1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
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(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURTITIES EXCHANGE ACT OF 1934
For the quarterly period ending March 31, 1999
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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 Number 0-21273
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Fulton Bancorp, Inc.
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(Exact name of small business
issuer as specified in its charter)
Delaware 43-1754577
- ------------------------------------ ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
410 Market Street, Fulton, MO 65251
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(Address of principal executive offices) (Zip Code)
573-642-6617
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(Registrant's telephone number)
None
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(Former name, former address and former
fiscal year, if changed since last report)
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 twelve 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
----- ------
As of May 3, 1999, there were 1,653,949 shares of the Registrant's Common Stock,
$0.01 par value per share, outstanding.
Transitional Small Business Disclosure Format
Yes No X
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FULTON BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
March 31, 1999
INDEX PAGE
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PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 3
CONSOLIDATED STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
PART II - OTHER INFORMATION
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ITEM 1 - LEGAL PROCEEDINGS 18
ITEM 2 - CHANGES IN SECURITIES 18
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4 - SUBMISSION OF MATTER TO VOTE OF SECURITY-HOLDERS 18
ITEM 5 - OTHER INFORMATION 18
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
FINANCIAL DATA SCHEDULE 20
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3
FULTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
March 31, June 30,
1999 1998
========= ==========
(Unaudited)
ASSETS
Cash, including interest-bearing accounts of $8,676,000
and $13,147,000, respectively $9,267 $13,778
Investment securities, available-for-sale 1,744 950
Stock in Federal Home Loan Bank of Des Moines 986 643
Loans held for sale 3,687 3,649
Loans receivable, net of allowance for loan losses of
$1,093,000 and $971,000, respectively 98,701 88,104
Accrued interest receivable 790 678
Premises and equipment 1,406 1,420
Foreclosed real estate 231 158
Loan servicing assets 621 535
Other assets 337 195
--------- ----------
TOTAL ASSETS $117,770 $110,110
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 72,208 $69,164
Advances from Federal Home Loan Bank of Des Moines 18,375 12,810
Advances from borrowers for property taxes and insurance 792 985
Other escrow accounts 605 499
Accrued interest payable 97 84
Other liabilities 276 1,073
--------- ----------
TOTAL LIABILITIES 92,353 84,615
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value per share, 1,000,000 shares
authorized, none issued -- --
Common stock, $0.01 par value per share, 6,000,000 shares
authorized, 1,765,411 and 1,719,250 issued, respectively 18 17
Additional paid-in capital 17,859 16,943
Treasury stock, 111,462 shares (1,899) --
Retained earnings - substantially restricted 11,107 10,674
Unearned ESOP shares (1,030) (1,134)
Deferred management recognition and development plan (635) (1,006)
Unrealized gain (loss) on securities available-for-sale (3) 1
--------- ----------
TOTAL STOCKHOLDERS' EQUITY 25,417 25,495
--------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $117,770 $110,110
========= ==========
See accompanying notes to Consolidated Financial Statements.
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FULTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Three Months ended Nine Months ended
March 31, March 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(unaudited)
INTEREST INCOME
Mortgage loans $1,896 $1,558 $5,485 $4,809
Consumer and other loans 212 239 654 701
Investment securities 40 30 104 107
Interest-earning deposits 77 221 402 480
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 2,225 2,048 6,645 6,097
INTEREST EXPENSE
Deposits 854 861 2,624 2,596
Advances from Federal Home Loan Bank
of Des Moines 276 229 794 509
TOTAL INTEREST EXPENSE 1,130 1,090 3,418 3,105
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,095 958 3,227 2,992
PROVISION FOR LOAN LOSSES 60 0 130 60
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,035 958 3,097 2,932
NON-INTEREST INCOME
Loan servicing fees 75 94 223 268
Gain on sales of loans 14 66 176 283
Service charges and other fees 22 19 70 63
Income (loss) from foreclosed asset 0 (1) (10) (40)
Other 1 2 5 6
---------- ---------- ---------- ----------
TOTAL NON-INTEREST INCOME 112 180 464 580
NON-INTEREST EXPENSE
Employee salaries and benefits 453 485 1,304 1,227
Occupancy costs 64 66 208 203
Advertising 11 11 40 44
Data processing 49 43 142 122
Federal insurance premiums 12 11 35 35
Directors' fees 33 24 79 67
Other 176 144 450 411
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TOTAL NON-INTEREST EXPENSE 798 784 2,258 2,109
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INCOME BEFORE INCOME TAXES 349 354 1,303 1,403
INCOME TAXES 137 131 488 518
---------- ---------- ---------- ----------
NET INCOME $ 212 $ 223 $ 815 $ 885
========== ========== ========== ==========
BASIC EARNINGS PER SHARE $ 0.14 $ 0.14 $ 0.53 $ 0.56
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ 0.14 $ 0.14 $ 0.52 $ 0.56
========== ========== ========== ==========
See accompanying notes to Consolidated Financial Statements.
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FULTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended
March 31,
1999 1998
---------- ---------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $815 $885
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 101 115
Provision for loan losses 130 60
Provision for loss on foreclosed real estate -- 40
Proceeds from sales of loans held for sale 23,185 14,221
Origination of loans held for sale (23,223) (15,149)
Gain on sales of loans held for sale (155) (258)
Amortization of servicing asset 69 --
ESOP shares released 171 223
MRDP compensation expense 371 --
Change to assets and liabilities increasing (decreasing) cash flows
Accrued interest receivable (112) 91
Other assets (141) (209)
Accrued interest payable 13 40
Other liabilities 51 394
---------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,275 453
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities
available-for-sale 950 700
Purchase of securities available-for-sale (1,748) --
Loans originated, net of repayments (10,799) (1,055)
Purchase of premises and equipment (87) (43)
Purchase of Federal Home Loan Bank stock (343) (136)
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (12,027) (534)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 3,044 2,034
Advances from Federal Home Loan Bank of Des Moines:
Borrowings 8,000 9,000
Repayments (2,435) (2,607)
Net increase (decrease) in escrows (87) (153)
Purchase of treasury shares (1,899) (475)
Dividends paid (382) (275)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 6,241 7,524
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NET INCREASE (DECREASE) IN CASH (4,511) 7,443
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Cash, beginning of period 13,778 7,095
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CASH, END OF PERIOD $ 9,267 $14,538
========== =========
See accompanying notes to Consolidated Financial Statements.
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FULTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- Basis of Presentation
- -------------------------------
The consolidated interim financial statements as of March 31, 1999, included in
this report have been prepared by Fulton Bancorp, Inc. (the "Company") without
audit. In the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation are reflected in the March
31, 1999, interim financial statements. The results of operations for the period
ended March 31, 1999, are not necessarily indicative of operating results for
the full year.
NOTE B -- Earnings Per Share
- ----------------------------
During the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
The Statement requires dual presentation of basic and diluted earnings per share
("EPS") on the face of the statement of income. Basic EPS is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
A summary of EPS calculations for the three and nine month periods ended March
31, 1999 and 1998, is as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
-------- -------- ------- --------
(In thousands, except per share amounts)
Basic earnings per share:
Income available to common shareholders $ 212 $ 223 $ 815 $ 885
======= ====== ======= =======
Average common shares outstanding 1,494 1,593 1,537 1,594
======= ====== ======= =======
Basic earnings per share $ 0.14 $ 0.14 $ 0.53 $ 0.56
======= ====== ======= =======
Diluted earnings per share:
Income available to common shareholders $ 212 $ 223 $ 815 $ 885
======= ====== ======= =======
Average common shares outstanding 1,494 1,593 1,537 1,594
Dilutive potential common shares outstanding
due to common stock options and grants 22 46 20 26
------- ------ ------- -------
Average number of common shares and
dilutive potential common shares outstanding 1,516 1,639 1,557 1,620
======= ====== ======= =======
Diluted earnings per share $ 0.14 $ 0.14 $ 0.52 $ 0.56
======= ====== ======= =======
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FULTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE C -- Employee Stock Ownership Plan
- ---------------------------------------
In connection with the conversion to stock form, the Company's subsidiary,
Fulton Savings Bank, FSB, (the "Bank"), established an Employee Stock Ownership
Plan ("ESOP") for the exclusive benefit of participating employees (all salaried
employees who have completed at least 1,000 hours of service in a twelve-month
period and have attained the age of 21). The ESOP borrowed funds from the
Company in an amount sufficient to purchase 137,450 shares (8% of the Common
Stock issued in the stock offering). The loan is secured by the shares purchased
and will be repaid by the ESOP with funds from contributions made by the Bank,
dividends received by the ESOP and any other earnings on ESOP assets. The Bank
presently expects to contribute approximately $203,300, including interest,
annually to the ESOP. Contributions will be applied to repay interest on the
loan first, then the remainder will be applied to principal. The loan is
expected to be repaid in approximately 10 years. Shares purchased with the loan
proceeds are held in a suspense account for allocation among participants as the
loan is repaid. Contributions to the ESOP and shares released from the suspense
account are allocated among participants in proportion to their compensation
relative to total compensation of all active participants. Benefits generally
become 20% vested after three years of credited service and then 20% per year
thereafter until 100% vested. Vesting is accelerated upon retirement, death or
disability of the participant. Forfeitures are returned to the Company or
reallocated to other participants to reduce future funding costs. Benefits may
be payable upon retirement, death, disability or separation from service. Since
the Bank's annual contributions are discretionary, benefits payable under the
ESOP cannot be estimated.
The Company accounts for its ESOP in accordance with Statement of Position 93-6,
EMPLOYERS' ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS. Accordingly, the debt
of the ESOP is eliminated in consolidation and the shares pledged as collateral
are reported as unearned ESOP shares in the consolidated balance sheets.
Contributions to the ESOP shall be sufficient to pay principal and interest
currently due under the loan agreement. As shares are committed to be released
from collateral, the Company reports compensation expense equal to the average
market price of the shares for the respective period, and the shares become
outstanding for earnings per share computations. Dividends on allocated ESOP
shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt. ESOP compensation
expense was $145,000 for the nine months ended March 31, 1999.
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FULTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A summary of ESOP shares at March 31, 1999, is as follows:
Shares distributed to terminated participants 208
Shares allocated 30,910
Shares released for allocation 3,457
Unreleased shares 102,965
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TOTAL 137,540
=======
Fair value of unreleased shares $1,557,346
==========
NOTE D - Stock Based Compensation Plans
- ---------------------------------------
The Board of Directors adopted and the shareholders subsequently approved a
Management Recognition and Development Plan ("MRDP") and a Stock Option Plan
("SOP") on October 23, 1997. These plans were established to assist the Company
and its subsidiary in attracting, retaining and motivating key management and
employees by aligning their financial interest with those of the shareholders of
the Company.
The MRDP is a fixed award of 68,761 shares of restricted stock which vests over
a five year period. The Company selected an amortization method which recognizes
a higher percentage of compensation cost in the earlier years than in the later
years of the service period. Compensation cost will approximate 34% of the cost
of the MRDP awards in the first year, 31% the second year, 18% the third, and
17% in the remaining two years.
Under the SOP, options to acquire shares of the Company's common stock may be
granted to certain officer, directors and employees of the Bank. The options
will enable the recipient to purchase stock at an exercise price equal to the
fair market value of the stock at the date of the grant. On November 12, 1997,
the Company granted options for 171,925 shares at $19.75 per share. The options
will vest over a five year period following the date of grant and are
exercisable for up to ten years.
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company has elected to apply the recognition provisions of Accounting Principles
Board Opinion No. 25, under which compensation expense is recorded on the date
of grant only if the current market price of the underlying stock exceeds the
exercise price. Accordingly, adoption of SFAS No. 123 will have no impact on the
Company's consolidated financial position or results of operations.
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FULTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE E - Year 2000 Issue
- ------------------------
The year 2000 issue concerns computer software programs which use only two
digits to identify the calendar year in date fields. Software applications
utilizing two digit date fields could produce erroneous results at the turn of
the century. The Federal Financial Institutions Examination Council requires all
insured financial institutions to complete an inventory of core computer
function and set priorities for meeting Year 2000 conversion goals. The
Company's material software applications are provide by a third party data
processing service. The Company has inventoried and assessed core computer
functions. All material systems were judged compliant by September 30, 1998.
Testing will continue through the remainder of 1999. Estimated cost to the
Company is not expected to be material since all critical applications are
supported by the third party data processing service.
NOTE F - Reclassifications
- --------------------------
Certain amounts in the prior period's consolidated financial statements have
been reclassified to conform with the current year presentation.
NOTE G - Comprehensive Income
- -----------------------------
On July 1, 1998 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income", which
established standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. For the three and nine month periods ended
March 31, 1999 and 1998, unrealized holding gains and losses on investments in
debt and equity securities available-for-sale were the Company's only other
comprehensive income component.
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FULTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Comprehensive income for the three and nine month periods ended March 31, 1999
and 1998 is summarized as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
-------- -------- ------- --------
(Dollars in thousands)
Net income $ 212 $ 223 $ 815 $ 885
Other comprehensive income:
Net unrealized holding gains (losses)
on investments in debt and equity
securities available-for-sale (4) 0 (4) 1
Adjustment for net securities (gains)
losses realized in net income, net
of applicable income taxes 0 0 0 0
---------- --------- -------- --------
Total other comprehensive income (4) 0 (4) 1
---------- --------- -------- --------
Comprehensive income $ 208 $ 223 $ 811 $ 886
========== ========= ======== ========
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FULTON BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
Fulton Bancorp, Inc. is a Delaware corporation that was organized for the
purpose of becoming the holding company for Fulton Savings Bank, FSB upon the
Bank's conversion from a federal mutual savings bank to a federal capital stock
savings bank. The Bank's conversion was completed on October 17, 1996. The Bank
is a community oriented financial institution that engages primarily in the
business of attracting deposits from the general public and using those funds to
originate residential and commercial mortgage loans within its market area. The
Bank's deposits are insured up to applicable limits by the Savings Association
Insurance Fund.
The Company's operating results depend primarily on its net interest income,
which is the difference between the income it receives on its loan and
investment portfolios, and its cost of funds, which consists of interest paid on
deposits and borrowings. The Company's operating results are also affected by
its level of non-interest income and expenses. Non-interest income consists
primarily of loan servicing fees, gain on sale of loans and service charges and
other fees. Non-interest expenses include employee salaries and benefits,
occupancy costs, deposit insurance premiums, data processing expenses and other
operating costs.
The discussion and analysis included herein covers certain changes in results of
operations during the three month and nine month periods ended March 31, 1999
and 1998, as well as those material changes in liquidity and capital resources
that have occurred since June 30, 1998.
The following should be read in conjunction with the Company's 1998 Annual
Report to Shareholders which contains the latest audited financial statements
and notes thereto, together with Management's Discussion and Analysis of
Financial Condition and Results of Operations contained therein. Therefore, only
material changes in financial condition and results of operation are discussed
herein.
FINANCIAL CONDITION AT MARCH 31, 1999 COMPARED TO JUNE 30, 1998
- ---------------------------------------------------------------
Total assets increased $7.7 million or 7.0% to $117.8 million at March 31, 1999
primarily due to growth in loans receivable, which increased $10.6 million or
12.0%. Management took advantage of favorable rates and terms available on
Federal Home Loan Bank advances which funded $5.6 million of the growth in total
assets. Deposits increased by $3.0 million or 4.4%. Transaction savings accounts
increased $1.8 million or 11.6% due to normal seasonal fluctuations, and
certificates of deposit increased $1.2 million or 2.3%.
During the nine months ended March 31, 1999, the Company completed one stock
repurchase program and its Board of Directors authorized a second stock
repurchase
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program for the repurchase of up to ten percent of the Company's outstanding
common shares, or 170,205 shares, in the open market over a twelve month period.
In connection with the repurchase programs, the Company purchased 111,462 shares
of treasury stock for $1,899,000 during the nine months ended March 31, 1999.
Primarily as a result of the treasury stock purchases, total stockholders'
equity decreased $78,000 from June 30, 1998 to March 31, 1999. Employee Stock
Ownership Plan (ESOP) and Management Recognition and Development Plan (MRDP)
transactions increased total stockholders equity $1,391,000 in the aggregate;
net income contributed $815,000; and dividends paid totaled $382,000.
Nonperforming assets, which are defined as loans 90 days or more past due, loans
on nonaccrual status, and foreclosed real estate owned totaled $1,079,000 or
0.92% of total assets at March 31, 1999 compared to $313,000 or 0.28% of total
assets as June 30, 1998. The increase in nonperforming loans primarily reflected
an increase in loans being reported as past due as a result of delays in
processing refinancings and extensions. Management believes that the allowance
for loan losses at March 31, 1999 is adequate to cover any potential loss
resulting from the increase in nonperforming assets.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
- ------------------------------------------------------------------------
Net income for the three months ended March 31, 1999 decreased $11,000 or 4.9%
compared to the three months ended March 31, 1998. Diluted earnings per share
were 14 cents per share for the current quarter, the same as reported for the
three months ended March 31, 1998. Net interest income increased $137,000
compared to the same quarter of a year ago. However, that favorable variance was
more than offset by a $60,000 increase in the provision for loan losses, a
$68,000 decrease in non-interest income, a $14,000 increase in non-interest
expense, and a $6,000 increase in income taxes.
The $137,000 or 14.3% increase in net interest income reflected a combination of
a $5.3 million or 4.9% increase in average total interest earning assets and 32
basis point increase in net interest margin to 3.89% for the current quarter.
The increase in net interest margin primarily reflected a favorable shift in
earning asset mix from lower yielding interest bearing accounts at other
financial institutions to higher yielding mortgage loans. Average mortgage loans
increased $14.3 million or 17.8%, while average interest bearing accounts at
other financial institutions decreased $8.9 million 52.8%. An increase in
average Federal Home Loan Bank advances of approximately $3.6 million funded a
significant portion of the increase in average total earning assets.
The $60,000 provision for loan losses in the current quarter reflected
management's judgment of the provision necessary to maintain an adequate loan
reserve balance based upon loan growth and the quality of the loan portfolio. No
provision for loan losses was recorded in the three month period ended March 31,
1998. The allowance for loan losses was 1.06% of total loans outstanding
(including loans held for sale) at March 31, 1999 compared to 1.05% of total
loans outstanding at June 30, 1998. At March 31,1999 the allowance for loan
losses was 128.9% of nonperforming loans compared to 626.5% of nonperforming
loans at June 30, 1998.
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The $68,000 or 37.8% decrease in non-interest income primarily reflected
decreases in gain on sales of loans and loan servicing fees. The decline in gain
on sales of loans primarily reflected the write-off of previously recorded
service assets on loans which pre-paid during the quarter, while the decline in
loan servicing fees was due to the amortization of servicing assets pursuant to
SFAS No. 125 which was adopted January 1, 1997.
The $14,000 or 1.8% increase in non-interest expense primarily reflected a
$32,000 increase in other non-interest expense plus increases in directors' fees
and data processing costs. Those unfavorable variances were partially offset by
a $32,000 decrease in employee salaries and benefits. The increase in other
non-interest expense primarily reflected fees paid to management consultants.
Directors' fees per meeting were increased in January, 1999, and the increase in
data processing costs resulted from system upgrades. The 6.6% decrease in
employee salaries and benefits, the largest component of non-interest expense,
was due primarily to a decrease of $77,000 in MRDP expense for the current
quarter compared to the same quarter of a year ago. The decrease in MRDP expense
was partially offset by a $29,000 or 13.1% increase in salary expense and a
reduction in deferred salary costs relating to loan originations. The 13.1%
increase in salary expense was necessary to remain competitive in the local
market area.
The Company's effective income tax rate for the three months ended March 31,
1999 was 39.3% compared to 37.0% for the same period last year.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
- -----------------------------------------------------------------------
Net income for the nine months ended March 31, 1999 decreased $70,000 or 7.9%
compared to the nine months ended March 31, 1998, and diluted earnings per share
decreased 4 cents or 7.1% to 52 cents per share for the current nine month
period. Net interest income increased $235,000 and income taxes decreased
$30,000. However, those favorable variances were more than offset by a $70,000
increase in the provision for loan losses, a $116,000 decrease in non-interest
income, and a $149,000 increase in non-interest expense.
The $235,000 or 7.9% increase in net interest income reflected a $9.0 million or
8.6% increase in average total earning assets. Average mortgage loans increased
$10.8 million or 13.5%, and all other interest earning assets decreased $1.8
million in the aggregate. Net interest margin was 3.79% of average earning
assets for the nine months ended March 31, 1999 compared to 3.82% for the same
period last fiscal year. The decline in net interest margin primarily reflected
an increase in the proportion of earning assets supported by higher cost Federal
Home Loan Bank advances. Approximately $6.3 million of the increase in average
total earning assets was funded by Federal Home Loan Bank advances.
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The $70,000 increase in the provision for loan losses reflected management's
judgment of the provision necessary to maintain an adequate loan reserve balance
based upon loan growth and the quality of the loan portfolio.
The $116,000 or 20.0% decrease in non-interest income primarily reflected
decreases in gain on sales of loans and loan servicing fees, which were
partially offset by a decrease in loss from foreclosed assets. The decline in
gain on sales of loans primarily reflected the write-off of previously recorded
gains on sales of loans which paid off during the first nine months, while the
decline in loan servicing fees was due to the amortization of servicing assets
pursuant to SFAS No. 125 which was adopted January 1, 1997.
The $149,000 or 7.1% increase in non-interest expense primarily reflected a
$77,000 increase in employee salaries and benefits, a $39,000 increase in other
noninterest expense, and a $20,000 increase in data processing costs. Employee
salaries and benefits, the largest component of non-interest expense increased
6.3% due primarily to an $87,000 or 13.5% increase in salary expense; a $22,000
increase in MRDP expense; and a $19,000 increase in payroll taxes. Those
increases were partially offset by a $60,000 decrease in ESOP expense. As stated
earlier, the increase in salary expense was necessary to remain competitive in
the local market area. MRDP expense was first incurred starting in October of
1997. Accordingly, the nine month period ended March 31, 1998 included only six
months of MRDP expense, while the nine month period ended March 31, 1999
included nine months of MRDP expense. The increase in payroll taxes primarily
reflected employer taxes on the first installment of MRDP shares vesting to
employees. The $60,000 decrease in ESOP expense primarily reflected a lower
average market price for the Company's stock. As mentioned earlier, the increase
in other noninterest expense primarily reflected management consulting fees and
the increase in data processing costs reflected system upgrades.
The $30,000 decrease in income tax expense primarily reflected decreased pre-tax
income. The Company's effective income tax rate was 37.5% for the nine months
ended March 31, 1999 compared to 36.9% for the nine months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Bank's primary sources of funds are deposits, proceeds from principal and
interest payments on loans, mortgage-backed securities, investment securities
and net operating income. While maturities and scheduled amortization of loans
and mortgage-backed securities are a somewhat predictable source of funds,
deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. The Bank utilizes advances
from the Federal Home Loan Bank (FHLB) to supplement its supply of lendable
funds. At March 31, 1999, FHLB advances totaled $18,375,000.
The Bank must maintain an adequate level of liquidity to ensure availability of
sufficient funds to support loan growth and deposit withdrawals, satisfy
financial commitments and to take advantage of investment opportunities. At
March 31, 1999 the Bank had approved loan commitments totaling $6.4 million and
had undisbursed loans in process of $8.6 million.
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Liquid funds necessary for normal daily operations are maintained in a working
checking account and a daily time account with the Federal Home Loan Bank of Des
Moines. It is the Bank's current policy to maintain adequate collected balances
in those deposit accounts to meet daily operating expenses, customer
withdrawals, and fund loan demand. Funds received from daily operating
activities are deposited on a daily basis in the checking account and
transferred, when appropriate, to the daily time account t enhance income.
At March 31, 1999, certificates of deposit amounted to $54.6 million or 75.6% of
total deposits, including $35.3 million of fixed rate certificates scheduled to
mature within twelve months. Historically, the Bank has been able to retain a
significant amount of its deposits as they mature. Management believes it has
adequate resources to fund all loan commitments from savings deposits, loan
payments, maturities of investment securities and the ability to obtain advances
from the Federal Home Loan Bank of Des Moines.
The Office of Thrift Supervision requires a thrift institution to maintain an
average daily balance of liquid assets (cash and eligible investments) equal to
at least 4% of the average daily balance of its net withdrawable deposits and
short-term borrowing. The Bank's liquidity ratio was 11.31% at March 31,1999.
The Bank consistently maintains liquidity levels in excess of regulatory
requirements, and believes this is an appropriate strategy for proper asset and
liability management.
The Office of Thrift Supervision requires institutions such as the Bank to meet
certain tangible, core, and risk-based capital requirements. Tangible capital
generally consists of stockholders' equity minus certain intangible assets. Core
capital generally consists of stockholders' equity. The risk-based capital
requirements presently address risk related to both recorded assets and
off-balance sheet commitments and obligations. The following table summarizes
the Bank's capital ratios and the ratios required by regulation (dollars in
thousands) at March 31, 1999.
Percent of Adjusted
Amount Total Assets
--------- ----------------------
(Unaudited)
Tangible capital $19,730 16.8%
Tangible capital requirement 2,353 2.0
------- ----
EXCESS $17,377 14.8%
======= ====
Core capital $19,730 16.8%
Core capital requirement 4,705 4.0
------- ----
EXCESS $15,025 12.8%
======= ====
Risk-based capital $20,594 29.9%
Risk-based capital requirement 5,508 8.0
------- ----
EXCESS $15,086 21.9%
======= ====
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YEAR 2000 ISSUE
- ---------------
The year 2000 issue concerns computer software programs which use only two
digits to identify the calendar year in date fields. Software applications
utilizing two digit date fields could produce erroneous results at the turn of
the century. The year 2000 issue presents several potential risks to the
Company.
The banking transactions of the Company's customers are processed by one or more
computer systems provided by a third-party data processing service. Failure of
one or more of those systems to function as a result of the year 2000 date
change could result in the Company's inability to properly process customer
transactions. If that were to occur, the Company could lose customers to other
financial institutions, resulting in a loss of revenue.
A number of the Company's borrowers utilize computers and computer software to
varying degrees in conjunction with the operation of their businesses. The
customers and suppliers of the businesses may utilize computers as well. Should
the Company's borrowers, or the businesses on which they depend, experience year
2000 related computer problems, such borrowers' cash flow could be disrupted,
adversely effecting their ability to repay their loans with the Company.
Concern on the part of certain depositors that the year 2000 related problems
could impair access to their deposit account balances following the year 2000
date change could result in the Company experiencing a deposit outflow prior to
December 31, 1999. Should the year 2000 related problems occur which cause any
of the Bank's systems, or the systems of the third-party service bureau upon
which the Company depends, to become inoperative, increased personnel costs
could be incurred if additional staff is required to perform functions that the
inoperative systems would have other wise performed.
Management believes it is not possible to estimate the potential lost revenue
due to the year 2000 issue, as the extent and longevity of such potential
problems cannot be predicted.
The Company has a Year 2000 Action Plan which management has used to identify
and correct Year 2000 compliance issues. The Company has reviewed all services
and operational components to identify technical and non-technical areas of
concern. Having identified these internal and external components, the Company
has replaced some of its computer hardware with Year 2000 compliant equipment.
The Company has requested third party providers to insure Year 2000 compliance
by requiring them to test their ow systems and services. All third party vendors
have identified Year 2000 issues and are compliant or are completing revisions
to systems and software to become Year 2000 complaint in the first quarter of
1999. Testing schedules have been established with each provider. The primary
service provider for the Company is Fiserv, which provides data processing
services. Fiserv has indicated that it is Year 2000 compliant. Further, the
Company has tested all of its internal computer software and has determined that
they are Year 2000 compliant.
A number of the Company's borrowers utilize computers and computer software to
varying degrees in conjunction with the operation of their businesses. Should
the Company's borrowers, or the businesses on with they depend, experience Year
2000 related computer
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problems, these borrowers may experience cash flow disruptions which could
adversely affect their ability to repay their loans to the Company. The Company
has contacted these borrowers to determine their status relating to compliance
with Year 200 issues. Responses received from these borrowers indicate that they
are aware of the Year 2000 problem and are compliant or taking the necessary
steps to be compliant. The Company is requiring new borrowers to be Year 2000
compliant before granting any extensions of credit.
The Company has developed a business resumption and contingency plan. This plan
takes into account the actions the Company will implement if there is a
disruption caused by Year 2000 related computer problems. The Company feels that
the probability of an extended disruption is unlikely. Nevertheless, the
contingency plans being developed take into account disruptions caused by the
loss utilities such as power, water or telecommunications. The Company is
preparing to handle its business transaction off-line for a short period of
time.
To date, the Company has incurred costs of approximately $106,000 relating to
the Year 2000 issue. The majority of that amount was the result of the purchase
of Year 2000 compliant hardware and software. The Company presently anticipates
that total expense relating to the Year 2000 issue will not exceed $150,000.
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FULTON BANCORP, INC AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to any material legal proceedings at
this time. From time to time the Bank is involved in various claims and legal
actions arising in the ordinary course of business.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
--------
27 -- Financial Data Schedule
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FULTON BANCORP, INC
Date May 6, 1999 By: /s/ Kermit D. Gohring
-------------------------
Kermit D. Gohring
President
Date May 6, 1999 By: /s/ Bonnie K. Smith
-------------------------
Bonnie K. Smith
Secretary - Treasurer
(Principal Accounting Officer)
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