  3.79%  3.92%  3.84%  4.14%  3.77%    3.38%  3.66%  4.11%  3.91%  3.99%  3.65%  3.72% 

Floating rate investments (3)

  —     —     —     —     200   13,038   13,238   13,238   —     —     —     164   —     10,504   10,668   10,668

Average rate

  —     —     —     —     5.84%  3.24%  3.28%    —     —     —     5.85%  —     3.32%  3.36% 

Other interest-earning assets

  151,071   —     —     —     —     —     151,071   151,071   163,018   —     —     —     —     —     163,018   163,018

Average rate

  5.47%  —     —     —     —     —     5.47%    5.92%  —     —     —     —     —     5.92% 
 


 


 


 


 


 


 


 

  


 


 


 


 


 


 


 

Total

 $2,796,758  $1,286,864  $1,062,566  $969,068  $744,126  $2,657,382   9,516,764  $9,645,550  $2,657,847  $1,406,664  $1,188,586  $1,113,069  $701,926  $2,517,317   9,585,409   9,629,044

Average rate

  5.05%  5.38%  5.39%  5.19%  4.98%  5.10%  5.15%    5.24%  5.35%  5.42%  5.10%  5.21%  5.12%  5.23% 
 


 


 


 


 


 


 


 

  


 


 


 


 


 


 


 

Fixed rate deposits (4)

 $1,392,239  $452,340  $340,493  $145,884  $61,974  $269,429  $2,662,359  $2,671,571  $1,386,117  $459,022  $415,634  $95,573  $57,759  $289,235  $2,703,340  $2,713,816

Average rate

  2.27%  2.80%  3.90%  3.97%  3.97%  4.29%  2.91%    2.20%  2.72%  3.94%  3.52%  3.27%  4.27%  2.85% 

Floating rate deposits (5)

  1,939,251   183,289   182,503   174,348   174,348   2,114,890   4,768,629   4,768,627   1,968,085   171,527   171,527   171,527   171,527   2,102,537   4,756,730   4,756,730

Average rate

  0.75%  0.38%  0.30%  0.19%  0.19%  0.14%  0.41%    0.85%  0.22%  0.22%  0.22%  0.22%  0.17%  0.45% 

Fixed rate borrowings (6)

  32,892   85,355   28,737   171,407   124,833   216,639   659,863   638,557   129,417   8,571   27,100   222,832   90,249   203,021   681,190   672,136

Average rate

  3.22%  5.99%  3.72%  4.60%  4.59%  5.10%  4.83%    4.73%  2.92%  3.65%  4.85%  4.45%  4.95%  4.73% 

Floating rate borrowings (7)

  1,236,545   —     —     —     —     —     1,236,545   1,236,545   1,174,156   —     —     —     —     —     1,174,156   1,174,156

Average rate

  0.98%  —     —     —     —     —     0.98%    1.50%  —     —     —     —     —     1.50% 
 


 


 


 


 


 


 


 

  


 


 


 


 


 


 


 

Total

 $4,600,927  $720,984  $551,733  $491,639  $361,155  $2,600,958  $9,327,396  $9,315,300  $4,657,775  $639,120  $614,261  $489,932  $319,535  $2,594,793  $9,315,416  $9,316,838

Average rate

  1.29%  2.56%  2.70%  2.84%  2.35%  0.98%  1.51%    1.52%  2.05%  2.89%  2.95%  1.95%  0.99%  1.59% 
 


 


 


 


 


 


 


 

  


 


 


 


 


 


 


 


Assumptions:

(1)Amounts are based on contractual payments and maturities, adjusted for expected prepayments.
(2)Average rates are shown on a fully taxable equivalent basis using an effective tax rate of 35%.
(3)Amounts are based on contractual maturities; adjusted for expected prepayments on mortgage-backed securities and expected calls on agency and municipal securities. Amounts do not include equity securities.
(4)Amounts are based on contractual maturities of time deposits.
(5)Money market, Super NOW, NOW and savings accounts are placed based on history of deposit flows.
(6)Amounts are based on contractual maturities of Federal Home Loan Bank advances, adjusted for possible calls.
(7)Amounts are Federal Funds Purchased and securities sold under agreements to repurchase, which mature in less than 90 days.
(8)Floating rate loans include adjustable rate commercial mortgages.

The preceding table and discussion addressed the liquidity implications of interest rate risk and focused on expected contractual cash flows from financial instruments. Expected maturities, however, do not necessarily estimate the net interest income impact of interest rate changes. Certain financial instruments, such as adjustable rate loans, have repricing periods that differ from expected cash flows.

 

The Corporation uses three complementary methods to measure and manage interest rate risk. They are static gap analysis, simulation of earnings, and estimates of economic value of equity. Using these

36


measurements in tandem provides a reasonably comprehensive summary of the magnitude of interest rate risk in the Corporation, level of risk as time evolves, and exposure to changes in interest rate relationships.

 

Static gap provides a measurement of repricing risk in the Corporation’s balance sheet as of a point in time. This measurement is accomplished through stratification of the Corporation’s assets and liabilities into predetermined repricing periods. The assets and liabilities in each of these periods are summed and compared for mismatches within that maturity segment. Core deposits having noncontractual maturities are placed into repricing periods based upon historical balance performance. Repricing for mortgage loans held and for mortgage-backed securities includes the effect of expected cash flows. Estimated prepayment effects are applied to these balances based upon industry projections for prepayment speeds. The Corporation’s policy limits the cumulative 6-month gap to plus or minus 15% of total earning assets. The cumulative 6-month gap as of JuneSeptember 30, 2004 was 0.95.0.96.

 

Simulation of net interest income and of net income is performed for the next twelve-month period. A variety of interest rate scenarios are used to measure the effects of sudden and gradual movements upward and downward in the yield curve. These results are compared to the results obtained in a flat or unchanged interest rate scenario. Simulation of earnings is used primarily to measure the Corporation’s short-term earnings exposure to rate movements. The Corporation’s policy limits the potential exposure of net interest income to 10% of the base case net interest income for every 100 basis point “shock” in interest rates. A “shock’ is an immediate upward or downward movement of interest rates across the yield curve based upon changes in the prime rate. The following table summarizes the expected impact of interest rate shocks on net interest income:

 

Rate Shock


  

Annual change

in net interest

income


  

% Change


+300bp

  +$ 19.2 22.0 million  +5.5%6.2%

+200bp

  +$ 13.5 15.3 million  +3.9%4.3%

+100bp

  +$8.6 9.6 million  +2.5%2.7%

-100bp

  -$ 18.2 19.1 million  -5.3%-5.4%

 

Economic value of equity estimates the discounted present value of asset cash flows and liability cash flows. Discount rates are based upon market prices for like assets and liabilities. Upward and downward shocks of interest rates are used to determine the comparative effect of such interest rate movements relative to the unchanged environment. This measurement tool is used primarily to evaluate the longer-term re-pricing risks and options in the Corporation’s balance sheet. A policy limit of 10% of economic equity may be at risk for every 100 basis point “shock” movement in interest rates. The following table summarizes the expected impact of interest rate shocks on economic value of equity.

 

Rate Shock


  

Change in

economic value

of equity


  

% Change


+300bp

  -$ 13.4 21.2 million  -1.0%-1.4%

+200bp

  -+$ 11.2 4.9 million  -0.8%+0.3%

+100bp

  +$3.2 18.8 million  +0.2%1.3%

-100bp

  -$ 11.2 41.9 million  -0.8%-2.8%

37


Item 4. Controls and Procedures

 

The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, the Corporation’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Corporation reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

There have been no changes in our internal control over financial reporting during the fiscal quarter covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

38


PART II OTHER INFORMATION

 

Item 2. Changes inUnregistered Sales of Equity Securities and Use of Proceeds and Issuer Purchases of Equity Securities

 

Period


  Total number
of shares
purchased


  Average
Price paid
per share


  Total number of shares
purchased as part of a
publicly announced plan
or program


  Maximum number of
shares that may yet be
purchased under the
plan or program


(4/1/04 - 4/30/04)

  627,585  20.43  627,585  4,456,134

(5/1/04 - 5/31/04)

  456,570  19.99  456,570  3,999,564

(6/1/04 - 6/30/04)

  221,000  20.12  221,000  3,779,000

Period


  Total number
of shares
purchased


  Average
Price paid
per share


  Total number of shares
purchased as part of a
publicly announced plan
or program


  Maximum number of
shares that may yet be
purchased under the
plan or program


(7/1/04 - 7/31/04)

  272,000  20.3479  272,000  3,507,000

(8/1/04 -8/31/04)

  442,000  20.6648  442,000  3,065,000

(9/1/04 - 9/30/04)

  430,699  21.5219  430,699  2,634,301

 

In September 2003, the Board authorized the repurchase of 5.8 million shares through June 30, 2004. For the three and six month ended June 30, 2004, 1.26 million shares and 1.08 million shares respectively, were repurchased under this plan. On June 15, 2004 a newstock repurchase plan was approved by the Board of Directors to repurchase up to 4.0 million shares through December 31, 2004. During JuneAs of September 30, 2004, 221,0001.37 million shares were repurchased under the newthis plan. No stock repurchases were made outside the plans and all were made under the guidelines of Rule 10b-18 issued in November 2003 and in compliance with Regulation M.

39


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:

 

 (3)Articles of incorporation, as amended and restated, and Bylaws of Fulton Financial Corporation, as amended – Incorporated by reference from Exhibit 3 of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.

 

 (4)Instruments defining the right of securities holders, including indentures:

 

 (a)Rights Agreement dated June 20, 1989, as amended and restated on April 27, 1999 between Fulton Financial Corporation and Fulton Bank - Incorporated by reference from Exhibit 1 of the Fulton Financial Corporation Current Report on Form 8-K dated April 27, 1999.

 

 (10)Material Contracts - Executive Compensation Agreements and Plans:

 

 (a)Severance Agreements entered into between Fulton Financial and: Rufus A. Fulton, Jr., as of April 17, 1984; R. Scott Smith, Jr., as of May 17, 1988; Richard J Ashby, Jr., as of May 17, 1988; and Charles J. Nugent, as of November 19, 1992 – Incorporated by reference from Exhibit 10(a) of the Fulton Financial Corporation Quarterly Report on Form 10-Q for quarter ended March 31, 1999.

 

 (b)2004 Stock Option and Compensation Plan adopted October 21, 2003 - Incorporated by reference from Exhibit C of Fulton Financial Corporation’s 2004 Proxy Statement.

(b)Reports on Form 8-K:

1)Form 8-K dated April 1, 2004 reporting the consummation of the Resource Bankshares Corporation acquisition.

2)Form 8-K/A filed April 12, 2004 correcting the number of shares reported as issued and outstanding by Premier Bancorp, Inc. prior to the its acquisition by the Corporation.

3)Form 8-K dated April 22, 2004 filing the Corporation’s press release of financial results for the quarter ended March 31, 2004.

4)Form 8-K dated April 22, 2004 reporting a presentation made at Fulton Financial Corporation’s Annual Meeting of Shareholders, which provided an overview of the Corporation’s 2003 performance.

5)Form 8-K dated May 6, 2004 reporting the engagement of Crowe Chizek and Company, LLC as the independent auditors of certain benefit plans of the Corporation.

6)Form 8-K dated June 2, 2004 reporting a presentation at an investor meeting to provide an overview of the Corporation’s strategy and performance.

7)Form 8-K dated June 15, 2004 disclosing the execution of a definitive Agreement and Plan of Merger with First Washington FinancialCorp.

8)Form 8-K dated July 20, 2004 filing the Corporation’s press release of financial results for the quarter ended June 30, 2004

9)Form 8-K dated July 27, 2004 reporting a presentation at an investor meeting to provide an overview of the Corporation’s strategy and performance.

40


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: August 6,November 5, 2004

 

/s/ Rufus A. Fulton, Jr.


  

Rufus A. Fulton, Jr.

Chairman and Chief Executive Officer

Date: August 6,November 5, 2004 

/s/ Charles J. Nugent


  

Charles J. Nugent

Senior Executive Vice President

and

Chief Financial Officer

41


EXHIBIT INDEX

 

Exhibits Required Pursuant

to Item 601 of Regulation S-K

 

3.Articles of incorporation, as amended and restated, and Bylaws of Fulton Financial Corporation as amended - Incorporated by reference from Exhibit 3 of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.

 

4.Instruments defining the rights of security holders, including indentures.

 

 (a)Rights Agreement dated June 20, 1989, as amended and restated on April 27, 1999 between Fulton Financial Corporation and Fulton Bank - Incorporated by reference to Exhibit 1 of the Fulton Financial Corporation Current Report on Form 8-K dated April 27, 1999.

 

10.Material Contracts

 

 (a)Severance Agreements entered into between Fulton Financial and: Rufus A. Fulton, Jr., as of April 17, 1984; R. Scott Smith, Jr., as of May 17, 1988; Charles J. Nugent, as of November 19, 1992; and Richard J Ashby, Jr., as of May 17, 1988 – Incorporated by reference from Exhibit 10 (a) of the Fulton Financial Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.

 

 (b)2004 Stock Option and Compensation Plan adopted October 21, 2003 - Incorporated by reference from Exhibit C of Fulton Financial Corporation’s 2004 Proxy Statement.

 

31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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