UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001, or
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-10587
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FULTON FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2195389
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Penn Square, P.O. Box 4887 Lancaster, Pennsylvania 17604
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(Address of principal executive offices) (Zip Code)
(717) 291-2411
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value - 82,886,560 shares outstanding as of July 31,
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2001.
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1
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2001
INDEX
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Description Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
(a) Consolidated Balance Sheets -
June 30, 2001 and December 31, 2000...............................................3
(b) Consolidated Statements of Income -
Three and six months ended June 30, 2001 and 2000.................................4
(c) Consolidated Statements of Shareholders' Equity -
Six months ended June 30, 2001 and 2000...........................................5
(d) Consolidated Statements of Cash Flows -
Six months ended June 30, 2001 and 2000...........................................6
(e) Notes to Consolidated Financial Statements - June 30, 2001........................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................25
SIGNATURES...........................................................................26
2
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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(Dollars in thousands, except per-share data)
June 30 December 31
2001 2000
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ASSETS
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Cash and due from banks ..............................................................$ 245,299 $ 267,178
Interest-bearing deposits with other banks ........................................... 2,584 3,199
Federal funds sold.................................................................... 60,900 -
Mortgage loans held for sale ......................................................... 19,095 5,241
Investment securities:
Held to maturity (Fair value: $58,791 in 2001 and $83,836 in 2000) .............. 58,089 84,762
Available for sale .............................................................. 1,420,870 1,140,646
Loans, net of unearned income ........................................................ 4,808,612 4,866,767
Less: Allowance for loan losses ................................................ (62,042) (60,269)
--------------- ---------------
Net Loans ................................................... 4,746,570 4,806,498
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Premises and equipment ............................................................... 109,202 97,147
Accrued interest receivable .......................................................... 38,670 40,411
Other assets ......................................................................... 166,079 126,073
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Total Assets ................................................$ 6,867,358 $ 6,571,155
=============== ===============
LIABILITIES
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Deposits:
Noninterest-bearing .............................................................$ 890,942 $ 857,696
Interest-bearing ................................................................ 4,498,183 4,076,709
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Total Deposits .............................................. 5,389,125 4,934,405
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Short-term borrowings:
Securities sold under agreements to repurchase................................... 245,248 248,375
Federal funds purchased.......................................................... - 155,000
Demand notes of U.S. Treasury ................................................... 4,862 4,791
--------------- ---------------
Total Short-Term Borrowings ................................. 250,110 408,166
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Accrued interest payable ............................................................. 41,274 41,637
Other liabilities .................................................................... 76,674 65,638
Long-term debt ....................................................................... 381,950 441,973
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Total Liabilities ........................................... 6,139,133 5,891,819
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SHAREHOLDERS' EQUITY
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Common stock, $2.50 par; Authorized - 400 million shares; Issued - 76.5 million;
Outstanding - 76.1 million in 2001 and 75.5 million in 2000 ..................... 191,155 182,052
Capital surplus ...................................................................... 505,420 444,570
Retained earnings .................................................................... 27,456 67,201
Accumulated other comprehensive income................................................ 11,375 2,358
Treasury stock, at cost (405,000 shares in 2001 and 944,000 shares in 2000)........... (7,181) (16,845)
--------------- ---------------
Total Shareholders' Equity .................................. 728,225 679,336
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Total Liabilities and Shareholders' Equity...................$ 6,867,358 $ 6,571,155
=============== ===============
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See notes to consolidated financial statements
3
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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(Dollars in thousands, except per-share data)
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------- --------------------------------
2001 2000 2001 2000
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INTEREST INCOME
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Loans, including fees ...................................... $ 97,503 $ 94,820 $ 198,508 $ 186,188
Investment securities:
Taxable ............................................... 15,033 14,130 29,076 28,319
Tax-exempt ............................................ 2,139 2,152 4,283 4,357
Dividends ............................................. 923 1,109 2,055 2,214
Other interest income....................................... 402 157 584 301
-------------- ------------- -------------- --------------
Total Interest Income ............ 116,000 112,368 234,506 221,379
INTEREST EXPENSE
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Deposits ................................................... 43,142 39,336 87,159 76,562
Short-term borrowings ...................................... 2,619 7,008 7,923 13,264
Long-term debt ............................................. 5,114 4,186 10,395 8,595
-------------- ------------- -------------- --------------
Total Interest Expense ............ 50,875 50,530 105,477 98,421
-------------- ------------- -------------- --------------
Net Interest Income ............... 65,125 61,838 129,029 122,958
PROVISION FOR LOAN LOSSES .................................. 2,799 2,025 5,578 4,050
-------------- ------------- -------------- --------------
Net Interest Income After
Provision for Loan Losses ...... 62,326 59,813 123,451 118,908
-------------- ------------- -------------- --------------
OTHER INCOME
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Investment management and trust services.................... 6,292 5,057 12,395 9,978
Service charges on deposit accounts ........................ 7,162 5,853 13,629 11,437
Other service charges and fees ............................. 3,820 3,276 7,461 6,357
Mortgage banking income..................................... 3,157 781 4,846 1,371
Investment securities gains ................................ 3,850 2,065 7,758 4,541
-------------- ------------- -------------- --------------
Total Other Income ................ 24,281 17,032 46,089 33,684
OTHER EXPENSES
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Salaries and employee benefits ............................. 26,097 22,601 51,646 45,346
Net occupancy expense ...................................... 3,702 3,411 7,533 7,002
Equipment expense .......................................... 2,691 2,241 5,217 4,724
Data processing ............................................ 2,703 2,554 5,417 5,327
Other ...................................................... 11,663 9,116 21,572 17,310
-------------- ------------- -------------- --------------
Total Other Expenses .............. 46,856 39,923 91,385 79,709
-------------- ------------- -------------- --------------
Income Before Income Taxes ........ 39,751 36,922 78,155 72,883
INCOME TAXES................................................ 11,710 11,015 22,870 21,662
-------------- ------------- -------------- --------------
Net Income ........................ $ 28,041 $ 25,907 $ 55,285 $ 51,221
============== ============= ============== ==============
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PER-SHARE DATA:
Net income (basic).......................................... $ 0.37 $ 0.35 $ 0.73 $ 0.69
Net income (diluted)........................................ 0.37 0.35 0.73 0.68
Cash dividends ............................................. 0.170 0.152 0.322 0.288
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See notes to consolidated financial statements
4
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Accumulated
Other
Comprehen-
Common Capital Retained sive Income
(Dollars in thousands, except per-share data) Stock Surplus Earnings (Loss)
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Balance at December 31, 2000.................................... $ 182,052 $ 444,570 $ 67,201 $ 2,358
Comprehensive income:
Net income................................................. 55,285
Other - net unrealized gain on securities (net of $4.9
million tax expense)................................. 9,017
Total comprehensive income............................
Stock dividends issued - 5% (3.6 million shares)................ 9,103 61,377 (70,554)
Stock issued (532,000 shares of treasury stock)................. (527)
Cash dividends - $0.322 per share............................... (24,476)
-------------------------------------------------------------------
Balance at June 30, 2001........................................ $ 191,155 $ 505,420 $ 27,456 $ 11,375
===================================================================
Balance at December 31, 1999.................................... $ 173,392 $ 394,234 $ 75,482 $ (11,846)
Comprehensive income:
Net income................................................. 51,221
Other - net unrealized loss on securities (net of $5.4
million tax benefit)................................. (10,032)
Total comprehensive income............................
Stock dividends issued - 5% (3.6 million shares)................ 8,660 59,065 (67,796)
Stock issued (127,000 shares)................................... (771)
Acquisition of treasury stock (2.3 million shares)..............
Cash dividends - $0.288 per share............................... (20,602)
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Balance at June 30, 2000........................................ $ 182,052 $ 452,528 $ 38,305 $ (21,878)
===================================================================
Treasury
(Dollars in thousands, except per-share data) Stock Total
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Balance at December 31, 2000.................................... $ (16,845) $ 679,336
Comprehensive income:
Net income................................................. 55,285
Other - net unrealized gain on securities (net of $4.9
million tax expense)................................. 9,017
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Total comprehensive income............................ 64,302
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Stock dividends issued - 5% (3.6 million shares)................ (74)
Stock issued (532,000 shares of treasury stock)................. 9,664 9,137
Cash dividends - $0.322 per share............................... (24,476)
---------------------------------
Balance at June 30, 2001........................................ $ (7,181) $ 728,225
=================================
Balance at December 31, 1999.................................... $ (16,968) $ 614,294
Comprehensive income:
Net income................................................. 51,221
Other - net unrealized loss on securities (net of $5.4
million tax benefit)................................. (10,032)
---------------
Total comprehensive income............................ 41,189
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Stock dividends issued - 5% (3.6 million shares)................ (71)
Stock issued (127,000 shares)................................... 2,331 1,560
Acquisition of treasury stock (2.3 million shares).............. (40,434) (40,434)
Cash dividends - $0.288 per share............................... (20,602)
---------------------------------
Balance at June 30, 2000........................................ $ (55,071) $ 595,936
=================================
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See notes to consolidated financial statements
5
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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(In thousands)
Six Months Ended
June 30
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2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income........................................................................ $ 55,285 $ 51,221
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses ................................................... 5,578 4,050
Depreciation and amortization of premises and equipment ..................... 5,466 5,033
Net amortization of investment security premiums ............................ 63 262
Investment security gains ................................................... (7,758) (4,541)
Net increase in mortgage loans held for sale................................. (13,854) (2,058)
Amortization of intangible assets ........................................... 1,807 652
Decrease (increase) in accrued interest receivable .......................... 1,741 (1,736)
(Increase) decrease in other assets ......................................... (3,054) 6,346
(Decrease) increase in accrued interest payable ............................. (363) 3,881
(Decrease) increase in other liabilities..................................... (369) 1,246
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Total adjustments...................................................... (10,743) 13,135
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Net cash provided by operating activities .............................. 44,542 64,356
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale ............................. 36,256 19,814
Proceeds from maturities of securities held to maturity .......................... 28,336 19,458
Proceeds from maturities of securities available for sale ........................ 228,384 86,840
Purchase of securities held to maturity .......................................... (1,669) (618)
Purchase of securities available for sale ........................................ (513,294) (70,153)
Increase in short-term investments ............................................... (60,285) (2,090)
Net decrease (increase) in loans ................................................. 54,183 (152,825)
Net cash paid for Dearden Maguire................................................. (14,624) -
Net cash paid for acquisition of branches......................................... (28,820) -
Purchase of premises and equipment................................................ (17,521) (10,761)
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Net cash used in investing activities .................................. (289,054) (110,335)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits ...................................... 212,551 101,012
Net increase in time deposits .................................................... 242,169 22,101
Decrease in long-term debt........................................................ (60,023) (21,613)
(Decrease) increase in short-term borrowings ..................................... (158,056) 26,197
Dividends paid ................................................................... (23,071) (20,488)
Net proceeds from issuance of common stock ....................................... 9,063 1,489
Acquisition of treasury stock .................................................... - (40,434)
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Net cash provided by financing activities............................... 222,633 68,264
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Net (Decrease) Increase in Cash and Due From Banks ............................... (21,879) 22,285
Cash and Due From Banks at Beginning of Period ................................... 267,178 245,572
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Cash and Due From Banks at End of Period ......................................... $ 245,299 $ 267,857
============= =============
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest .................................................................... $ 105,840 $ 94,540
Income taxes ................................................................ 20,211 19,098
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See notes to consolidated financial statements
6
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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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 month periods ended June
30, 2001 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2001.
NOTE B - 5% Stock Dividend
The Corporation issued a 5% stock dividend on May 25, 2001. All share and
per-share information has been restated to reflect the effect of this stock
dividend.
NOTE C - Net Income Per Share
The Corporation's basic net income per share is calculated as net income divided
by the weighted average number of shares outstanding. For diluted net income per
share, net income is divided by the weighted average number of shares
outstanding plus the incremental number of shares added as a result of
converting common stock equivalents, calculated using the treasury stock method.
The Corporation's common stock equivalents consist solely of outstanding stock
options.
A reconciliation of the weighted average shares outstanding used to calculate
basic net income per share and diluted net income per share follows (in
thousands):
Three months ended Six months ended
June 30 June 30
---------------------------- ---------------------------
2001 2000 2001 2000
---- ---- ---- ----
Weighted average shares outstanding (basic)............. 75,920 73,936 75,792 74,584
Impact of common stock equivalents...................... 426 423 452 338
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Weighted average shares outstanding (diluted)........... 76,346 74,359 76,244 74,922
============= ========== ========== ==========
NOTE D - Comprehensive Income
The following table summarizes the reclassification adjustment for realized
security gains (net of taxes) for each of the indicated periods (in thousands):
2001 2000
---- ----
Unrealized holding gains (losses) arising during period.............. $ 14,060 $ (7,080)
Less: reclassification adjustment for gains included
in net income................................................ 5,043 2,952
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Net unrealized gains (losses) on securities.......................... $ 9,017 $ (10,032)
============== =============
7
NOTE E - New Accounting Standards
Business Combinations and Intangible Assets - In July, 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards Nos. 141, "Business Combinations" (Statement 141) and 142 "Goodwill
and Other Intangible Assets" (Statement 142). Statement 141 requires that the
purchase method of accounting be used for all business combinations and
eliminates the use of pooling of interests for transactions initiated subsequent
to the issuance of the statement. Statement 142 eliminates the amortization to
expense of goodwill recorded as a result of such combinations, but requires
periodic evaluation of the goodwill for impairment. Write-downs of the balance,
if necessary, are to be charged to results of operations. Goodwill existing
prior to the issuance of the statement must be amortized through December 31,
2001.
This Corporation does not expect that these statements will have a material
impact on its financial condition or results of operations for 2001. We expect
the adoption of these new accounting standards will have the impact of reducing
our amortization of goodwill beginning January 1, 2002; however, impairment
reviews may result in future periodic writedowns.
Accounting for Derivative Instruments and Hedging Activities: In June, 1998, the
FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (Statement 133). This statement
expanded the previous definition of derivatives to include certain additional
transactions. Entities are required to record derivatives at their fair values
and recognize any changes in fair value in current period earnings, unless
specific hedge criteria are met. Statement 133, as amended by Statement 137, was
effective for years beginning after June 15, 2000. The Corporation adopted
Statement 133 on January 1, 2001 and there was no material on its balance sheet,
comprehensive income or net income.
NOTE F - Acquisitions
Branch Acquisition - On June 8, 2001, the Corporation assumed $315 million of
deposits and purchased $53 million in loans in an acquisition of 18 branches
located in New Jersey, Delaware and Pennsylvania. This transaction was accounted
for as a purchase and the Corporation recorded $31.6 million of goodwill and
other intangible assets.
Dearden, Maguire, Weaver and Barrett, Inc. - On January 2, 2001, the Corporation
completed its previously announced acquisition of investment management and
advisory company Dearden, Maguire, Weaver and Barrett, Inc. (Dearden Maguire).
The acquisition was accounted for as a purchase, and goodwill of approximately
$14.4 million was recorded as the initial purchase price paid in excess of the
fair value of net assets acquired. Additional payments of up to $6.6 million may
become payable upon Dearden Maguire achieving certain revenue goals through
December 31, 2005. The goals and the dates of such payments are specified in the
purchase agreement. Upon payment of any such amounts, goodwill will be
increased.
The goodwill is being amortized to expense on a straight-line basis over 20
years. Since the acquisition was accounted for under the purchase method of
accounting, the accounts and results of operations of Dearden Maguire are not
included in the financial statements of the Corporation for periods prior to
January 2, 2001.
NOTE G - Subsequent Events
On July 1, 2001, the Corporation completed its acquisition of Drovers Bancshares
Corporation (Drovers) of York, Pennsylvania. Drovers, a $820 million bank
holding company whose primary subsidiary is the Drovers & Mechanics Bank
(Drovers Bank), operates 16 community banking offices in York County,
Pennsylvania.
8
Under the terms of the merger agreement, each of the 5.2 million shares of
Drovers common stock was exchanged for 1.302 shares of the Corporation's common
stock. In addition, each of the options to acquire Drovers stock was also
exchanged for options to purchase the Corporation's common stock. As a result of
the acquisition, Drovers was merged with and into Fulton Financial Corporation
and Drovers Bank became a wholly owned subsidiary of the Corporation.
The acquisition of Drovers was accounted for as a pooling of interests and, as
such, historical financial information of the Corporation will be restated to
include the results of Drovers. The financial statements of the Corporation
presented in this report do not include the results of Drovers as the
acquisition was consummated subsequent to June 30, 2001.
In connection with the acquisition of Drovers, the Corporation recorded merger
and restructuring expenses of approximately $7.1 million ($4.6 million, net of
tax). These expenses will be reflected in the Corporation's results of
operations for the quarter ending September 30, 2001.
NOTE H - Reclassifications
Certain amounts in the 2000 consolidated financial statements and notes have
been reclassified to conform to the 2001 presentation.
9
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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This discussion concerns Fulton Financial Corporation (the Corporation), a
financial holding company incorporated under the laws of the Commonwealth of
Pennsylvania in 1982, and its wholly-owned subsidiaries. This discussion and
analysis should be read in conjunction with the consolidated financial
statements and other financial information presented in this report.
The Corporation has made, and may continue to make, certain forward-looking
statements with respect to its management of net interest income and margin, the
ability to realize gains on equity investments, allowance and provision for loan
losses, expected levels of certain non-interest expenses and the impact of
acquisitions on future results. The Corporation cautions that these
forward-looking statements are subject to various assumptions, risks and
uncertainties. Because of the possibility of changes in these assumptions, risks
and uncertainties, actual results could differ materially from forward-looking
statements.
In addition to the factors identified herein, the following could cause actual
results to differ materially from such forward looking statements: pricing
pressures on loan and deposit products, actions of bank and nonbank competitors,
changes in local and national economic conditions, changes in regulatory
requirements and regulatory oversight of the Corporation, actions of the Federal
Reserve Board (FRB) and the Corporation'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.
MERGER AND ACQUISITION ACTIVITY
- -------------------------------
Branch Acquisition - On June 8, 2001, the Corporation assumed $315 million of
deposits and purchased $53 million in loans in an acquisition of 18 branches
located in New Jersey, Delaware and Pennsylvania. This transaction was accounted
for as a purchase and the Corporation recorded $31.6 million of goodwill and
other intangible assets.
Dearden, Maguire, Weaver and Barrett, Inc. - On January 2, 2001, the Corporation
completed its previously announced acquisition of investment management and
advisory company Dearden, Maguire, Weaver and Barrett, Inc. (Dearden Maguire).
Dearden Maguire provides investment advice to, and manages the assets of,
clients in the mid-Atlantic region. The firm has approximately $1.3 billion in
assets under management. Dearden Maguire retained its name and operates in
conjunction with Fulton Financial Advisors, N.A. (Advisors), the Corporation's
investment management and trust services subsidiary.
The acquisition was accounted for as a purchase, and goodwill of approximately
$14.4 million was recorded as the initial purchase price paid in excess of the
net assets acquired. Additional payments of up to $6.6 million may become
payable upon Dearden Maguire achieving certain revenue goals through December
31, 2005. The goals and the dates of such payments are specified in the purchase
agreement. Upon payment of any such amounts, goodwill will be increased.
The goodwill is being amortized to expense on a straight-line basis over 20
years. Since the acquisition was accounted for under the purchase method of
accounting, the accounts and results of operations of Dearden Maguire are not
included in the financial statements of the Corporation for periods prior to
January 2, 2001.
10
Skylands Financial Corporation - On August 1, 2000, the Corporation completed
its acquisition of Skylands Financial Corporation (SFC) of Hackettstown, New
Jersey. SFC's sole subsidiary, Skylands Community Bank (Skylands), had
approximately $240 million in total assets on the acquisition date. This
acquisition allowed the Corporation to expand its geographical reach into
northern New Jersey through Skylands's eight community banking offices located
in Morris, Warren and Sussex counties.
Under the terms of the merger agreement, each of the 2.5 million outstanding
shares of SFC's common stock was exchanged for 0.86 shares of the Corporation's
common stock. In addition, options to acquire shares of SFC stock were also
exchanged for options to purchase the Corporation's common stock. SFC was merged
with and into the Corporation and, as a result, Skylands became the
Corporation's third banking subsidiary located in New Jersey.
The acquisition was accounted for as a purchase, and goodwill of approximately
$17.5 million was recorded as the purchase price paid in excess of the net
assets acquired. The goodwill is being amortized to expense on a straight-line
basis over 15 years. Since the acquisition was accounted for as a purchase, the
accounts and results of operations of Skylands are included in the financial
statements of the Corporation prospectively from the August 1, 2000 acquisition
date.
RESULTS OF OPERATIONS
- ---------------------
Quarter ended June 30, 2001 versus Quarter ended June 30, 2000
- ----------------------------------------------------------------
Fulton Financial Corporation's net income for the second quarter of 2001
increased $2.1 million, or 8.2%, in comparison to net income for the second
quarter of 2000. Diluted net income per share increased $0.02, or 5.7%, compared
to 2000. Second quarter net income of $28.0 million, or $0.37 per share (basic
and diluted), represented an annualized return on average assets (ROA) of 1.71%
and an annualized return on average equity (ROE) of 15.82%. This compares to
2000 net income of $25.9 million, or $0.35 (basic and diluted -- 1.70% ROA and
17.48% ROE).
Net Interest Income
- -------------------
Net interest income is the Corporation's largest revenue source, accounting for
approximately 75% of total revenues. For the quarter, net interest income
increased $3.3 million, or 5.3%. Excluding the impact of Skylands, which added
$3.2 million during the quarter, net interest income was essentially flat,
increasing $117,000, or 0.2%. This resulted mainly from continued pressure on
the Corporation's net interest margin due to loan and deposit competition and
changes in the general interest rate environment. The following table provides a
comparative average balance sheet and net interest income analysis for the
second quarter of 2001 as compared to the same period in 2000. All dollar
amounts are in thousands.
11
Quarter Ended June 30, 2001 Quarter Ended June 30, 2000
Average Yield/ Average Yield/
ASSETS Balance Interest Rate (1) Balance Interest Rate (1)
- --------------------------------------- ------------- ------------- --------- ------------- ------------- ---------
Interest-earning assets:
Loans and leases..................... $ 4,825,671 $ 97,503 8.10% $ 4,551,173 $ 94,820 8.38%
Taxable investment securities........ 1,001,517 15,033 6.02 932,547 14,130 6.09
Tax-exempt investment securities..... 197,800 2,139 4.34 201,433 2,152 4.30
Equity securities.................... 83,553 923 4.43 86,145 1,109 5.18
Short-term investments............... 38,257 402 4.21 8,012 157 7.88
------------- ------------- ------ ------------- ------------- ------
Total interest-earning assets.......... 6,146,798 116,000 7.57 5,779,310 112,368 7.82
Noninterest-earning assets:
Cash and due from banks.............. 219,918 227,319
Premises and equipment............... 103,753 83,458
Other assets......................... 180,042 114,452
Less: Allowance for loan losses...... (61,738) (58,814)
------------- -------------
Total Assets................. $ 6,588,773 $ 6,145,725
============= =============
Interest-bearing liabilities:
Demand deposits...................... $ 661,633 $ 2,159 1.31% $ 592,875 $ 2,293 1.56%
Savings deposits..................... 1,092,530 5,237 1.92 1,036,078 6,454 2.51
Time deposits........................ 2,522,251 35,746 5.68 2,237,524 30,589 5.50
Short-term borrowings................ 269,276 2,619 3.90 488,277 7,008 5.77
Long-term debt....................... 381,975 5,114 5.37 321,164 4,186 5.24
------------- ------------- ------ ------------- ------------- ------
Total interest-bearing liabilities..... 4,927,665 50,875 4.14 50,530 4.35
Noninterest-bearing liabilities:
Demand deposits...................... 846,060 778,830
Other................................ 104,128 94,844
------------- -------------
Total Liabilities............ 5,877,853 5,549,592
Shareholders' equity................... 710,920 596,133
------------- -------------
Total Liabilities and
Shareholders' Equity....... $ 6,588,773 $ 6,145,725
============= =============
Net interest income.................... $ 65,125 $ 61,838
============= =============
Net interest margin (FTE).............. 4.37% 4.41%
------ ------
(1) Yields on tax-exempt securities are not fully taxable equivalent (FTE).
The increases in average balances from 2000 to 2001 were positively impacted
by the purchase accounting acquisition of Skylands. Approximately $176.9
million of the $274.5 million increase in average loans and $250.5 million
of the $367.5 million increase in average total interest-earning assets
resulted from the inclusion of this acquisition in the 2001 average
balances. Similarly, Skylands contributed approximately $245.4 million to
the $477.2 million increase in average deposits.
The 6.4% increase in average earning assets accounted for an interest income
increase of approximately $7.2 million. This was offset by a $3.6 million
reduction as a result of the 25 basis point decline in average yields.
Average yields decreased from the second quarter of 2000 to the second
quarter of 2001 due to a general decrease in interest rates as a result of
the actions of the FRB. The prime lending rate averaged 9.27% during the
second quarter of 2000, dropping to an average of 7.27% during the same
period in 2001. While changes in index rates have an immediate effect only
on floating rate loans, the impact was evident as the average yield on loans
declined 28 basis points to 8.10%.
The Corporation's average loan portfolio grew by approximately $274.5
million, or 6.0%. Excluding Skylands, the increase was a more modest $97.6
million, or 2.1%, as increases in commercial mortgages ($101.6 million, or
8.1%) and commercial loans ($85.3 million, or 7.8%) were offset by decreases
in
12
consumer loans ($51.5 million, or 4.1%) and residential mortgages ($48.4
million, or 5.4%). The consumer loan decline resulted from runoff of the
indirect auto portfolio while the residential mortgage decline resulted from
refinance activity as new fixed rate mortgages were sold in the secondary
market.
Average investment securities, excluding unrealized gains and losses, increased
$62.7 million, or 5.1%. This reflects the investment of excess funds as loan
growth was somewhat slower than the increase in funding sources. New investments
were made primarily in mortgage-backed securities.
The $251.7 million, or 5.4%, increase in average interest-bearing liabilities
resulted in a $2.8 million increase in interest expense. This was offset by a
$2.5 million decrease caused by the 21 basis point decline in the average cost
of interest-bearing funds. Strong average interest-bearing deposit growth of
$409.9 million, or 10.6% ($210.3 million, or 5.4%, excluding Skylands), allowed
the Corporation to reduce its reliance on short- term borrowings. Such
borrowings decreased $219.0 million, or 44.9%. Time deposits accounted for the
majority of the average growth, increasing $284.7 million, or 12.7%. This was
supplemented by increases in less costly interest-bearing demand and savings
deposits ($125.2 million, or 7.9% increase) as well as noninterest-bearing
demand deposits ($67.2 million, or 8.6% increase).
Both the average yield on earning assets and the cost of interest-bearing
liabilities decreased at similar rates during the period. This allowed the
Corporation to minimize the decline in its net interest margin, which fell only
four basis points to 4.37% in 2001 from 4.41% in 2000. The Corporation continues
to manage its asset/liability position and interest rate risk through the
methods discussed in the "Market Risk" section of this document. Management
believes that these procedures have been effective in managing the net interest
margin during this period of decreasing rates.
The acquisition of 18 branches occurred on June 8, 2001 and did not have a
meaningful impact on the average quarterly balances. However, the acquisition of
$315 million in deposits allowed the Corporation to reduce its reliance on
short-term borrowings and has been beneficial in managing its overall interest
rate risk.
Provision and Allowance for Loan Losses
- ---------------------------------------
The following table summarizes loans outstanding (including unearned income) as
of the dates shown:
June 30 December 31 June 30
2001 2000 2000
---------------- ---------------- ----------------
(in thousands)
Commercial, financial and agricultural............. $ 1,276,590 $ 1,219,845 $ 1,075,286
Real estate - construction......................... 230,084 223,575 201,268
Real estate - residential mortgage................. 1,291,082 1,424,274 1,367,818
Real estate - commercial mortgage.................. 1,248,523 1,215,000 1,124,319
Consumer .......................................... 688,994 709,985 739,484
Leasing and other.................................. 85,584 87,004 74,485
Unearned income.................................... (12,245) (12,916) (10,829)
---------------- ---------------- ----------------
Total Loans..................................... $ 4,808,612 $ 4,866,767 $ 4,571,831
================ ================ ================
13
The following table summarizes the activity in the Corporation's allowance for
loan losses:
Three Months Ended
June 30
-------------------------------------
2001 2000
--------------- ---------------
(dollars in thousands)
Loans outstanding at end of period (net of unearned)............... $ 4,808,612 $ 4,571,831
=============== ===============
Daily average balance of loans and leases.......................... $ 4,825,671 $ 4,551,173
=============== ===============
Balance of allowance for loan losses
at beginning of period........................................ $ 60,357 $ 58,034
Loans charged-off:
Commercial, financial and agricultural......................... 2,335 1,268
Real estate - mortgage......................................... 122 282
Consumer....................................................... 1,671 1,571
Leasing and other.............................................. 179 87
--------------- ---------------
Total loans charged-off........................................ 4,307 3,208
--------------- ---------------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural......................... 229 689
Real estate - mortgage......................................... 91 52
Consumer....................................................... 754 675
Leasing and other.............................................. 34 13
--------------- ---------------
Total recoveries............................................... 1,108 1,429
--------------- ---------------
Net loans charged-off.............................................. 3,199 1,779
Allowance purchased (Branch Acquisition)........................... 2,085 -
Provision for loan losses.......................................... 2,799 2,025
--------------- ---------------
Balance at end of period........................................... $ 62,042 $ 58,280
=============== ===============
Net charge-offs to average loans (annualized)...................... 0.27% 0.16%
=============== ===============
Allowance for loan losses to loans outstanding..................... 1.29% 1.27%
=============== ===============
The following table summarizes the Corporation's non-performing assets as of the
indicated dates.
June 30 Dec. 31 June 30
(Dollars in thousands) 2001 2000 2000
------------------ --------------- ----------------
Nonaccrual loans..................................... $ 20,598 $ 19,465 $ 17,138
Loans 90 days past due and accruing.................. 9,989 7,127 8,541
Other real estate owned (OREO)....................... 1,573 931 892
------------------ --------------- ----------------
Total non-performing assets.......................... $ 32,160 $ 27,523 $ 26,571
================== =============== ================
Non-performing loans/Total loans..................... 0.64% 0.55% 0.56%
Non-performing assets/Total assets................... 0.47% 0.42% 0.43%
Non-performing assets/Total loans and OREO........... 0.67% 0.57% 0.58%
Allowance/Non-performing loans....................... 202.3% 226.6% 227.0%
Additions to the allowance for loan losses are charged to income through the
provision for loan losses when, in the opinion of management and based on
internal credit quality reviews and analyses, it is believed that the allowance
is not adequate to absorb the losses inherent in the portfolio. Management
14
considers various factors in completing its analyses, assessing the adequacy of
the allowance for loan losses and determining the provision for the period.
Among these are charge-off history and trends, risk classification of
significant credits, adequacy of collateral, the mix and risk characteristics of
loan types in the portfolio, and the balance of the allowance relative to total
and nonperforming loans. Additional consideration is given to local and national
economic conditions. The Corporation's policy is individually applied to each of
its subsidiary bank and resulting provisions and allowances are aggregated for
consolidated financial reporting.
For the second quarter of 2001, net charge-offs totaled $3.2 million, or 0.27%
of average loans on an annualized basis. This compares to $1.8 million, or
0.16%, for the second quarter of 2000. The increase was attributable mainly to
commercial loans, as other loan categories remained consistent with 2000.
Non-performing loans, including loans 90 days past due and still accruing, to
total loans were 0.64% at June 30, 2001 as compared to 0.55% at December 31,
2001 and 0.56% at June 31, 2000.
Recent economic conditions have impacted asset quality for the Corporation and
banks in general. While this has resulted in moderate increases in the
Corporation's net charge-offs and non-performing assets, these levels continue
to be favorable in comparison to the industry as a whole.
The provision for loan losses increased $774,000, or 38.2%, to $2.8 million in
2001. This increase occurred to support the growth in the loan portfolio and to
account for the economic factors that have influenced overall asset quality. The
total provision for the quarter was $400,000 less than net charge-offs for the
period, however, $1.6 million of the commercial loan charge-offs were provided
for in prior periods.
The Corporation's periodic loan portfolio review and allowance calculation
resulted in an unallocated allowance for loan losses of 28% at June 30, 2001, as
compared to 28% at June 30, 2000 and 30% at December 31, 2000. Management
believes that the allowance balance of $61.9 million is sufficient to cover
losses incurred in the loan portfolio and appropriate based on applicable
accounting standards.
Other Income
- ------------
Other income for the quarter ended June 30, 2001 was $24.3 million, an increase
of $7.2 million, or 42.6%, over the comparable period in 2000. Excluding
investment security gains, which increased from $2.1 million in 2000 to $3.9
million in 2001, other income increased $5.5 million, or 36.5%. Skylands did not
contribute significantly to the increase in other income.
The most significant increase, in terms of percentage growth, was realized in
mortgage banking income, which increased $2.4 million, or 304.2%, to $3.2
million. With relatively low mortgage rates in place during the quarter, many
consumers refinanced to lower rate loans. The Corporation sold all qualifying
fixed rate mortgage loans it originated during the quarter in order to limit
interest rate risk, resulting in an increase in mortgage sale gains of $1.7
million. In addition, the Corporation sold a portfolio of seasoned loans to
further reduce interest rate risk, resulting in additional gains totaling $1.0
million.
Investment management and trust services income also showed strong growth, with
an increase of $1.2 million, or 24.4%, mainly as a result of the Dearden Maguire
acquisition. Service charges on deposit accounts increased $1.3 million, or
22.4%, as deposit balances grew during the period. Other service charges also
realized a moderate increase of $544,000, or 16.6%, reflecting the Corporation's
goal of increasing non-interest revenues.
Other Expenses
- --------------
Total other expenses for the second quarter of 2001 of $46.9 million increased
$6.9 million, or 17.4%, from 2000. The acquisitions of Skylands and Dearden
Maguire contributed $2.8 million to the increase. Excluding these amounts, other
expenses increased $4.1 million, or 10.3%. The Corporation's efficiency ratio,
which is the ratio of noninterest expense to fully taxable equivalent revenues
(excluding security gains), increased to 53.6% in 2001 from 50.8% in 2000.
15
Salaries and employee benefits increased $3.5 million, or 15.5%, in comparison
to the second quarter of 2000 ($2.3 million, or 10.2%, excluding Skylands and
Dearden Maguire). The increase is attributable to the continued growth of the
Corporation and the resulting expansion of its employee base. In addition,
normal merit increases and additional overtime and part time expense to assist
in recent systems conversions also contributed to the increase. The employee
benefits component of the expense increased $595,000, or 17.6%, due to rising
health plan and retirement plan expenses.
Net occupancy and equipment expenses increased $291,000, or 8.5%, and $450,000,
or 20.1%, respectively. These increases resulted from the addition of Skylands,
the construction of a new data processing center at an affiliate bank, and the
completion of the construction of the new office space at the Corporation's main
office location.
Data processing expense rose a moderate $149,000, or 5.8% as the benefits from
its renegotiated outside data processing services contract were offset by
increased processing costs due to acquisitions and conversions. Other expense
increased $2.5 million, or 27.9%, to $11.7 million in 2001. Excluding Skylands
and Dearden Maguire, the increase was $1.3 million, or 14.4%, and resulted from
the Corporation's growth.
Income Taxes
- ------------
Income tax expense for the second quarter of 2001 was $11.7 million, a $695,000,
or 6.3%, increase from $11.0 million in 2000. The Corporation's effective tax
rate was approximately 29.5% in 2001 as compared to 29.8% in 2000. The effective
rate is lower than the federal statutory rate of 35% due mainly to investments
in tax-free municipal securities and federal tax credits from investments in low
and moderate income housing partnerships.
Six Months ended June 30, 2001 versus Six Months ended June 30, 2000
- --------------------------------------------------------------------
Fulton Financial Corporation's net income for the first six months of 2001
increased $4.1 million, or 7.9%, in comparison to net income for the same period
in 2000. Diluted net income per share increased $0.05, or 7.4%, compared to
2000. Net income for the first six months of 2001 of $55.3 million, or $0.73 per
share (basic and diluted), represented an ROA of 1.70% and an ROE of 15.96%.
This compares to 2000 net income of $51.2 million, or $0.69 per share (basic)
and $0.68 per share (diluted -- 1.69% ROA and 17.02% ROE).
Net Interest Income
- -------------------
For the first six months of 2001, net interest income increased $6.1 million, or
4.9%. Excluding the impact of Skylands, which added $6.4 million during the
period, net interest income decreased $285,000, or 0.2%. The following table
provides a comparative average balance sheet and net interest income analysis
for the first six months of 2001 as compared to the same period in 2000. All
dollar amounts are in thousands.
16
Six Months Ended June 30, 2001 Six Months Ended June 30, 2000
---------------------------------------- ----------------------------------------
Average Yield/ Average Yield/
ASSETS Balance Interest Rate (1) Balance Interest Rate (1)
- --------------------------------------- ------------- ------------- -------- ------------- ------------- --------
Interest-earning assets:
Loans and leases..................... $ 4,848,138 $ 198,508 8.26% $ 4,509,845 $ 186,188 8.30%
Taxable investment securities........ 957,190 29,076 6.13 938,005 28,319 6.07
Tax-exempt investment securities..... 198,379 4,283 4.35 202,778 4,357 4.32
Equity securities.................... 83,612 2,055 4.96 85,422 2,214 5.21
Short-term investments............... 25,094 584 4.69 8,501 301 7.12
Total interest-earning assets.......... -------------- ------------- -------- ------------- ------------- --------
6,112,413 234,506 7.74 5,744,551 221,379 7.75
Noninterest-earning assets:
Cash and due from banks.............. 221,089 226,553
Premises and equipment............... 101,799 82,004
Other assets......................... 172,718 118,475
Less: Allowance for loan losses...... (61,496) (58,645)
------------- -------------
Total Assets................. $ 6,546,523 $ 6,112,938
------------- -------------
Interest-bearing liabilities:
Demand deposits...................... $ 639,548 $ 2,159 1.40% $ 588,175 $ 4,429 1.51%
Savings deposits..................... 1,070,014 5,237 2.16 1,028,185 12,473 2.44
Time deposits........................ 2,481,379 79,763 5.79 2,227,685 59,660 5.39
Short-term borrowings................ 337,559 7,923 4.73 483,360 13,264 5.52
Long-term debt....................... 391,909 10,395 5.35 330,928 8,595 5.22
------------- ------------- -------- ------------- ------------- --------
Total interest-bearing liabilities..... 4,920,409 105,477 4.32 4,658,333 98,421 4.25
Noninterest-bearing liabilities:
Demand deposits...................... 822,568 754,727
Other................................ 105,162 94,601
------------- -------------
Total Liabilities............ 5,848,139 5,507,661
Shareholders' equity................... 698,384 605,277
------------- -------------
Total Liabilities and
Shareholders' Equity....... $ 6,546,523 $ 6,112,938
============= =============
Net interest income.................... $ 129,029 $ 122,958
============= =============
Net interest margin (FTE).............. 4.36% 4.42%
======== ========
(1) Yields on tax-exempt securities are not fully taxable equivalent (FTE).
The Skylands acquisition accounted for approximately $176.3 million of the
$338.3 million increase in average loans and $247.2 million of the $367.9
million increase in average interest-earning assets. Skylands accounted for
$240.8 million of the $414.7 million increase in total average deposits.
The $13.1 million increase in interest income resulted almost entirely from
the 6.4% increase in average earning assets, as average yields remained
virtually unchanged at 7.74% for the first six months of 2001 as compared to
7.75% in 2000. Although the average yield was consistent, during the first
six months of 2001 rates were generally decreasing, while 2000 saw a
steadily increasing rate environment.
The Corporation's average loan portfolio grew by approximately $338.3
million, or 7.5%. Excluding Skylands, the increase was $162.0 million, or
3.6%. As was the case with the second quarter, growth in commercial
mortgages ($116.7 million, or 9.5%) and commercial loans ($89.6 million, or
8.2%) was offset by declines in consumer loans ($39.5 million, or 3.2%) and
residential mortgages ($18.4 million, or 2.1%).
The $262.1 million, or 5.6%, increase in average interest-bearing
liabilities resulted in a $5.5 million increase in interest expense while
the seven basis point increase in the average costs of funds accounted for
the remaining $1.5 million increase. Strong average interest-bearing deposit
growth of $346.9 million, or
17
9.0% ($151.4 million, or 3.9%, excluding Skylands), contributed to a decrease in
short-term borrowings of $145.9 million, or 30.2%.
With the average yield on earning assets remaining flat and the cost of
interest-bearing liabilities increasing slightly, the Corporation's net interest
margin decreased a moderate six basis points, to 4.36% in 2001 from 4.42% in
2000.
Provision for Loan Losses
- -------------------------
The following table summarizes the activity in the Corporation's allowance for
loan losses:
Six Months Ended
June 30
-------------------------------------
2001 2000
--------------- ---------------
(dollars in thousands)
Loans outstanding at end of period (net of unearned)............... $ 4,808,612 $ 4,571,831
=============== ===============
Daily average balance of loans and leases.......................... $ 4,848,138 $ 4,509,845
=============== ===============
Balance of allowance for loan losses
at beginning of period........................................ $ 60,269 $ 57,631
Loans charged-off:
Commercial, financial and agricultural......................... 4,051 2,084
Real estate - mortgage......................................... 356 631
Consumer....................................................... 3,397 3,348
Leasing and other.............................................. 333 180
--------------- ---------------
Total loans charged-off........................................ 8,137 6,243
--------------- ---------------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural......................... 371 1,065
Real estate - mortgage......................................... 280 340
Consumer....................................................... 1,557 1,423
Leasing and other.............................................. 39 14
--------------- ---------------
Total recoveries............................................... 2,247 2,842
--------------- ---------------
Net loans charged-off.............................................. 5,890 3,401
Allowance purchased (Branch acquisition)........................... 2,085 -
Provision for loan losses.......................................... 5,578 4,050
--------------- ---------------
Balance at end of period........................................... $ 62,042 $ 58,280
=============== ===============
Net charge-offs to average loans (annualized)...................... 0.24% 0.15%
=============== ===============
Allowance for loan losses to loans outstanding..................... 1.29% 1.27%
=============== ===============
Refer to the "Provision for Loan Losses" section of Management's Discussion of
the second quarter results of operations for a summary of the Corporation's
process for establishing the provision and allowance for loan losses. For the
first six months of 2001, net charge-offs totaled $5.9 million, or 0.24%, of
average loans on an annualized basis. This compares to $3.4 million, or 0.15%,
for the first half of 2000 and 0.19% for all of 2000. Non-performing loans,
including loans 90 days past due and still accruing, to total loans were 0.64%
at June 30, 2001 as compared to 0.55% at December 31, 2000 and 0.56% at June 30,
2000.
18
The provision for loan losses of $5.6 million for the first half of 2001
increased $1.5 million, or 37.7%, in comparison to 2000. This increase was due
to the growth in the loan portfolio and economic conditions causing moderate
increases in net charge-offs and non-performing assets.
Other Income
- ------------
Other income for the six months ended June 30, 2001 was $46.1 million. This was
an increase of $12.4 million, or 36.8%, over the comparable period in 2000.
Excluding investment security gains, which increased $3.2 million, or 70.8%, to
$7.8 million in 2001, other income increased $9.2 million, or 31.5%. The most
significant increase, $3.5 million, or 253.5%, was realized in mortgage banking
income as a result relatively low interest rates and sales of refinanced fixed
rate mortgage loans in the secondary market.
Investment management and trust services income increased $2.4 million, or
24.2%, mainly due to the addition of Dearden Maguire. Service charges on deposit
accounts increased $2.2 million, or 19.2%, as a result of growth in transaction
accounts and changes in service charge fee structures. Other service charges and
fees increased $1.1 million, or 17.4%.
Other Expenses
- --------------
Total other expenses for the first six months of 2001 were $91.4 million, an
$11.7 million, or 14.6%, increase over the same period in 2000. The acquisitions
of Skylands and Dearden Maguire contributed approximately $5.6 million to the
increase. Excluding these amounts, other expenses increased $6.1 million, or
7.7%. The Corporation's efficiency ratio, which is the ratio of noninterest
expense to fully taxable equivalent revenues (excluding security gains),
increased to 53.5% in 2001 from 51.2% in 2000.
Salaries and employee benefits increased $6.3 million, or 13.9%, in comparison
to the first half of 2000 ($3.9 million, or 8.0%, excluding Skylands and Dearden
Maguire). Of this increase, $1.6 million was attributable to employee benefits,
which rose 24.1% due to increases in the cost of health insurance and retirement
benefits. Salary expense increased $2.3 million, or 5.6%, due to growth in the
employee base and normal merit increases.
Net occupancy and equipment expenses increased $531,000, or 7.6%, and $493,000,
or 10.4%, respectively. These increases resulted from the addition of Skylands,
the construction of a new data processing center at an affiliate bank, and the
completion of the construction of the new office space at the Corporation's main
office location.
Data processing expense increased only $90,000, or 1.7%, as the benefits from
its renegotiated outside data processing services contract were offset by
increased processing costs due to acquisitions and conversions. Other expense
increased $4.3 million, or 24.6%, to $21.6 million in 2001. Excluding Skylands
and Dearden Maguire, the increase was $1.9 million, or 10.1%.
Income Taxes
- ------------
Income tax expense for the six months ended June 30, 2001 was $22.9 million, a
$1.2 million, or 5.6%, increase from $21.7 million in 2000. The Corporation's
effective tax rate was approximately 29.3% in 2001 as compared to 29.7% in 2000.
The effective rate is lower than the federal statutory rate of 35% due mainly to
investments in tax-free municipal securities and federal tax credits from
investments in low and moderate income housing partnerships.
FINANCIAL CONDITION
- -------------------
At June 30, 2001, the Corporation had total assets of $6.9 billion, reflecting
an increase of $296.2 million, or 4.5%, from December 31, 2000. The increase was
realized mainly in investment securities as growth in funding sources exceeded
overall loan demand. Balance sheet changes for the first six months of 2001 were
19
largely influenced by the June branch acquisition which brought $223 million in
net funds to the Corporation.
Loans decreased by $58.2 million, or 1.2%, to $4.8 billion at June 30, 2001.
Commercial loans increased $56.7 million, or 4.7%, and commercial mortgages
increased $33.5 million, or 2.8%. Offsetting this growth, however, was a $133.2
million, or 9.4% decline in the residential mortgage portfolio. With a
relatively low interest rate environment during the first six months of the
year, many borrowers refinanced to lower fixed rates. Such loans are sold by the
Corporation in the secondary market to reduce interest rate risk. In addition,
the Corporation sold approximately $98 million of existing fixed rate mortgages
to further reduce its interest rate risk.
Investment securities increased $253.6 million, or 20.7% as securities purchases
of $515.5 million exceeded proceeds from maturities and sales of $293.0 million.
Funds were available to invest as a result of loans showing a net decrease for
the period.
Premises and equipment increased $12.1 million, or 12.4%, due to the
construction of a new building at the Corporation's headquarters location. Other
assets increased $39.8 million, or 31.6%, as a result of intangible assets
recorded in connection with the branch acquisition ($30.9 million) and the
Dearden Maguire acquisition ($14.4 million).
The branch acquisition contributed $290.6 million of deposits to the total
increase of $454.7 million, or 9.2%. Overall, the mix of deposit growth was
evenly distributed by type. Time deposits ($242.2 million, or 10.2% increase),
interest-bearing demand deposits ($75.3 million, or 11.7% increase) and savings
deposits ($104.0, or 9.9% increase) each experienced significant increases.
With funds available as a result of the increase in deposits and the net
decrease in loans, the Corporation was able to reduce its reliance on short-term
borrowings during the first half of 2001. Federal funds purchased were reduced
to zero ($155 million decrease) and the Corporation became a seller of funds,
with balances totaling $60.9 million at June 30, 2001. The Corporation also
reduced its long-term debt by $60.0 million, or 13.6%. Other liabilities
increased $11.0 million, or 16.8%, due to investment securities purchases which
settled subsequent to June 30, 2001.
Capital Resources
- -----------------
Total shareholders' equity increased $48.9 million, or 7.2%, during the first
six months of 2001. This increase was due to net income of $55.3 million, a $9.0
million improvement in the net unrealized gain on investment securities and $9.1
million in issuances of stock. These increases were offset by $24.5 million in
cash dividends to shareholders. In addition, the Corporation did not have any
stock repurchase plans in place during the first six months and, consequently,
no shares were repurchased.
Common stock, capital surplus and retained earnings were also adjusted during
the quarter for the impact of the 5% stock dividend paid on May 25, 2001. See
Note B to the financial statements.
Current capital guidelines measure the adequacy of a bank holding company's
capital by taking into consideration the differences in risk associated with
holding various types of assets as well as exposure to off-balance sheet
commitments. The guidelines call for a minimum risk-based Tier I capital
percentage of 4.0% and a minimum risk-based total capital percentage of 8.0%.
Tier I capital includes common shareholders' equity less goodwill and
non-qualified intangible assets. Total capital includes all Tier I capital
components plus the allowance for loan losses.
The Corporation is also subject to a "leverage capital" requirement, which
compares capital (using the definition of Tier I capital) to total balance sheet
assets and is intended to supplement the risk based capital ratios in measuring
capital adequacy. The minimum acceptable leverage capital ratio is 3.0% for
institutions
20
such as the Corporation which are highly-rated in terms of safety and soundness.
Other institutions are expected to maintain capital levels at least one or two
percent above the minimum.
As of June 30, 2001, the Corporation and each of its subsidiaries met the
minimum capital requirements. In addition, the Corporation and each of its
subsidiaries' capital ratios exceeded the amounts required to be considered
"well-capitalized" as defined in the regulations.
MARKET RISK
- -----------
Market risk is the exposure to economic loss that arises from changes in the
values of certain financial instruments. The types of market risk exposures
generally faced by banking entities include interest rate risk, equity market
price risk, foreign currency risk and commodity price risk. Due to the nature of
its operations, only equity market price risk and interest rate risk are
significant to the Corporation.
Equity Market Price Risk
- ------------------------
Equity market price risk is the risk that changes in the values of equity
investments could have a material impact on the financial position or results of
operations of the Corporation. The Corporation's equity investments consist of
common stocks of publicly traded financial institutions (cost basis of
approximately $50.6 million) and U.S. Government agency stock (cost basis of
approximately $29.9 million). The Corporation's financial institutions stock
portfolio had net unrealized gains of approximately $9.2 million at June 30,
2001.
Although the book value of equity investments accounted for only 1.4% of the
Corporation's total assets, the unrealized gains on the portfolio represent a
potential source of revenue. The Corporation has a history of periodically
realizing gains from this portfolio and, if values were to decline
significantly, this revenue source could be lost.
The Corporation manages its equity market price risk by investing primarily in
regional financial institutions. Management continuously monitors the fair value
of its equity investments and evaluates current market conditions and operating
results of the companies. Periodic sale and purchase decisions are made based on
this monitoring process..........None of the Corporation's equity securities are
classified as trading. Future cash flows from these investments are not provided
in the "Interest Rate Sensitivity" table on the following page since none have
maturity dates.
Interest Rate Risk
- ------------------
Interest rate risk creates exposure in two primary areas. First, changes in
rates have an impact on the Corporation's liquidity position and could affect
its ability to meet obligations and continue to grow. Second, movements in
interest rates can create fluctuations in the Corporation's net income and
changes in the economic value of its equity.
The Corporation employs various management techniques to minimize its exposure
to interest rate risk. An Asset/Liability Management Committee (ALCO),
consisting of key financial and senior management personnel, meets on a weekly
basis. The ALCO is responsible for reviewing the interest rate sensitivity
position of the Corporation, approving asset and liability management policies,
and overseeing the formulation and implementation of strategies regarding
balance sheet positions and earnings. The primary goal of asset/liability
management is to address the liquidity and net income risks noted above.
From a liquidity standpoint, the Corporation must maintain a sufficient level of
liquid assets to meet the ongoing cash flow requirements of customers, who, as
depositors, may want to withdraw funds or who, as borrowers, need credit
availability. Liquidity sources are found on both sides of the balance sheet.
Liquidity is provided on a continuous basis through scheduled and unscheduled
principal reductions and
21
interest payments on outstanding loans and investments. Liquidity is also
provided through the availability of deposits and borrowings.
The following table provides information about the Corporation's interest rate
sensitive financial instruments. The table provides expected cash flows and
weighted average rates for each significant interest rate sensitive financial
instrument, by expected maturity period. None of the Corporation's financial
instruments are classified as trading.
22
FULTON FINANCIAL CORPORATION
INTEREST RATE SENSITIVITY
(dollars in thousands) Expected Maturity Period
-----------------------------------------------------------------------------------------------
(less than) (greater than)
1 Year 1-2 Years 2-3 Years 3-4 Years 4-5 Years 5 Years
------------- ------------- ------------- ------------- ------------- -------------
Fixed rate loans (1) $ 891,832 $ 614,738 $ 477,259 $ 292,184 $ 204,588 $ 658,669
Average rate (1) 7.74% 8.03% 8.04% 8.09% 8.08% 7.69%
Floating rate loans (2) 562,861 198,941 145,701 129,198 103,022 529,619
Average rate 7.72% 7.85% 8.02% 8.08% 7.21% 7.27%
Fixed rate investments (3) 272,326 252,371 260,117 143,573 127,830 311,134
Average rate 5.78% 6.23% 6.14% 6.10% 6.00% 5.72%
Floating rate investments (3) 50 - 1,000 - - 12,548
Average rate 7.52% - 5.55% - - 6.37%
Other interest-earning assets 82,579 - - - - -
Average rate 3.51% - - - - -
----------------------------------------------------------------------------------------------
Total $ 1,809,648 $ 1,066,050 $ 884,077 $ 564,955 $ 435,440 $ 1,511,970
Average rate 7.25% 7.57% 7.47% 7.58% 7.26% 7.13%
----------------------------------------------------------------------------------------------
Fixed rate deposits (4) $ 1,895,951 $ 447,525 $ 106,785 $ 73,954 $ 24,990 $ 15,195
Average rate 5.49% 5.66% 5.53% 5.94% 5.72% 5.39%
Floating rate deposits (5) 697,583 136,375 131,265 131,265 131,265 1,596,972
Average rate 2.41% 0.78% 0.74% 0.74% 0.74% 0.60%
Fixed rate borrowings (6) 78,371 485 67,780 280 73,280 161,754
Average rate 4.58% 5.95% 5.05% 5.76% 6.36% 5.60%
Floating rate borrowings (7) 250,110 - - - - -
Average rate 3.43% - - - - -
----------------------------------------------------------------------------------------------
Total $ 2,922,015 $ 584,385 $ 305,830 $ 205,499 $ 229,535 $ 1,773,921
Average rate 4.55% 4.52% 3.37% 2.62% 3.08% 1.10%
----------------------------------------------------------------------------------------------
FULTON FINANCIAL CORPORATION
INTEREST RATE SENSITIVITY
(dollars in thousands) Estimated
Total Fair Value
---------------- --------------
Fixed rate loans (1) $ 3,139,270 $ 3,213,760
Average rate (1) 7.89%
Floating rate loans (2) 1,669,342 1,652,174
Average rate 7.62%
Fixed rate investments (3) 1,367,351 1,375,347
Average rate 5.96%
Floating rate investments (3) 13,598 13,796
Average rate 6.31%
Other interest-earning assets 82,579 82,579
Average rate 3.51%
-------------------------------
Total $ 6,272,140 $ 6,337,656
Average rate 7.33%
-------------------------------
Fixed rate deposits (4) $ 2,564,400 $ 2,599,019
Average rate 5.54%
Floating rate deposits (5) 2,824,725 2,824,631
Average rate 1.08%
Fixed rate borrowings (6) 381,950 381,445
Average rate 5.44%
Floating rate borrowings (7) 250,110 250,110
Average rate 3.43%
-------------------------------
Total $ 6,021,185 $ 6,055,205
Average rate 3.35%
-------------------------------
Assumptions:
1) Amounts are based on contractual payments and maturities, adjusted for
expected prepayments.
2) Average rates are shown on a fully taxable equivalent basis using an
effective tax rate of 35%.
3) Amounts are based on contractual maturities, adjusted for expected
prepayments on mortgage-backed securities, and expected calls on other
securities.
4) Amounts are based on contractual maturities of time deposits.
5) Money market and Super NOW deposits are shown in first year. NOW and
savings accounts are spread based on history of deposit flows.
6) Amounts are based on contractual maturities of Federal Home Loan Bank
advances.
7) Amounts are Federal funds purchased and securities sold under agreements
to repurchase, which mature in less than 90 days.
23
The Corporation uses three complementary methods to measure and manage interest
rate risk. They are static gap analysis, simulation of earnings, and estimates
of economic value of equity. Using these measurements in tandem provides a
reasonably comprehensive summary of the magnitude of interest rate risk in the
Corporation, level of risk as time evolves, and exposure to changes in interest
rate relationships.
Static gap provides a measurement of repricing risk in the Corporation'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 June 30, 2001 was 1.00.
Simulation of net interest income and of net income is performed for the next
twelve-month period. A variety of interest rate scenarios is used to measure the
effects of sudden and gradual movements upward and downward in the yield curve.
These results are compared to the results obtained in a flat or unchanged
interest rate scenario. Simulation of earnings is used primarily to measure the
Corporation's short-term earnings exposure to rate movements. The Corporation's
policy limits the potential exposure of net interest income to 10% of the base
case net interest income for every 100 basis point "shock" in interest rates. A
"shock' is an immediate upward or downward movement of interest rates across the
yield curve based upon changes in the prime rate. At June 30, 2001 the
Corporation had a larger exposure to downward rate shocks, with net interest
income at risk of loss over the next twelve months of 2%, 3% and 6% where
interest rates are shocked downward by 100, 200 and 300 basis points,
respectively.
Economic value of equity estimates the discounted present value of asset cash
flows and liability cash flows. Discount rates are based upon market prices for
like assets and liabilities. Upward and downward shocks of interest rates are
used to determine the comparative effect of such interest rate movements
relative to the unchanged environment. This measurement tool is used primarily
to evaluate the longer term repricing risks and options in the Corporation's
balance sheet. A policy limit of 10% of economic equity may be at risk for every
100 basis point "shock" movement in interest rates. As of June 30, 2001, upward
shocks of 100, 200 or 300 basis points were estimated to have negative effects
upon economic value of 3%, 6%, and 9%, respectively.
24
PART II -- OTHER INFORMATION
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits -- The following is a list of the exhibits required by
Item 601 of Regulation S-K and filed as part of this report:
(1) Articles of incorporation, as amended and restated, and Bylaws
of Fulton Financial Corporation, as amended - Incorporated by
reference from Exhibit 3 of the Fulton Financial Corporation
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.
(2) Instruments defining the right of securities holders,
including indentures:
(a) Rights Agreement dated June 20, 1989, as amended and
restated on April 27, 1999 between Fulton Financial
Corporation and Fulton Bank - Incorporated by reference
from Exhibit 1 of the Fulton Financial Corporation Current
Report on Form 8-K dated April 27, 1999.
(3) Material Contracts - Executive Compensation Agreements and
Plans:
(a) Severance Agreements entered into between Fulton Financial
and: Rufus A. Fulton, Jr., as of April 17, 1984; R. Scott
Smith, Jr., as of May 17, 1988; Richard J Ashby, Jr., as
of May 17, 1988; and Charles J. Nugent, as of November 19,
1992 - Incorporated by reference from Exhibit 10(a) of the
Fulton Financial Corporation Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.
(b) Incentive Stock Option Plan adopted September 19, 1995 -
Incorporated by reference from Exhibit A of Fulton
Financial Corporation's 1996 Proxy Statement.
(b) Reports on Form 8-K:
(1) Form 8-K dated July 13, 2001 reporting the consummation of the
Agreement and Plan of Merger by and between Fulton Financial
Corporation and Drovers Bankshares Corporation.
25
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 10, 2001 /s/ Rufus A. Fulton, Jr.
------------------------------- ---------------------------------
Rufus A. Fulton, Jr.
Chairman and
Chief Executive Officer
Date: August 10, 2001 /s/ Charles J. Nugent
------------------------------- ---------------------------------
Charles J. Nugent
Senior Executive Vice President and
Chief Financial Officer
26
EXHIBIT INDEX
Exhibits Required Pursuant
to Item 601 of Regulation S-K
-----------------------------
3. Articles of incorporation, as amended and restated, and Bylaws of Fulton
Financial Corporation as amended.
4. Instruments defining the rights of security holders, including
indentures.
(a) Rights Agreement dated June 20, 1989, as amended and restated on
April 27, 1999 between Fulton Financial Corporation and Fulton
Bank - Incorporated by reference to Exhibit 1 of the Fulton
Financial Corporation Current Report on Form 8-K dated April 27,
1999.
10. Material Contracts
(a) Severance Agreements entered into between Fulton Financial and:
Rufus A. Fulton, Jr., as of April 17, 1984; R. Scott Smith, Jr.,
as of May 17, 1988; Charles J. Nugent, as of November 19, 1992;
and Richard J Ashby, Jr., as of May 17, 1988.
(b) Incentive Stock Option Plan adopted September 19, 1995 -
Incorporated by reference from Exhibit A of Fulton Financial
Corporation's 1996 Proxy Statement.
27