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 September 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 _______________
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 - 82,567,929 shares outstanding as of October 31,
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2001.
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1
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 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 -
September 30, 2001 and December 31, 2000..................................3
(b) Consolidated Statements of Income -
Three and nine months ended September 30, 2001 and 2000...................4
(c) Consolidated Statements of Shareholders' Equity -
Nine months ended September 30, 2001 and 2000.............................5
(d) Consolidated Statements of Cash Flows -
Nine months ended September 30, 2001 and 2000.............................6
(e) Notes to Consolidated Financial Statements - September 30, 2001...........7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................27
SIGNATURES...................................................................28
2
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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(Dollars in thousands, except per-share data)
September 30 December 31
2001 2000
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ASSETS
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Cash and due from banks ................................................................... $ 271,158 $ 282,586
Interest-bearing deposits with other banks ................................................ 5,623 8,417
Mortgage loans held for sale .............................................................. 28,484 5,241
Investment securities:
Held to maturity (Fair value: $54,420 in 2001 and $83,836 in 2000) ................... 52,946 84,762
Available for sale ................................................................... 1,763,722 1,370,133
Loans, net of unearned income ............................................................. 5,283,987 5,374,659
Less: Allowance for loan losses ..................................................... (71,694) (65,640)
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Net Loans ........................................................ 5,212,293 5,309,019
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Premises and equipment .................................................................... 128,091 116,407
Accrued interest receivable ............................................................... 43,329 44,747
Other assets .............................................................................. 180,880 143,492
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Total Assets ..................................................... $ 7,686,526 $ 7,364,804
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LIABILITIES
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Deposits:
Noninterest-bearing .................................................................. $ 993,875 $ 915,308
Interest-bearing ..................................................................... 4,980,562 4,587,394
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Total Deposits ................................................... 5,974,437 5,502,702
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Short-term borrowings:
Securities sold under agreements to repurchase ....................................... 268,828 281,538
Federal funds purchased .............................................................. 15,500 160,100
Demand notes of U.S. Treasury ........................................................ 4,988 4,791
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Total Short-Term Borrowings ...................................... 289,316 446,429
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Accrued interest payable .................................................................. 47,853 47,713
Other liabilities ......................................................................... 67,348 69,786
Long-term debt ............................................................................ 501,132 567,003
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Total Liabilities ................................................ 6,880,086 6,633,633
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SHAREHOLDERS' EQUITY
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Common stock, $2.50 par; Authorized - 400 million shares; Issued - 83.2 million;
Outstanding - 82.8 million in 2001 and 81.8 million in 2000 .......................... 207,962 198,612
Capital surplus ........................................................................... 536,646 472,828
Retained earnings ......................................................................... 49,246 76,615
Accumulated other comprehensive income .................................................... 21,194 1,149
Treasury stock, at cost (399,000 shares in 2001 and 1.3 million shares in 2000) ........... (8,608) (18,033)
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Total Shareholders' Equity ....................................... 806,440 731,171
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Total Liabilities and Shareholders' Equity ....................... $ 7,686,526 $ 7,364,804
============== ==============
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See notes to consolidated financial statements
3
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per-share data)
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------- --------------------------------
2001 2000 2001 2000
INTEREST INCOME
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Loans, including fees ..................................... $ 104,754 $ 111,952 $ 324,288 $ 318,515
Investment securities:
Taxable .............................................. 21,174 17,188 56,619 50,866
Tax-exempt ........................................... 2,349 2,511 7,116 7,772
Dividends ............................................ 1,218 1,528 3,904 4,522
Other interest income ..................................... 514 258 1,807 717
----------- ----------- ----------- -----------
Total Interest Income ........... 130,009 133,437 393,734 382,392
INTEREST EXPENSE
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Deposits .................................................. 47,371 48,785 146,913 136,368
Short-term borrowings ..................................... 2,337 8,286 11,339 22,997
Long-term debt ............................................ 6,917 6,111 20,903 18,086
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Total Interest Expense ........... 56,625 63,182 179,155 177,451
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Net Interest Income .............. 73,384 70,255 214,579 204,941
PROVISION FOR LOAN LOSSES ................................. 5,533 2,746 11,911 10,998
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Net Interest Income After
Provision for Loan Losses ..... 67,851 67,509 202,668 193,943
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OTHER INCOME
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Investment management and trust services .................. 7,133 5,155 20,405 15,934
Service charges on deposit accounts ....................... 8,509 6,767 23,201 19,136
Other service charges and fees ............................ 4,535 4,053 12,819 11,084
Mortgage banking income ................................... 2,766 1,003 8,108 2,617
Investment securities gains ............................... 4,100 1,348 10,865 5,700
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Total Other Income ............... 27,043 18,326 75,398 54,471
OTHER EXPENSES
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Salaries and employee benefits ............................ 30,115 26,449 87,012 76,716
Net occupancy expense ..................................... 4,418 3,801 12,725 11,538
Equipment expense ......................................... 3,336 2,908 9,407 8,424
Data processing ........................................... 2,909 2,868 8,597 8,422
Merger-related expenses ................................... 7,105 -- 7,105 --
Other ..................................................... 13,616 10,160 37,075 29,485
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Total Other Expenses ............. 61,499 46,186 161,921 134,585
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Income Before Income Taxes ....... 33,395 39,649 116,145 113,829
INCOME TAXES .............................................. 9,233 11,532 33,405 33,020
----------- ----------- ----------- -----------
Net Income ....................... $ 24,162 $ 28,117 $ 82,740 $ 80,809
=========== =========== =========== ===========
PER-SHARE DATA:
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Net income (basic) ........................................ $ 0.29 $ 0.35 $ 1.00 $ 1.00
Net income (diluted) ...................................... 0.29 0.34 1.00 0.99
Cash dividends ............................................ 0.170 0.152 0.492 0.441
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See notes to consolidated financial statements
4
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Accumulated
Other
Comprehen-
Common Capital Retained sive Income Treasury
(Dollars in thousands, except per-share data) Stock Surplus Earnings (Loss) Stock Total
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Balance at December 31, 2000 ................................. $ 198,612 $ 472,828 $ 76,615 $ 1,149 $ (18,033) $ 731,171
Comprehensive income:
Net income .............................................. 82,740 82,740
Other - net unrealized gain on securities (net of $10.8
million tax expense) ............................ 20,045 20,045
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Total comprehensive income ......................... 102,785
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Stock dividends issued - 5% (3.6 million shares) ............. 9,103 61,377 (70,554) (74)
Stock issued (811,000 shares, including 709,000
shares of treasury stock) ............................... 247 2,441 12,358 15,046
Acquisition of treasury stock (137,000 shares) ............... (2,933) (2,933)
Cash dividends - $0.492 per share ............................ (39,555) (39,555)
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Balance at September 30, 2001 ................................ $ 207,962 $ 536,646 $ 49,246 $ 21,194 $ (8,608) $ 806,440
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Balance at December 31, 1999 ................................. $ 189,035 $ 419,443 $ 87,957 $ (15,530) $ (18,156) $ 662,749
Comprehensive income:
Net income .............................................. 80,809 80,809
Other - net unrealized loss on securities (net of
$326,000 million tax benefit) ................... 606 606
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Total comprehensive income ......................... 81,415
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Stock dividends issued - 5% (4.0 million shares) ............. 9,442 61,767 (71,287) (78)
Stock issued (203,000 shares) ................................ 84 (744) 3,090 2,430
Stock issued for acquisition of Skylands Financial
Corporation (2.2 million shares) ........................ (7,421) 39,282 31,861
Acquisition of treasury stock (2.5 million shares) ........... (45,162) (45,162)
Cash dividends - $0.441 per share ............................ (34,831) (34,831)
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Balance at September 30, 2000 ................................ $ 198,561 $ 473,045 $ 62,648 $ (14,924) $ (20,946) $ 698,384
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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)
Nine Months Ended
September 30
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2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ........................................................................... $ 82,740 $ 80,809
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ....................................................... 11,911 10,998
Depreciation and amortization of premises and equipment ......................... 9,757 8,609
Net amortization of investment security premiums ................................ (136) 303
Investment security gains ....................................................... (10,865) (5,700)
Net increase in mortgage loans held for sale .................................... (23,243) (2,651)
Amortization of intangible assets ............................................... 3,303 1,191
Decrease (increase) in accrued interest receivable .............................. 1,418 (5,802)
Increase in other assets ........................................................ (6,423) (935)
Increase in accrued interest payable ............................................ 140 10,575
Decrease in other liabilities ................................................... (12,669) (4,862)
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Total adjustments ......................................................... (26,807) 11,726
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Net cash provided by operating activities .................................. 55,933 92,535
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale ................................. 109,044 24,089
Proceeds from maturities of securities held to maturity .............................. 36,406 33,799
Proceeds from maturities of securities available for sale ............................ 335,123 162,223
Purchase of securities held to maturity .............................................. (4,622) (1,683)
Purchase of securities available for sale ............................................ (788,247) (159,876)
Decrease (increase) in short-term investments ........................................ 2,794 (835)
Net decrease (increase) in loans ..................................................... 84,815 (251,365)
Net cash paid for Dearden Maguire .................................................... (16,224) --
Net cash paid for Branch Acquisition ................................................. (28,820) --
Cash acquired from Skylands Financial Corporation .................................... -- 11,632
Purchase of premises and equipment ................................................... (21,441) (21,649)
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Net cash used in investing activities ...................................... (291,172) (203,665)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits .......................................... 330,128 14,566
Net increase in time deposits ........................................................ 141,607 85,336
(Decrease) increase in long-term debt ................................................ (65,871) 93,059
Decrease in short-term borrowings .................................................... (157,113) (18,039)
Dividends paid ....................................................................... (36,979) (33,711)
Net proceeds from issuance of common stock ........................................... 14,972 2,352
Acquisition of treasury stock ........................................................ (2,933) (45,162)
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Net cash provided by financing activities .................................. 223,811 98,401
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Net Decrease in Cash and Due From Banks .............................................. (11,428) (12,729)
Cash and Due From Banks at Beginning of Period ....................................... 282,586 266,169
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Cash and Due From Banks at End of Period ............................................. $ 271,158 $ 253,440
============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest ........................................................................ $ 105,337 $ 94,902
Income taxes .................................................................... 21,886 29,143
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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 nine month periods ended
September 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 Nine months ended
September 30 September 30
----------------------- -----------------------
2001 2000 2001 2000
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Weighted average shares outstanding (basic) .................... 82,861 80,998 82,596 80,987
Impact of common stock equivalents ............................. 574 530 559 460
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Weighted average shares outstanding (diluted) .................. 83,435 81,528 83,155 81,447
========== ========== ========== ==========
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):
Nine Months Ended
September 30
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2001 2000
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Unrealized holding gains arising during period .................. $ 27,107 $ 4,311
Less: reclassification adjustment for gains included
in net income ........................................... 7,062 3,705
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Net unrealized gains on securities .............................. $ 20,045 $ 606
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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 impact on its balance
sheet, comprehensive income or net income.
NOTE F - Acquisitions
Drovers Bancshares Corporation - On July 1, 2001, the Corporation completed its
acquisition of Drovers Bancshares Corporation (Drovers), a $820 million bank
holding company located in York, Pennsylvania. 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 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 its wholly owned bank subsidiary, The Drovers &
Mechanics Bank (Drovers Bank) was merged into Fulton Bank, the Corporation's
largest subsidiary bank.
The acquisition of Drovers was accounted for as a pooling of interests and, as
such, all financial information has been restated to reflect the impact of
Drovers for all periods presented. The effect of the merger on the Corporation's
previously reported revenues, net income and net income per share for the three
months ended September 30, 2000 follows.
8
Fulton Drovers
Financial Bancshares Adjustments Restated
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(in thousands, except per-share data)
Net interest income $ 64,337 $ 5,782 $ 136 $ 70,255
Other income 16,890 1,550 (114) 18,326
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Total income $ 81,227 $ 7,332 $ 22 $ 88,581
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Net income $ 26,121 $ 2,015 $ (19) $ 28,117
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Net income per share (basic) $ 0.35 $ 0.40 -- $ 0.35
Net income per share (diluted) $ 0.35 $ 0.40 -- $ 0.34
The effect of the merger on the Corporation's previously reported revenues, net
income and net income per share for the nine months ended September 30, 2000
follows.
Fulton Drovers
Financial Bancshares Adjustments Restated
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(in thousands, except per-share data)
Net interest income $187,295 $ 17,525 $ (121) $204,941
Other income 50,574 4,129 (232) 54,471
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Total income $237,869 $ 21,654 $ (353) $259,412
---------- ---------- ---------- ----------
Net income $ 77,342 $ 3,525 $ (58) $ 80,809
---------- ---------- ---------- ----------
Net income per share (basic) $ 1.04 $ 0.70 -- $ 1.00
Net income per share (diluted) $ 1.03 $ 0.69 -- $ 0.99
Adjustments to effect the restatement include certain reclassifications to
conform Drovers presentation to the Corporation's. The reduction in net income
reflects a prior period adjustment to conform the accounting for investments in
low income housing partnerships.
In connection with the Drovers acquisition, the Corporation recorded
merger-related expenses of approximately $9.8 million ($6.4 million, net of
tax). These consisted of an additional provision for loan losses resulting from
the consistent application of the Corporation's allowance evaluation procedures
($2.7 million) and one-time expenses related to employee severance costs,
systems conversions, real estate closures and sales, and professional fees ($7.1
million).
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. The intangible assets are being amortized on a
straight-line over 12 years.
Dearden, Maguire, Weaver and Barrett, Inc. - On January 2, 2001, the Corporation
completed its 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
$16.0 million was recorded as the initial purchase price paid in excess of the
fair value of net assets acquired. Additional payments of up to $5.0 million may
become payable upon Dearden Maguire achieving certain revenue
9
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 - Acquisition of Treasury Stock
The Corporation accounted for the acquisition of Drovers under the pooling
method of accounting, which would normally preclude it from repurchasing its own
stock for a period following the acquisition. In an effort to stabilize equity
markets following the terrorist attacks on September 11, 2001, the U.S.
Securities and Exchange Commission temporarily suspended the restrictions on
treasury stock purchases. During the third quarter of 2001, the Corporation
acquired 137,000 shares of its stock.
NOTE H - Reclassifications
Certain amounts in the 2000 consolidated financial statements and notes have
been reclassified to conform to the 2001 presentation.
10
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
- -------------------------------
Drovers Bancshares Corporation - On July 1, 2001, the Corporation completed its
acquisition of Drovers Bancshares Corporation (Drovers), a $820 million bank
holding company located in York, Pennsylvania. 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 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 its wholly owned bank subsidiary, The Drovers &
Mechanics Bank (Drovers Bank) was merged into Fulton Bank, the Corporation's
largest subsidiary bank.
The acquisition of Drovers was accounted for as a pooling of interests and, as
such, all financial information has been restated to reflect the impact of
Drovers for all periods presented.
In connection with the Drovers acquisition, the Corporation recorded
merger-related expenses of approximately $9.8 million ($6.4 million, net of
tax). These consisted of an additional provision for loan losses resulting from
the consistent application of the Corporation's allowance evaluation procedures
($2.7 million) and one-time expenses related to employee severance costs,
systems conversions, real estate closures and sales, and professional fees ($7.1
million).
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
(Acquired 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.
11
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. 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
$16.0 million was recorded as the initial purchase price paid in excess of the
net assets acquired. Additional payments of up to $5.0 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.
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 September 30, 2001 versus Quarter ended September 30, 2000
- ------------------------------------------------------------------------
Fulton Financial Corporation's net income for the third quarter of 2001
decreased $4.0 million, or 14.1%, in comparison to net income for the third
quarter of 2000. Diluted net income per share decreased $0.05, or 14.7%,
compared to 2000. The decrease from 2000 resulted mainly from the merger-related
expenses recorded as a result of the Drovers acquisition. Excluding the impact
of these expenses, which totaled $6.4 million after tax, earnings increased $2.4
million, or 8.6%. On a diluted per-share basis, the increase was $0.03, or 8.8%.
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 $3.1 million, or 4.5%. The increase resulted from the addition of
Skylands and the Acquired Branches, mitigating the continued downward pressure
on the Corporation's net interest margin due to changes in the general interest
rate environment and economic conditions. The following table provides a
comparative average balance sheet and net interest income
12
analysis for the third quarter of 2001 as compared to the same period in 2000.
All dollar amounts are in thousands.
Quarter Ended September 30, 2001 Quarter Ended September 30, 2000
----------------------------------------- -------------------------------------------
Average Yield/ Average Yield/
ASSETS Balance Interest Rate (1) Balance Interest Rate (1)
- --------------------------------------- ----------- ------------ ----------- ----------- ------------ -----------
Interest-earning assets:
Loans and leases ..................... $ 5,321,613 $ 104,754 7.81% $ 5,201,221 $ 111,952 8.56%
Taxable investment securities ........ 1,436,436 21,174 5.85 1,096,962 17,188 6.23
Tax-exempt investment securities ..... 215,374 2,349 4.33 229,386 2,511 4.35
Equity securities .................... 100,903 1,218 4.79 109,283 1,528 5.56
Short-term investments ............... 52,996 514 3.85 12,885 258 7.97
------------- ------------- --------- ------------- ------------- ---------
Total interest-earning assets .......... 7,127,322 130,009 7.24 6,649,737 133,437 7.98
Noninterest-earning assets:
Cash and due from banks .............. 247,309 251,576
Premises and equipment ............... 129,031 109,525
Other assets ......................... 241,098 146,537
Less: Allowance for loan losses ...... (71,284) (64,880)
------------- -------------
Total Assets ................. $ 7,673,476 $ 7,092,495
------------- -------------
Interest-bearing liabilities:
Demand deposits ...................... $ 790,331 $ 2,318 1.16% $ 655,741 $ 2,569 1.56%
Savings deposits ..................... 1,346,518 5,934 1.75 1,200,153 8,581 2.84
Time deposits ........................ 2,875,375 38,936 5.37 2,605,614 37,626 5.74
Short-term borrowings ................ 293,323 2,337 3.16 541,558 8,286 6.09
Long-term debt ....................... 502,477 7,100 5.61 452,957 6,120 5.38
------------- ------------- --------- ------------- ------------- ---------
Total interest-bearing liabilities ..... 5,808,024 56,625 3.87 5,456,023 63,182 4.61
Noninterest-bearing liabilities:
Demand deposits ...................... 956,776 864,085
Other ................................ 110,449 96,508
------------- -------------
Total Liabilities ............ 6,875,249 6,416,616
Shareholders' equity ................... 798,227 675,879
------------- -------------
Total Liabilities and
Shareholders' Equity ....... $ 7,673,476 $ 7,092,495
------------- -------------
Net interest income .................... $ 73,384 $ 70,255
------------- -------------
Net interest margin (FTE) .............. 4.22% 4.34%
--------- ------
(1) Yields on tax-exempt securities are not fully taxable equivalent (FTE).
Interest income decreased $3.4 million, or 2.6%, as a result of the
offsetting effects of rate and volume changes. The 7.2% increase in average
earning assets accounted for an interest income increase of approximately
$9.5 million. This was more than offset by a $13.0 million reduction as a
result of the 75 basis point decline in average yields. Average yields
decreased from the third quarter of 2000 to the third 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 9.50% during the third quarter of
2000, dropping to an average of 6.56% during the same period in 2001. The
changes in such index rates have an immediate effect only on floating rate
loans and the impact was evident as the average yield on loans also
declined 75 basis points to 7.81%.
The Corporation's average loan portfolio grew by approximately $120.4
million, or 2.3%. Strong increases in commercial mortgages ($127.3 million,
or 8.5%) and commercial loans ($135.0 million, or 10.5%) were offset by
decreases in residential mortgages ($130.7 million, or 13.0%). The
residential mortgage portfolio continued to decline as favorable mortgage
rates fueled refinance activity. In addition, the Corporation sold
approximately $100 million of existing residential mortgages for balance
sheet management purposes.
13
Average investment securities increased $317.1 million, or 22.1%, as a
result of deposit growth in excess of net increases in loans. In addition
to strong internal deposit growth, the Corporation also received $250
million of net funds from the Acquired Branches. The Corporation used these
funds to purchase investment securities, particularly mortgage-backed
securities, which grew by $461.5 million, or 56.8%.
As with interest income, the $6.6 million, or 10.4%, decrease in interest
expense was caused by the effect of declining rates more than offsetting
the impact of balance increases. The $352.0 million, or 6.5%, increase in
average interest-bearing liabilities resulted in a $4.1 million increase in
interest expense. This was more than offset by a $10.7 million decrease
caused by the 74 basis point decline in the average cost of
interest-bearing funds. Average interest-bearing deposits grew $550.7
million, or 12.3%. Of this increase, $273.5 million resulted from the
Acquired Branches.
Short-term borrowings decreased by $248.2 million, or 45.8%, as the deposit
growth allowed the Corporation to reduce its dependence on such borrowings.
With short-term rates falling from an average of 6.09% in 2000 to 3.16% in
2001, the change in the funding mix had a negative impact on the
Corporation's net interest income and margin. However, management believes
that by reducing its short-term borrowings, its balance sheet is better
positioned for long-term net interest income growth. The acquisition of
deposits also expanded its customer base and allowed it to enter new
markets, which should have a favorable impact on future growth and
earnings.
Both the average yield on earning assets and the cost of interest-bearing
liabilities decreased at similar rates during the period, with yields
dropping 75 basis points (a 9.4% decline) and costs declining 74 basis
points (a 16.1% decline). This allowed the Corporation to minimize the
reduction in its net interest margin, which fell 12 basis points to 4.22%
in 2001 from 4.34% 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.
Provision and Allowance for Loan Losses
---------------------------------------
The following table summarizes loans outstanding (including unearned
income) as of the dates shown:
September 30 December 31 September 30
2001 2000 2000
-------------- ------------- --------------
(in thousands)
Commercial, financial and agricultural ....... $ 1,398,964 $ 1,386,172 $ 1,319,359
Real estate - construction ................... 260,975 247,382 237,215
Real estate - residential mortgage ........... 1,461,222 1,569,637 1,566,848
Real estate - commercial mortgage ............ 1,432,459 1,359,714 1,330,884
Consumer ..................................... 658,932 738,797 767,524
Leasing and other ............................ 84,688 87,947 87,070
Unearned income .............................. (13,253) (14,988) (14,967)
------------- ------------- -------------
Total Loans ............................... $ 5,283,987 $ 5,374,661 $ 5,293,933
============= ============= =============
14
The following table summarizes the activity in the Corporation's allowance for
loan losses:
Three Months Ended
September 30
-------------------------------
2001 2000
---------- ----------
(dollars in thousands)
Loans outstanding at end of period (net of unearned) ........................... $ 5,283,987 $ 5,293,933
============= =============
Daily average balance of loans and leases ...................................... $ 5,321,613 $ 5,201,221
============= =============
Balance of allowance for loan losses
at beginning of period .................................................... $ 67,903 $ 62,212
Loans charged-off:
Commercial, financial and agricultural ..................................... 802 1,296
Real estate - mortgage ..................................................... 139 433
Consumer ................................................................... 1,675 1,458
Leasing and other .......................................................... 48 39
------------- -------------
Total loans charged-off .................................................... 2,664 3,226
------------- -------------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural ..................................... 225 269
Real estate - mortgage ..................................................... 17 324
Consumer ................................................................... 662 416
Leasing and other .......................................................... 18 1
------------- -------------
Total recoveries ........................................................... 922 1,010
------------- -------------
Net loans charged-off .......................................................... 1,742 2,216
Allowance purchased (Skylands) ................................................. -- 2,633
Provision for loan losses ...................................................... 2,833 2,746
Provision for loan losses, merger-related ...................................... 2,700 --
------------- -------------
Total provision for loan losses ........................................... 5,533 2,746
------------- -------------
Balance at end of period ....................................................... $ 71,694 $ 65,375
============= =============
Net charge-offs to average loans (annualized) .................................. 0.13% 0.17%
============= =============
Allowance for loan losses to loans outstanding ................................. 1.36% 1.23%
============= =============
The following table summarizes the Corporation's non-performing assets as of the
indicated dates.
Sept. 30 Dec. 31 Sept. 30
(Dollars in thousands) 2001 2000 2000
------------------ --------------- ----------------
Nonaccrual loans..................................... $ 23,484 $ 21,790 $ 19,779
Loans 90 days past due and accruing.................. 8,932 7,135 7,228
Other real estate owned (OREO)....................... 1,575 1,035 796
------------------ --------------- ----------------
Total non-performing assets.......................... $ 33,991 $ 29,960 $ 27,803
================== =============== ================
Non-performing loans/Total loans..................... 0.61% 0.54% 0.51%
Non-performing assets/Total assets................... 0.44% 0.41% 0.38%
Non-performing assets/Total loans and OREO........... 0.64% 0.56% 0.53%
Allowance/Non-performing loans....................... 221.2% 227.5% 242.1%
15
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
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 banks and resulting provisions and allowances are aggregated for
consolidated financial reporting.
As a percentage of total loans, commercial loans and mortgages increased to
53.6% of the total portfolio at September 30, 2001 from 50.0% at September 30,
2000. This shift reflects increases in these loan types as well as a decrease in
residential mortgages from 29.6% in 2000 to 27.6% in 2001 resulting from active
refinance activity. The change in the loan mix is one factor considered by the
Corporation in assessing the adequacy of its allowance for loan losses.
For the third quarter of 2001, net charge-offs totaled $1.7 million, or 0.13%,
of average loans on an annualized basis. This was an improvement from the $2.2
million, or 0.17%, in net charge-offs for the third quarter of 2000. In 2000,
the Corporation charged-off certain troubled commercial accounts.
While charge-offs improved during the quarter, recent economic conditions have
impacted some of the Corporations' other asset quality measures. Non-performing
assets increased to $34.0 million, or 0.44% of total assets, at September 30,
2001, from $27.8 million, or 0.38% of total assets, at September 30, 2000.
Despite the moderate downward trend, this level of non-performing assets
continues to be favorable in comparison to the industry as a whole.
The total provision for loan losses increased $2.8 million, or 101.5%, to $5.5
million in 2001. Of this increase, $2.7 million represented an increase related
to the Drovers acquisition. Applying the Corporation's consistent allowance
evaluation procedures to the acquired Drovers loan portfolio resulted in the
need for an additional provision for loan losses. Excluding this additional
amount, the provision for loan losses increased only $87,000, or 3.2%. This
small increase reflects the moderation of net charge-off activity during the
quarter.
The Corporation's periodic loan portfolio review and allowance calculation
resulted in an unallocated allowance for loan losses of 34% at September 30,
2001, as compared to 23% at September 30, 2000 and 30% at December 31, 2000.
Management believes that the allowance balance of $71.7 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 September 30, 2001 was $27.0 million, an
increase of $8.7 million, or 47.6%, over the comparable period in 2000.
Excluding investment security gains, which increased from $1.3 million in 2000
to $4.1 million in 2001, other income increased $6.0 million, or 35.1%.
The most significant increase, in terms of percentage growth, was realized in
mortgage banking income, which increased $1.8 million, or 175.8%, to $2.8
million. With relatively low mortgage rates in place during the quarter,
consumers continued to refinance 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.
Investment management and trust services income also showed strong growth, with
an increase of $2.0 million, or 38.4%. Dearden Maguire contributed $949,000 to
this increase. Service charges on deposit accounts increased $1.7 million, or
25.7%, mainly due to strong growth in transaction accounts, such as
16
savings and demand deposits. Other service charges and fees also realized a
moderate increase of $482,000, or 11.9%, reflecting the Corporation's efforts to
increase non-interest revenues.
Other Expenses
- --------------
Total other expenses for the third quarter of 2001 of $61.5 million increased
$15.3 million, or 33.2%, from 2000. Excluding merger-related expenses of $7.1
million, other expenses were up $8.2 million, or 17.8%. Overall, the increase
was driven by a full quarter of expenses in 2001 for Dearden Maguire, Skylands
and the Acquired Branches ($2.4 million total impact), and an increase in
intangible amortization as a result of these acquisitions ($960,000).
The remaining increase of $4.8 million, or 10.8%, contributed to an increase in
the Corporation's efficiency ratio, which is the ratio of noninterest expense to
fully taxable equivalent revenues (excluding security gains), to 53.7% in 2001
from 51.1% in 2000, excluding the impact of the $7.1 million merger-related
expenses.
Salaries and employee benefits increased $3.7 million, or 13.9%, in comparison
to the third quarter of 2000 ($2.3 million, or 8.8%, excluding Dearden Maguire,
Skylands and the Acquired Branches). 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 $438,000, or
10.7%, due to rising health plan expenses.
Net occupancy and equipment expenses increased $617,000, or 16.2%, and $428,000,
or 14.7%, respectively. The net occupancy expense increase resulted mainly from
depreciation expense and other occupancy costs related to the Corporation's new
office building at its main office location as well as the Acquired Branches.
Equipment expense increased as a result of investments in new technology to
support the Corporation's operations.
Data processing expense was essentially flat at $2.9 million in both periods as
the benefits from the Corporation's renegotiated outside data processing
services contract were offset by increased processing costs due to acquisitions
and conversions. Other expense increased $3.5 million, or 34.0%, to $13.6
million in 2001. Excluding Dearden Maguire, Skylands and the Acquired Branches,
the increase was $2.0 million, or 20.6%. This was due to an increase in the
residual value reserve for the Corporation's leasing business ($600,000),
additional advertising costs related to acquisition transition ($200,000),
increased state taxes resulting from the merger of two of the Corporation's
existing affiliates and normal growth.
Income Taxes
- ------------
Income tax expense for the third quarter of 2001 was $9.2 million, a $2.3
million, or 19.9%, decrease from $11.5 million in 2000. The steep decrease
resulted from the 15.8% decline in income before income taxes. The Corporation's
effective tax rate was approximately 27.6% in 2001 as compared to 29.1% 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.
Nine Months ended September 30, 2001 versus Nine Months ended September 30, 2000
- --------------------------------------------------------------------------------
Fulton Financial Corporation's net income for the first nine months of 2001
increased $1.9 million, or 2.4%, in comparison to net income for the same period
in 2000. Diluted net income per share increased $0.01, or 1.0%, compared to
2000. Excluding the merger-related expenses from the Drovers acquisition,
earnings for the first nine months of 2001 increased $8.3 million, or 10.3%. On
a per-share basis, the increase was $0.08, or 8.1%.
Net Interest Income
- -------------------
17
For the first nine months of 2001, net interest income increased $9.6 million,
or 4.7%. Excluding the impact of Skylands and the estimated impact of the
Acquired Branches, which added $9.2 million during the period, net interest
income was essentially flat, increasing only $467,000, or 0.2%. The following
table provides a comparative average balance sheet and net interest income
analysis for the first nine months of 2001 as compared to the same period in
2000. All dollar amounts are in thousands.
Nine Months Ended Sept. 30, 2001 Nine Months Ended Sept. 30, 2000
---------------------------------------- ----------------------------------------
Average Yield/ Average Yield/
ASSETS Balance Interest Rate (1) Balance Interest Rate (1)
- -------------------------------------- ----------- ------------ ---------- ----------- ------------ ----------
Interest-earning assets:
Loans and leases..................... $ 5,344,730 $ 324,288 8.11% $ 5,060,537 $ 318,515 8.41%
Taxable investment securities........ 1,243,185 56,619 6.09 1,095,045 50,866 6.20
Tax-exempt investment securities..... 216,891 7,116 4.39 234,743 7,772 4.42
Equity securities.................... 102,804 3,904 5.08 108,737 4,522 5.55
Short-term investments............... 55,038 1,807 4.39 13,374 717 7.16
------------- ------------- ---------- ------------- ------------- ----------
Total interest-earning assets.......... 6,962,648 393,734 7.56 6,512,436 382,392 7.84
Noninterest-earning assets:
Cash and due from banks.............. 239,551 246,646
Premises and equipment............... 123,552 102,952
Other assets......................... 210,677 135,122
Less: Allowance for loan losses...... (68,517) (63,389)
------------- -------------
Total Assets................. $ 7,467,911 $ 6,933,767
============= =============
Interest-bearing liabilities:
Demand deposits...................... $ 725,002 $ 6,970 1.29% $ 646,446 $ 7,256 1.50%
Savings deposits..................... 1,281,506 20,601 2.15 1,180,187 23,991 2.72
Time deposits........................ 2,811,118 119,144 5.67 2,537,323 105,097 5.53
Short-term borrowings................ 351,993 11,339 4.31 532,884 22,997 5.76
Long-term debt....................... 509,127 21,101 5.54 449,669 18,110 5.38
------------- ------------- ---------- ------------- ------------- ----------
Total interest-bearing liabilities..... 5,678,746 179,155 4.22 5,346,509 177,451 4.43
Noninterest-bearing liabilities:
Demand deposits...................... 904,624 825,710
Other................................ 114,480 99,815
------------- -------------
Total Liabilities............ 6,697,850 6,272,034
Shareholders' equity................... 770,061 661,733
------------- -------------
Total Liabilities and
Shareholders' Equity....... $ 7,467,911 $ 6,933,767
============= ==============
Net interest income.................... $ 214,579 $ 204,941
============= =============
Net interest margin (FTE).............. 4.23% 4.32%
========== ==========
(1) Yields on tax-exempt securities are not fully taxable equivalent (FTE).
The Skylands acquisition accounted for approximately $137.7 million of the
$284.2 million increase in average loans and $196.8 million of the $450.2
million increase in average interest-earning assets. Skylands accounted for
$194.5 million of the $453.7 million increase in total average deposits,
with the acquired branches.
The $450.2 million increase in average earning assets contributed to an
interest income increase of $26.4 million, which was offset by a $15.1
million reduction as a result of the 28 basis point decline in average
yields. The $284.2 million loan increase was driven by strong production of
commercial loans and commercial mortgages, as well as the acquisition of
Skylands, which added $137.7 million in average balances over the period.
Increases were offset by a reduction in average residential mortgages due
to refinance activity.
18
Average investment securities for the nine months ended September 30, 2001
totaled $1.6 billion, an increase of $124.4, or 8.6% over 2000. This
increase was generated by total inflows of funds exceeding the net increase
in loans. The Corporation invested these funds primarily in mortgage backed
securities, which increased $246.5 million, or 30.2%.
The $332.2 million, or 6.2%, increase in average interest-bearing
liabilities resulted in an $11.0 million increase in interest expense,
while the 21 basis point decrease in the average costs of funds offset this
increase by $9.3 million, resulting in a net increase in interest expense
of $1.7 million. The $453.7 million increase in average interest-bearing
deposits resulted from a combination of internal growth and acquired
deposits. Skylands and the Acquired Branches contributed $273.4 million to
the increase while the remaining $180.3 million resulted from internal
growth.
The increase in deposit funds was used to fund loan growth, purchase
investment securities and to reduce short-term borrowings. The average
balance of such borrowings, which consist primarily of Federal funds
purchased, decreased $180.9 million, or 33.9%, during the nine months ended
September 30, 2001 as compared to 2000. Conversely, average long-term debt
- consisting of advances from the Federal Home Loan Bank - increased $59.5
million, or 13.2%. This occurred as the Corporation continued to manage its
interest sensitivity gap through the use of such longer-term advances. See
additional discussion of the Corporation's asset/liability management
strategies in the "Market Risk" section of this document.
Net interest margin for the nine months ended September 20, 2001 was 4.23%,
a nine basis point decrease from 4.32% in the same period of 2000. This
moderate decline reflects the more pronounced decrease in yields on assets
(28 basis points) as compared to costs of funds (22 basis points). The
decline in margin was somewhat mitigated by an increase in non-interest
bearing demand deposits, which grew by $78.9 million, or 9.6%.
19
The following table summarizes the activity in the Corporation's allowance
for loan losses:
Nine Months Ended
September 30
-------------------------------
2001 2000
------------ ------------
(dollars in thousands)
Loans outstanding at end of period (net of unearned) ......... $ 5,283,987 $ 5,293,933
-------------- --------------
Daily average balance of loans and leases .................... $ 5,344,730 $ 5,060,537
-------------- --------------
Balance of allowance for loan losses
at beginning of period .................................. $ 65,640 $ 61,539
Loans charged-off:
Commercial, financial and agricultural ................... 5,020 7,036
Real estate - mortgage ................................... 560 1,562
Consumer ................................................. 5,184 4,887
Leasing and other ........................................ 380 219
-------------- --------------
Total loans charged-off .................................. 11,144 13,704
-------------- --------------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural ................... 596 1,348
Real estate - mortgage ................................... 299 665
Consumer ................................................. 2,250 1,881
Leasing and other ........................................ 57 15
-------------- --------------
Total recoveries ......................................... 3,202 3,909
-------------- --------------
Net loans charged-off ........................................ 7,942 9,795
Allowance purchased .......................................... 2,085 2,633
Provision for loan losses .................................... 9,211 10,998
Provision for loan losses, merger-related .................... 2,700 --
-------------- --------------
Total provision for loan losses ......................... 11,911 10,998
-------------- --------------
Balance at end of period ..................................... $ 71,694 $ 65,375
-------------- --------------
Net charge-offs to average loans (annualized) ................ 0.20% 0.26%
-------------- --------------
Allowance for loan losses to loans outstanding ............... 1.36% 1.23%
-------------- --------------
Refer to the "Provision for Loan Losses" section of Management's Discussion of
the third quarter results of operations for a summary of the Corporation's
process for establishing the provision and allowance for loan losses. For the
first nine months of 2001, net charge-offs totaled $7.9 million, or 0.20%, of
average loans on an annualized basis. This compares to $9.8 million, or 0.26%,
for the first nine months of 2000 as well as all of 2000. In 2000, Drovers
charged-off a significant corporate relationship, accounting for $3.5 million of
the total net charge-offs included in the restated numbers.
Non-performing loans, including loans 90 days past due and still accruing, to
total loans were 0.64% at September 30, 2001 as compared to 0.56% at December
31, 2000 and 0.53% at September 30, 2000.
The provision for loan losses of $11.9 million for the first nine months of 2001
included $2.7 million related to the Drovers loan portfolio which resulted from
applying the Corporation's allowance evaluation procedures on a consistent
basis. Excluding this amount, the total provision decreased $1.8 million, or
16.2%, in comparison to 2000. This decrease mirrors the decline in net
charge-offs.
20
Other Income
- ------------
Other income for the nine months ended September 30, 2001 was $75.4 million.
This was an increase of $20.9 million, or 38.4%, over the comparable period in
2000. Excluding investment security gains, other income increased $15.8 million,
or 32.3%. The most significant increase, $5.5 million, or 209.8%, was realized
in mortgage banking income as a result favorable interest rates and sales of
refinanced fixed rate mortgage loans in the secondary market.
Investment management and trust services income increased $4.5 million, or
28.1%, mainly due to the addition of Dearden Maguire, which contributed $2.9
million to the total income increase. Service charges on deposit accounts
increased $4.1 million, or 21.2%, as a result of growth in transaction-based
deposit accounts. Other service charges and fees increased $1.7 million, or
15.7%.
Investment securities gains increased $5.2 million, or 90.6%, to $10.9 million
in 2001. The increase resulted from the favorable performance of the
Corporation's equity portfolio, consisting mainly of investments in bank stocks.
Management monitors the Corporation's equity portfolio and makes periodic sale
and investment decisions based on its assessment of the investments' values.
Other Expenses
- --------------
Total other expenses for the first nine months of 2001 were $161.9 million, a
$27.3 million, or 20.3%, increase over the same period in 2000. Skylands,
Dearden Maguire and the Acquired Branches contributed approximately $9.3 million
to the increase. Excluding these amounts and the Drovers merger-related charge
of $7.1 million, other expenses increased $11.0 million, or 8.1%. The
Corporation's efficiency ratio, increased to 53.1% in 2001 from 51.3% in 2000,
excluding the impact of the merger-related expenses.
Salaries and employee benefits increased $10.3 million, or 13.4%, in comparison
to the first nine months of 2000 ($6.4 million, or 8.4%, excluding Dearden
Maguire, Skylands and the Acquired Branches). Of this increase, $2.4 million was
attributable to employee benefits, which rose 21.3% due mainly to increases in
the cost of health insurance. Salary expense increased a moderate $2.7 million,
or 4.1%. Additions to staff and normal merit increases were offset by savings
realized as a result of the Drovers acquisition.
Net occupancy and equipment expenses increased $1.2 million, or 10.3%, and
$983,000, or 11.7%, 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 $175,000, or 2.1%, 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 $7.6 million, or 25.7%, to $37.1 million for the nine months ended
September 30, 2001. Dearden Maguire, Skylands and the Acquired Branches
accounted for $4.0 million of the increase, including $2.1 million in intangible
amortization. Excluding these amounts, other expense increased $3.6 million, or
12.4%.
Income Taxes
- ------------
Income tax expense for the nine months ended September 30, 2001 was $33.4
million, a $385,000, or 1.2%, increase from $33.0 million in 2000. The small
increase is consistent with the 2.0% increase in income before income taxes. The
Corporation's effective tax rate was approximately 28.8% in 2001 as compared to
29.0% 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.
21
FINANCIAL CONDITION
- -------------------
At September 30, 2001, the Corporation had total assets of $7.7 billion, an
increase of $321.7 million, or 4.4%, from December 31, 2000. The increase was
realized mainly in investment securities as growth in funding sources exceeded
the net increase in loans. Balance sheet changes for the first nine months of
2001 were largely influenced by the Acquired Branches, which brought $223
million in net funds to the Corporation.
Loans decreased by $90.7 million, or 1.7%, to $5.3 billion at September 30,
2001. Commercial loans and commercial mortgages increased $85.5 million, or
3.1%. Offsetting this growth, however, was a $108.4 million, or 6.9% decline in
the residential mortgage portfolio. With a relatively low interest rate
environment during the first nine 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 $100 million of existing fixed rate mortgages to further reduce
its interest rate risk.
Investment securities increased $361.8 million, or 24.9% as securities purchases
of $792.9 million exceeded proceeds from maturities and sales of $480.6 million.
Funds were available to invest as a result of loans showing a net decrease for
the period.
Premises and equipment increased $11.7 million, or 10.0%, due to the
construction of a new building at the Corporation's headquarters location. Other
assets increased $37.4 million, or 26.1%, as a result of intangible assets
recorded in connection with the Acquired Branches ($30.9 million) and the
Dearden Maguire acquisition ($16.0 million).
The branch acquisition contributed $290.6 million of deposits to the total
increase of $471.7 million, or 8.6%. Overall, the mix of deposit growth was
evenly distributed by type. Time deposits ($141.6 million, or 5.3% increase),
interest-bearing demand deposits ($95.3 million, or 13.7% increase) and savings
deposits ($156.3, or 12.9% 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 nine months of 2001. Federal funds purchased were
reduced to $15.5 million at September 30, 2001 from $160.1 million at December
31, 2000. The Corporation also reduced its long-term debt by $65.9 million, or
11.6%.
Capital Resources
- -----------------
Total shareholders' equity increased $75.3 million, or 10.3%, during the first
nine months of 2001. This increase was due to net income of $82.7 million, a
$20.0 million improvement in the net unrealized gain on investment securities
and $15.0 million in issuances of stock. These increases were offset by $39.5
million in cash dividends to shareholders.
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
22
ratios in measuring capital adequacy. The minimum acceptable leverage capital
ratio is 3.0% for institutions such as the Corporation which are highly-rated in
terms of safety and soundness. Other institutions are expected to maintain
capital levels at least one or two percent above the minimum.
As of September 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 $57.9 million) and U.S. Government agency stock (cost basis of
approximately $44.8 million). The Corporation's financial institutions stock
portfolio had net unrealized gains of approximately $3.8 million at September
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
23
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.
24
FULTON FINANCIAL CORPORATION
INTEREST RATE SENSITIVITY
(dollars in thousands)
Expected Maturity Period
----------------------------------------------------------------------------
less than greater than Estimated
1 Year 1-2 Years 2-3 Years 3-4 Years 4-5 Years 5 Years Total Fair Value
---------- ---------- ---------- ---------- ---------- ------------ ---------- ----------
Fixed rate loans (1) $1,067,718 $ 716,624 $ 516,112 $ 314,545 $ 218,865 $ 511,077 $3,344,941 $3,528,919
Average rate (1) 7.82% 7.96% 7.97% 8.00% 7.95% 7.61% 7.87%
Floating rate loans (2) 613,918 262,945 190,293 164,652 135,197 572,041 1,939,046 1,931,233
Average rate 7.09% 7.26% 7.37% 7.40% 6.87% 6.75% 7.05%
Fixed rate investments (3) 397,094 378,272 245,361 88,798 56,802 472,150 1,638,477 1,666,641
Average rate 6.20% 6.10% 6.13% 6.23% 6.29% 5.52% 5.95%
Floating rate investments (3) 50 1,000 -- -- -- 41,815 42,865 43,524
Average rate 7.52% 5.55% -- -- -- 5.84% 5.84%
Other interest-earning assets 34,107 -- -- -- -- -- 34,107 34,107
Average rate 2.50% -- -- -- -- -- 2.50%
-----------------------------------------------------------------------------------------------------
Total $2,112,887 $1,358,841 $ 951,766 $ 567,995 $ 410,864 $1,597,083 $6,999,436 $7,204,424
Average rate 7.22% 7.30% 7.38% 7.55% 7.37% 6.64% 7.15%
-----------------------------------------------------------------------------------------------------
Fixed rate deposits (4) $2,006,052 $ 492,761 $ 133,694 $ 75,518 $ 24,763 $ 19,422 $2,752,210 $2,812,529
Average rate 5.18% 5.38% 5.15% 6.09% 5.35% 5.36% 5.24%
Floating rate deposits (5) 758,909 159,338 159,338 159,338 159,338 1,825,966 3,222,227 3,222,227
Average rate 2.27% 0.77% 0.77% 0.77% 0.77% 0.55% 1.00%
Fixed rate borrowings (6) 72,772 19,503 55,773 84,273 5,508 263,303 501,132 520,031
Average rate 5.00% 5.92% 5.38% 6.40% 5.21% 5.39% 5.52%
Floating rate borrowings (7) 289,316 -- -- -- -- -- 289,316 289,316
Average rate 2.90% -- -- -- -- -- 2.90%
-----------------------------------------------------------------------------------------------------
Total $3,127,049 $ 671,602 $ 348,805 $ 319,129 $ 189,609 $2,108,691 $6,764,885 $6,844,103
Average rate 4.26% 4.30% 3.19% 3.52% 1.50% 1.20% 3.14%
-----------------------------------------------------------------------------------------------------
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, 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.
25
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 September 30, 2001 was 1.01.
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 September 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 7% 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 September 30, 2001,
upward shocks of 100, 200 or 300 basis points were estimated to have negative
effects upon economic value of 1%, 4%, and 6%, respectively.
26
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 Bancshares Corporation.
(2) Form 8-K dated August 13, 2001 reporting results of
operations for Fulton Financial Corporation for the seven
months ended July 31, 2001.
27
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: November 13, 2001 /s/ Rufus A. Fulton, Jr.
------------------------- ------------------------------------
Rufus A. Fulton, Jr.
Chairman and Chief Executive Officer
Date: November 13, 2001 /s/ Charles J. Nugent
------------------------- ----------------------------------------
Charles J. Nugent
Senior Executive Vice President and
Chief Financial Officer
28
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.
29