-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JbsZBuaVJALoMnigsjt+2TLdAG0qHQxE9sjkocEGqtlebh+Tu8+cYOvRDsiKe2hB EBPKTSO+Qv4O916VZAzVTQ== /in/edgar/work/0000950109-00-004551/0000950109-00-004551.txt : 20001115 0000950109-00-004551.hdr.sgml : 20001115 ACCESSION NUMBER: 0000950109-00-004551 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FULTON FINANCIAL CORP CENTRAL INDEX KEY: 0000700564 STANDARD INDUSTRIAL CLASSIFICATION: [6021 ] IRS NUMBER: 232195389 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-10587 FILM NUMBER: 765213 BUSINESS ADDRESS: STREET 1: ONE PENN SQ STREET 2: PO BOX 4887 CITY: LANCASTER STATE: PA ZIP: 17604 BUSINESS PHONE: 7172912411 MAIL ADDRESS: STREET 1: ONE PENN SQ STREET 2: PO BOX 4887 CITY: LANCASTER STATE: PA ZIP: 17604 10-Q 1 0001.txt FORM 10-Q 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, 2000, or ------------------ [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ____________ Commission File No. 0-10587 ------ FULTON FINANCIAL CORPORATION -------------------------------------------------------------------- (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2195389 -------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Penn Square, P.O. Box 4887 Lancaster, Pennsylvania 17604 -------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (717)291-2411 -------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 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 - 71,839,013 shares outstanding as of ------------------------------------------------------------------- October 31, 2000. ---------------- 1 FULTON FINANCIAL CORPORATION AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000 INDEX -----
Description Page - ----------- ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): (a) Consolidated Balance Sheets - September 30, 2000 and December 31, 1999............................. 3 (b) Consolidated Statements of Income - Three and nine months ended September 30, 2000 and 1999.............. 4 (c) Consolidated Statements of Shareholders' Equity - Nine months ended September 30, 2000 and 1999........................ 5 (d) Consolidated Statements of Cash Flows - Nine months ended September 30, 2000 and 1999........................ 6 (e) Notes to Consolidated Financial Statements - September 30, 2000...... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 18 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................ 23 SIGNATURES............................................................... 24
2 FULTON FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) - -------------------------------------------------------------------------------- (Dollars in thousands, except per-share data)
September 30 December 31 2000 1999 --------------- ------------ ASSETS - -------------------------------------------------------------------------------------------------------------------------- Cash and due from banks .............................................................. $ 237,913 $ 245,572 Interest-bearing deposits with other banks ........................................... 3,161 1,798 Mortgage loans held for sale ......................................................... 3,667 1,016 Investment securities: Held to maturity (Fair value: $95,277 in 2000 and $84,777 in 1999) .............. 96,590 85,474 Available for sale .............................................................. 1,130,482 1,137,846 Loans ................................................................................ 4,816,449 4,432,030 Less: Allowance for loan losses ................................................ (61,072) (57,631) Unearned income .......................................................... (12,750) (9,623) ----------- ------------ Net Loans ................................................... 4,742,627 4,364,776 ----------- ------------ Premises and equipment ............................................................... 93,689 79,217 Accrued interest receivable .......................................................... 37,828 31,496 Other assets ......................................................................... 132,816 122,824 ----------- ------------ Total Assets ................................................ $ 6,478,773 $ 6,070,019 =========== ============ LIABILITIES - -------------------------------------------------------------------------------------------------------------------------- Deposits: Noninterest-bearing ............................................................. $ 807,655 $ 724,778 Interest-bearing ................................................................ 4,016,839 3,822,035 ----------- ------------ Total Deposits .............................................. 4,824,494 4,546,813 ----------- ------------ Short-term borrowings: Securities sold under agreements to repurchase................................... 273,309 309,790 Federal funds purchased.......................................................... 179,000 172,250 Demand notes of U.S. Treasury ................................................... 3,871 5,506 ----------- ------------ Total Short-Term Borrowings ................................. 456,180 487,546 ----------- ------------ Accrued interest payable ............................................................. 42,379 32,313 Other liabilities .................................................................... 60,120 60,803 Long-term debt ....................................................................... 448,575 328,250 ----------- ------------ Total Liabilities ........................................... 5,831,748 5,455,725 ----------- ------------ SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------------------------------------------------- Common stock ($2.50 par) Shares: Authorized 400,000,000 Issued 72,824,439; Outstanding 71,756,343 (71,924,447 in 1999) ........ 182,052 173,392 Capital surplus ...................................................................... 444,899 394,234 Retained earnings .................................................................... 52,130 75,482 Accumulated other comprehensive income................................................ (12,298) (11,846) Treasury stock, at cost (1,068,096 shares in 2000 and 899,992 shares in 1999)......... (19,758) (16,968) ----------- ------------ Total Shareholders' Equity .................................. 647,025 614,294 ----------- ------------ Total Liabilities and Shareholders' Equity................... $ 6,478,773 $ 6,070,019 =========== ============ - --------------------------------------------------------------------------------------------------------------------------
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 --------------------------------- ----------------------------- 2000 1999 2000 1999 -------------- ------------- ---------- ---------- INTEREST INCOME - --------------------------------------------------------------------------------------------------------------------------------- Loans, including fees ...................................... $ 101,169 $ 86,671 $ 287,357 $ 253,134 Investment securities: Taxable ............................................... 14,345 15,452 42,664 47,661 Tax-exempt ............................................ 2,147 2,271 6,504 6,119 Dividends ............................................. 1,133 991 3,347 3,004 Other interest income....................................... 188 26 489 227 -------------- ------------- ---------- ---------- Total Interest Income ............ 118,982 105,411 340,361 310,145 INTEREST EXPENSE - --------------------------------------------------------------------------------------------------------------------------------- Deposits ................................................... 42,706 35,511 119,268 106,851 Short-term borrowings ...................................... 7,460 4,302 20,724 10,401 Long-term debt ............................................. 4,479 3,894 13,074 11,566 -------------- ------------- ---------- ---------- Total Interest Expense ............ 54,645 43,707 153,066 128,818 -------------- ------------- ---------- ---------- Net Interest Income ............... 64,337 61,704 187,295 181,327 PROVISION FOR LOAN LOSSES .................................. 2,345 1,997 6,395 6,049 -------------- ------------- ---------- ---------- Net Interest Income After Provision for Loan Losses ...... 61,992 59,707 180,900 175,278 -------------- ------------- ---------- ---------- OTHER INCOME - --------------------------------------------------------------------------------------------------------------------------------- Investment management and trust services.................... 4,769 4,635 14,747 12,066 Service charges on deposit accounts ........................ 6,226 5,494 17,700 15,441 Other service charges and fees ............................. 3,699 2,760 10,019 8,509 Mortgage banking income..................................... 842 935 2,213 3,436 Investment securities gains ................................ 1,354 1,587 5,895 6,313 -------------- ------------- ---------- ---------- Total Other Income ................ 16,890 15,411 50,574 45,765 OTHER EXPENSES - --------------------------------------------------------------------------------------------------------------------------------- Salaries and employee benefits ............................. 24,016 22,520 69,362 65,987 Net occupancy expense ...................................... 3,441 3,361 10,443 9,803 Equipment expense .......................................... 2,494 2,345 7,218 7,023 Special services ........................................... 2,739 2,693 8,066 8,347 Other ...................................................... 9,010 9,487 26,320 27,782 -------------- ------------- ---------- ---------- Total Other Expenses .............. 41,700 40,406 121,409 118,942 -------------- ------------- ---------- ---------- Income Before Income Taxes ........ 37,182 34,712 110,065 102,101 INCOME TAXES................................................ 11,061 10,303 32,723 30,122 -------------- ------------- ---------- ---------- Net Income ........................ $ 26,121 $ 24,409 $ 77,342 $ 71,979 ============== ============= ========== ========== - --------------------------------------------------------------------------------------------------------------------------------- PER-SHARE DATA: Net income (basic).......................................... $ 0.37 $ 0.34 $ 1.09 $ 0.99 Net income (diluted)........................................ 0.37 0.34 1.08 0.99 Cash dividends ............................................. 0.160 0.143 0.463 0.416 - ---------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements 4 FULTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Accumulated Other Comprehen- Common Capital Retained Sive Income Treasury (Dollars in thousands, except per-share data) Stock Surplus Earnings (Loss) Stock Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999................................. $173,392 $394,234 $ 75,482 $(11,846) $ (16,968) $ 614,294 Comprehensive income: Net income................................................. 77,342 77,342 Other - net unrealized loss on securities (net of $243,000 tax benefit)......................... (452) (452) --------- Total comprehensive income.............................. 76,890 --------- Stock dividends issued - 5% (3.5 million shares)............. 8,660 59,065 (67,796) (71) Stock issued for acquisition of Skylands Financial Corporation (2.1 million shares)........................ (7,421) 39,282 31,861 Stock issued (161,000 shares of treasury stock).............. (979) 3,090 2,111 Acquisition of treasury stock (2.4 million shares)........... (45,162) (45,162) Cash dividends - $0.463 per share............................ (32,898) (32,898) -------------------------------------------------------------------- Balance at September 30, 2000................................ $182,052 $444,899 $ 52,130 $(12,298) $ (19,758) $ 647,025 ==================================================================== Balance at December 31, 1998................................. $157,638 $293,897 $136,668 $ 23,619 $ (3,488) $ 608,334 Comprehensive income: Net income.............................................. 71,979 71,979 Other - net unrealized loss on securities (net of $14.0 million tax benefit).......... (26,036) (26,036) --------- Total comprehensive income......................... 45,943 --------- Stock dividends issued - 10% (6.6 million shares)............ 15,754 102,099 (117,917 ) (64) Stock issued (149,000 shares of treasury stock) ............. (1,286) 3,104 1,818 Acquisition of treasury stock (589,000 shares)............... (11,535) (11,535) Cash dividends - $0.416 per share............................ (30,197 ) (30,197) -------------------------------------------------------------------- Balance at September 30, 1999................................ $173,392 $394,710 $ 60,533 $ (2,417) $ (11,919) $ 614,299 ==================================================================== - -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements 5 FULTON FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - -------------------------------------------------------------------------------- (In thousands)
Nine Months Ended September 30 ------------------------------- 2000 1999 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income........................................................................ $ 77,342 $ 71,979 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ................................................... 6,395 6,049 Depreciation and amortization of premises and equipment ..................... 7,589 7,364 Net amortization of investment security premiums ............................ 323 1,026 Investment security gains ................................................... (5,895) (6,313) Net (increase) decrease in mortgage loans held for sale...................... (2,651) 6,185 Amortization of intangible assets ........................................... 1,047 974 (Increase) decrease in accrued interest receivable .......................... (5,086) 2,938 Decrease in other assets .................................................... 6,760 4,321 Increase (decrease) in accrued interest payable ............................. 9,674 (567) (Decrease) increase in other liabilities..................................... (3,953) 3,074 ------------- ------------- Total adjustments...................................................... 14,203 25,051 ------------- ------------- Net cash provided by operating activities .............................. 91,545 97,030 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale ............................. 24,089 14,434 Proceeds from maturities of securities held to maturity .......................... 30,514 78,331 Proceeds from maturities of securities available for sale ........................ 127,924 250,978 Purchase of securities held to maturity .......................................... (1,683) (917) Purchase of securities available for sale ........................................ (123,606) (291,236) (Increase) decrease in short-term investments .................................... (1,069) 1,741 Net increase in loans ............................................................ (217,123) (257,107) Cash acquired from Skylands Financial Corporation................................. 11,632 - Purchase of premises and equipment................................................ (18,284) (9,249) ------------- ------------- Net cash provided by (used in) investing activities .................... (167,606) (213,025) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand and savings deposits ........................... 3,513 (59,194) Net increase (decrease) in time deposits ......................................... 58,230 (27,415) Increase in long-term debt........................................................ 120,325 1,757 (Decrease) increase in short-term borrowings ..................................... (38,766) 218,669 Dividends paid ................................................................... (31,778) (29,230) Net proceeds from issuance of common stock ....................................... 2,040 1,754 Acquisition of treasury stock .................................................... (45,162) (11,535) ------------- ------------- Net cash provided by financing activities............................... 68,402 94,806 ------------- ------------- Net Decrease in Cash and Due From Banks .......................................... (7,659) (21,189) Cash and Due From Banks at Beginning of Period ................................... 245,572 247,558 ------------- ------------- Cash and Due From Banks at End of Period ......................................... $ 237,913 $ 226,369 ============= ============= Supplemental Disclosures of Cash Flow Information Cash paid during the period for: Interest .................................................................... $ 143,392 $ 129,385 Income taxes ................................................................ 28,738 22,113 Stock issued for acquisition of Skylands Financial Corporation ................... 31,861 - - -----------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements 6 FULTON FINANCIAL CORPORATION AND SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. NOTE B - 5% Stock Dividend The Corporation issued a 5% stock dividend on May 31, 2000. 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. Diluted net income per share is calculated as net income 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 --------------------------------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Weighted average shares outstanding (basic)............. 71,030 72,393 71,031 72,540 Impact of common stock equivalents...................... 470 431 377 439 -------- -------- -------- -------- Weighted average shares outstanding (diluted)........... 71,500 72,824 71,408 72,979 ======== ======== ======== ========
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):
2000 1999 ---- ---- Unrealized holding losses arising during period............................... $ 3,380 $ (21,933) Less: reclassification adjustment for gains included in net income............ 3,832 4,103 --------- ---------- Net unrealized losses on securities........................................... $ (452) $ (26,036) ========= ==========
NOTE E - New Accounting Standards Accounting for Derivative Instruments and Hedging Activities: In June, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement 133). This statement expanded the 7 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, is effective for years beginning after June 15, 2000. The Corporation does not expect the adoption of Statement 133 to have a material effect on its balance sheet, comprehensive income or net income. NOTE F - Acquisitions Skylands Financial Corporation - On August 1, 2000, the Corporation completed its acquisition of Skylands Financial Corporation (SFC) of Hackettstown, New Jersey. SFC, with approximately $240 million in total assets on the acquisition date, was a bank holding company whose sole banking subsidiary, Skylands Community Bank (Skylands), operates eight community banking offices 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 0.819 shares of the Corporation's common stock. In addition, the 308,000 options to acquire shares of SFC stock were also exchanged for options to purchase the Corporation's common stock. As a result of the acquisition, SFC was merged with and into Fulton Financial Corporation (parent company) and Skylands became the Corporation's third banking subsidiary located in New Jersey. The acquisition was accounted for as a purchase. Goodwill of approximately $17.5 million was recorded as the purchase price paid in excess of the net assets acquired. The goodwill will be amortized to expense on a straight line basis over 15 years. 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. Dearden, Maguire, Weaver and Barrett, Inc. - On October 30, 2000, the Corporation announced its intention to acquire asset management company Dearden, Maguire, Weaver and Barrett, Inc. (Dearden Maguire). This acquisition, which will be a cash purchase, is expected to close in the first quarter of 2001. Dearden Maguire provides investment advice to, and manages the assets of, clients in the mid-Atlantic region. The firm currently has $1.25 billion in assets under management. Dearden Maguire will retain its name and will operate in conjunction with Fulton Financial Advisors, N.A., the Corporation's investment management and trust services subsidiary. NOTE G - Reclassifications Certain amounts in the 1999 consolidated financial statements and notes have been reclassified to conform to the 2000 presentation. 8 FULTON FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- This discussion concerns Fulton Financial Corporation (the Corporation), a bank holding company incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly-owned subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and other financial information presented in this report. The Corporation has made, and may continue to make, certain forward-looking statements with respect to its management of net interest income and margin, allowance and provision for loan losses and non-interest income growth initiatives. 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 loans and deposits, actions of bank and nonbank competitors, changes in local and national economic conditions, changes in regulatory requirements and oversight of the Corporation, actions of the Federal Reserve Board (FRB) and customers' acceptance of the Corporation's products and services. The Corporation's forward-looking statements are relevant only as of the date on which such statements are made. By making any forward-looking statements, the Corporation assumes no duty to update them to reflect new, changing or unanticipated events or circumstances. RESULTS OF OPERATIONS - --------------------- Quarter ended September 30, 2000 versus Quarter ended September 30, 1999 - ------------------------------------------------------------------------ Fulton Financial Corporation's net income for the third quarter of 2000 increased $1.7 million, or 7.0%, in comparison to net income for the third quarter of 1999. Diluted net income per share increased $0.03, or 8.8%, compared to 1999. Third quarter net income of $26.1 million, or $0.37 per share (basic and diluted), represented a return on average assets (ROA) of 1.64% and a return on average equity (ROE) of 16.61%. This compares to 1999 net income of $24.4 million, or $0.34 (basic and diluted -- 1.64% ROA and 15.81% ROE). The increase in net income in 2000 resulted mainly from strong loan growth, continued high asset quality, control of non-interest expenses and fee income growth. Net Interest Income - ------------------- Net interest income increased $2.6 million, or 4.3%, for the quarter. Excluding a one-time recovery of $1.0 million in interest income on a non-accrual loan, net interest income increased $1.6 million, or 2.6%. This modest increase reflected the changes in the interest rate environment as short-term rates continued to rise over the past year. Rising rates affected the cost of the Corporation's short-term borrowings and put upward pricing pressure on its deposits. Due to the shorter term nature of these funding sources relative to the Corporation's loan portfolio, the result was slower net interest income growth and a downward trend for net interest margin, despite strong balance sheet growth. The following table provides a comparative average balance sheet and net interest income analysis for the third quarter of 2000 as compared to the same period in 1999. All dollar amounts are in thousands. 9
Quarter Ended September 30, 2000 Quarter Ended September 30, 1999 --------------------------------------- ---------------------------------------- Average Yield/ Average Yield/ ASSETS Balance Interest Rate (1) Balance Interest Rate (1) - --------------------------------------- ------------ ------------ -------- ------------ ------------ -------- Interest-earning assets: Loans and leases..................... $ 4,717,994 $ 101,169 8.59% $ 4,216,432 $ 86,671 8.21% Taxable investment securities........ 935,634 14,345 6.13 1,040,438 15,452 5.94 Tax-exempt investment securities..... 201,093 2,147 6.21 207,875 2,271 6.40 Equity securities.................... 86,169 1,133 5.24 83,769 991 4.71 Short-term investments............... 8,769 188 8.53 2,365 26 3.71 ------------ ------------ -------- ------------ ------------ -------- Total interest-earning assets.......... 5,949,659 118,982 8.09 5,550,879 105,411 7.68 Noninterest-earning assets: Cash and due from banks.............. 234,324 202,923 Premises and equipment............... 90,530 77,642 Other assets......................... 131,567 148,485 Less: Allowance for loan losses...... (60,839) (59,303) ------------ ------------ Total Assets................. $ 6,345,241 $ 5,920,626 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Demand deposits...................... $ 604,523 $ 2,441 1.61% $ 580,276 $ 1,909 1.30% Savings deposits..................... 1,052,182 6,905 2.61 1,038,961 5,774 2.20 Time deposits........................ 2,325,011 33,360 5.71 2,197,762 27,828 5.02 Short-term borrowings................ 493,224 7,460 6.00 365,815 4,302 4.67 Long-term debt....................... 345,191 4,479 5.16 298,467 3,894 5.18 ------------ ------------ -------- ------------ ------------ -------- Total interest-bearing liabilities..... 4,820,131 54,645 4.51 4,481,281 43,707 3.87 Noninterest-bearing liabilities: Demand deposits...................... 809,515 734,341 Other................................ 89,796 92,548 ------------ ------------ Total Liabilities............ 5,719,442 5,308,170 Shareholders' equity................... 625,799 612,456 ------------ ------------ Total Liabilities and Shareholders' Equity....... $ 6,345,241 $ 5,920,626 ============ ============ Net interest income.................... $ 64,337 $ 61,704 ============ =========== Net interest margin (FTE).............. 4.44% 4.55% ======== ========
(1) Yields are fully taxable equivalent (FTE) The increases in average balances from 1999 to 2000 were impacted by the purchase accounting acquisition of Skylands on August 1, 2000. Approximately $112.6 million of the increase in average loans and $150.6 million of the increase in average total interest-earning assets resulted from the inclusion of Skylands in the above numbers from August 1, 2000 through the end of the quarter. Similarly, approximately $146.9 million of the increase in average deposits is attributable to the Skylands acquisition. Although the balance increases were affected, the yields and costs for each period were not significantly impacted, as the total assets of Skylands account for less than 5% of the total assets of the Corporation. The discussion that follows does not isolate the impact of Skylands in any further detail as the effect on the overall discussion is negligible. Total interest income increased $13.6 million, or 12.9%. Of this increase, approximately $7.5 million resulted from the $398.8 million, or 7.2%, increase in average interest-earning assets, with the remaining $6.1 million increase resulting from the 41 basis point increase in average yields. Average total loans grew by $501.6 million, or 11.9%, to $4.7 billion in the third quarter of 2000. This growth occurred mainly in commercial loans and mortgages ($371.1 million, or 17.7% increase), residential mortgages ($65.4 million, or 8.1% increase) and home equity loans ($69.2 million, or 20.5% increase). In 10 terms of rates, the majority of the commercial loan increase ($250.6 million) was realized in fixed rate loans. As borrowers locked in fixed rates over the past year, the average yield on loans increased only 38 basis points, as compared to a 139 basis point increase in the average prime lending rate over the same period. Average investment securities decreased $109.2 million, or 8.2%, as funds from maturing investments were used to support loan growth. Total interest expense increased $10.9 million, or 25.0%, from $43.7 million in 1999 to $54.6 million in 2000. This increase was primarily a result of higher interest rates, which contributed $7.6 million to the increase, with the remaining $3.3 million attributable to an increase in average balances. Total interest-bearing deposits increased $164.7 million, or 4.3%, to $4.0 billion in 2000. Time deposits grew the fastest ($127.2 million, or 5.8 % increase), mainly in maturities of between one and two years. With deposit growth lagging the increase in loans, the Corporation continued to increase its borrowings as an alternative funding source. Average short-term borrowings, consisting mainly of overnight federal funds purchased, increased $127.4 million, or 34.8%, to $493.2 million. Long-term debt increased $46.7 million, or 15.7%. The use of more costly short-term borrowings and time deposits as the primary funding source for loan growth, as well as the increase in rates in general, caused the Corporation's cost of funds to increase 64 basis points from 1999 to 2000. As the increase in the cost of funds outpaced the increase in the yield on earning assets (64 bp vs. 41 bp), the Corporation's net interest margin realized a decline (4.44% in the third quarter of 2000 as compared to 4.55% in the prior year). The Corporation was able to moderate the decline by increasing its non-interest bearing deposits by $75.2 million, or 10.2%. Provision and Allowance for Loan Losses - --------------------------------------- The following table summarizes loans outstanding (including unearned income) as of the dates shown: September 30 December 31 2000 1999 ----------- ----------- (in thousands) Commercial, financial and agricultural...... $ 1,159,742 $ 1,051,958 Real estate - construction.................. 217,657 164,583 Real estate - mortgage...................... 2,615,513 2,371,764 Consumer ................................... 737,295 774,098 Leasing and other........................... 86,242 69,627 ----------- ----------- Totals................................... $ 4,816,449 $ 4,432,030 =========== =========== The loans summary as of December 31, 1999 as shown above has been restated to conform to the presentation adopted in 2000 as a result of changes in the Corporation's financial reporting system. In addition to some immaterial classification changes, approximately $400 million of loans previously classified as commercial mortgages are now being shown as commercial loans. This reclassification has no impact on the Corporation's assessment of the risk of these loans for allowance evaluation purposes. The allowance for loan loss procedures as documented in the following section are applied to categories of loans based on sub-system classification or to individually large credits. These procedures are not dependent upon the ultimate classification of the loans for financial reporting purposes. 11 The following table summarizes the activity in the Corporation's allowance for loan losses:
Three Months Ended September 30 --------------------------------- 2000 1999 ------------ ------------ (dollars in thousands) Loans outstanding at end of period (net of unearned).......... $ 4,803,699 $ 4,282,314 ============ ============ Daily average balance of loans and leases..................... $ 4,717,994 $ 4,216,432 ============ ============ Balance of allowance for loan losses at beginning of period................................... $ 58,280 $ 58,942 Loans charged-off: Commercial, financial and agricultural.................... 1,296 1,038 Real estate - mortgage.................................... 401 436 Consumer.................................................. 1,430 1,497 Leasing and other......................................... 39 471 ------------ ------------ Total loans charged-off................................... 3,166 3,442 ------------ ------------ Recoveries of loans previously charged-off: Commercial, financial and agricultural.................... 268 74 Real estate - mortgage.................................... 310 84 Consumer.................................................. 401 572 Leasing and other......................................... 1 53 ------------ ------------ Total recoveries.......................................... 980 783 ------------ ------------ Net loans charged-off......................................... 2,186 2,659 Allowance acquired (Skylands)................................. 2,633 - Provision for loan losses..................................... 2,345 1,997 ------------ ------------ Balance at end of period...................................... $ 61,072 $ 58,280 ============ ============ Net charge-offs to average loans (annualized)................. 0.19% 0.25% ============ ============ Allowance for loan losses to loans outstanding................ 1.27% 1.36% ============ ============
The following table summarizes the Corporation's non-performing assets as of the indicated dates.
Sept. 30 Dec. 31 Sept. 30 (Dollars in thousands) 2000 1999 1999 ------------- ------------ -------------- Nonaccrual loans................................ $ 17,779 $ 18,653 $ 17,022 Loans 90 days past due and accruing............. 7,226 8,516 7,349 Other real estate owned (OREO).................. 692 917 1,315 ------------- ------------ -------------- Total non-performing assets..................... $ 25,697 $ 28,086 $ 25,686 ============= ============ ============== Non-performing loans/Total loans................ 0.52% 0.61% 0.57% Non-performing assets/Total assets.............. 0.40% 0.46% 0.43% Non-performing assets/Gross loans and OREO...... 0.53% 0.63% 0.60%
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 continuing analyses of the loan portfolio, it is believed that the allowance is not adequate to absorb the losses inherent in the portfolio. Management considers various factors in 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, 12 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 affiliate banks. Resulting provisions and allowances are aggregated for consolidated financial reporting. For the third quarter of 2000, net charge-offs totaled $2.2 million, or 0.19%, of average loans on an annualized basis. This net charge-off rate was an improvement from $2.7 million, or 0.25%, in the third quarter of 1999. Non-performing loans, including loans 90 days past due and still accruing, to total loans were 0.52% at September 30, 2000, also an improvement over 0.61% at December 31, 1999 and 0.57% at September 30, 1999. Despite the improvement in the asset quality measurements noted in the previous paragraph, the provision for loan losses increased $348,000, or 17.4%, to $2.3 million in 2000. This increase was attributable to the 12.2% growth in the Corporation's loan portfolio since September 30, 1999. The Corporation's periodic loan portfolio review and allowance calculation resulted in an unallocated allowance for loan losses of 23% at September 30, 2000 and 32% at December 31, 1999. Management believes that the allowance balance of $61.1 million is sufficient to cover losses incurred in the loan portfolio and is appropriate based on applicable accounting standards. Other Income - ------------ Other income for the quarter ended September 30, 2000 was $16.9 million. This was an increase of $1.5 million, or 9.6%, over the comparable period in 1999. Excluding investment security gains, which decreased from $1.6 million in 1999 to $1.4 million in 2000, other income increased $1.7 million, or 12.4%. The acquisition of Skylands contributed approximately $200,000 to this increase, mainly in service charges on deposits. Other service charges and fees increased the most dramatically, $939,000, or 34.0%, over the third quarter of 1999. This growth was led by merchant fees ($235,000, or 42.9% increase), debit card income ($121,000, or 18.4% increase) and commercial letter of credit fees ($122,000, or 58.2% increase) as the Corporation continued to focus on other income opportunities. Service charges on deposit accounts also realized strong growth, increasing $732,000, or 13.3%, to $6.2 million in 2000. The strongest category of service charge growth was in cash management fees from commercial customers, which increased $291,000, or 29.5%. The Corporation has continued to stress cash management as an attractive fee source. Investment management and trust services income increased a modest $134,000, or 2.9%, over 1999. Despite this modest growth, the formation of the Corporation's investment management and trust services subsidiary, Fulton Financial Advisors, N.A. (FFA) in May, 2000 is expected to contribute to more significant revenue growth in the future. Mortgage banking income, which consists of gains on mortgage loan sales and servicing income, decreased $93,000, or 9.9%. This decline was almost entirely due to a decline in mortgage loan sale volume, as interest rates have risen and refinance activity has, therefore, decreased. Other Expenses - -------------- Total other expenses for the third quarter of 2000 of $41.7 million increased $1.3 million, or 3.2%, in comparison to the third quarter of 1999. This increase resulted almost entirely from the acquisition of Skylands, which contributed $1.2 million to total other expenses for the quarter. The Corporation's efficiency ratio, which is the ratio of noninterest expense to fully taxable equivalent revenues (excluding security gains), improved to 51.1% in 2000 from 52.3% in 1999. 13 Salaries and employee benefits increased $1.5 million, or 6.6%, in comparison to the third quarter of 1999. Excluding the impact of two months of expense from Skylands, totaling $517,000, salaries and benefits expense increased $979,000, or 4.3%. This increase is in line with the Corporation's expectations for average merit increases and also reflects a small increase in the number of employees. Other expenses, excluding salaries and benefits expenses, decreased $202,000, or 1.1%. Excluding the $635,000 increase attributable to Skylands, the decrease was even more pronounced at $837,000, or 4.7%. This decrease resulted from several factors, including a reduction in data processing expense due to the renewal of the Corporation's contract with its third party provider and the continued emphasis on cost controls throughout the organization. Income Taxes - ------------ Income tax expense for the third quarter of 2000 was $11.1 million, a $758,000, or 7.4%, increase from $10.3 million in 1999. The Corporation's effective tax rate remained consistent at 29.7% in both 2000 and 1999. 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, 2000 versus Nine Months ended September 30, 1999 - -------------------------------------------------------------------------------- Fulton Financial Corporation's net income for the first nine months of 2000 increased $5.4 million, or 7.5%, in comparison to net income for the same period in 1999. Diluted net income per share increased $0.09, or 9.1%, compared to 1999. Net income for the first nine months of 2000 of $77.3 million, or $1.09 per share (basic) and $1.08 per share (diluted), represented an ROA of 1.67% and an ROE of 16.88%. This compares to 1999 net income of $72.0 million, or $0.99 per share (basic and diluted -- 1.65% ROA and 15.63% ROE). The increase in net income in 2000 resulted from continued growth of the Corporation's core banking business, as shown by increases in both net interest income and non-interest income. These increases were offset by decreases in investment securities gains and a small increase in other expenses. Net Interest Income - ------------------- Net interest income increased $6.0 million, or 3.3%, for the first nine months of 2000. Overall, this increase was a result of growth in the Corporation's balance sheet, offset by a rising cost of funds. The following table provides a comparative average balance sheet and net interest income analysis for the first nine months of 2000 as compared to the same period in 1999. All dollar amounts are in thousands. 14
Nine Months Ended Nine Months Ended September 30, 2000 September 30, 1999 ---------------------------------------- ---------------------------------------- Average Yield/ Average Yield/ ASSETS Balance Interest Rate (1) Balance Interest Rate (1) - --------------------------------------- ------------- ------------- -------- ------------- ------------- -------- Interest-earning assets: Loans and leases..................... $ 4,579,734 $ 287,357 8.43% $ 4,121,791 $ 253,134 8.25% Taxable investment securities........ 937,210 42,664 6.07 1,063,696 47,661 5.98 Tax-exempt investment securities..... 202,212 6,504 6.25 184,071 6,119 6.49 Equity securities.................... 85,672 3,347 5.21 81,488 3,004 4.92 Short-term investments............... 8,590 489 7.60 6,500 227 4.66 ------------- ------------- ------- ------------- ------------- ------- Total interest-earning assets.......... 5,813,418 340,361 7.94 5,457,546 310,145 7.71 Noninterest-earning assets: Cash and due from banks.............. 229,162 208,184 Premises and equipment............... 84,867 76,944 Other assets......................... 122,873 158,563 Less: Allowance for loan losses...... (59,382) (58,979) ------------- ------------- Total Assets................. $ 6,190,938 $ 5,842,258 ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Demand deposits...................... $ 593,664 $ 6,870 1.50% $ 574,152 $ 5,610 1.31% Savings deposits..................... 1,036,242 19,378 2.49 1,031,642 16,965 2.19 Time deposits........................ 2,260,365 93,020 5.50 2,198,009 84,276 5.13 Short-term borrowings................ 486,673 20,724 5.67 312,489 10,401 4.45 Long-term debt....................... 335,717 13,074 5.20 298,545 11,566 5.18 ------------- ------------- ------- ------------- ------------- ------- Total interest-bearing liabilities..... 4,712,661 153,066 4.34 4,414,837 128,818 3.90 Noninterest-bearing liabilities: Demand deposits...................... 773,123 718,506 Other................................ 92,986 93,126 ------------- ------------- Total Liabilities............ 5,578,770 5,226,469 Shareholders' equity................... 612,168 615,789 ------------- ------------- Total Liabilities and Shareholders' Equity....... $ 6,190,938 $ 5,842,258 ============= ============= Net interest income.................... $ 187,295 $ 181,327 ============= ============= Net interest margin (FTE).............. 4.42% 4.56% ======= =======
(1) Yields are fully taxable equivalent (FTE) The acquisition of Skylands did not have as significant an impact on average balances for the first nine months of 2000 as it did for the third quarter. Average loans and average total interest earning assets increased approximately $37 million and $50 million, respectively, as a result of the acquisition. Average deposits increased approximately $49 million. Total interest income for the first nine months of 2000 increased $30.2 million, or 9.7%. Of this increase, approximately $20.6 million resulted from the $355.9 million, or 6.5%, increase in average interest-earning assets, with the remaining $9.6 million increase resulting from the 23 basis point increase in average yields. Average total loans grew by $457.9 million, or 11.1%, to $4.6 billion for the first nine months of 2000. This growth occurred mainly in commercial loans and mortgages ($334.5 million, or 16.4% increase). In addition, the Corporation experienced moderate growth in residential mortgages and home equity loans. As with the quarter, the majority of the loan growth was realized in fixed rate loans, which limited the benefit that the Corporation received from the increase in interest rates in general from 1999 to 2000. While the average prime lending rate increased 128 basis points from 7.88% in 1999 to 9.16% in 2000, the average yield on loans increased only 18 basis points to 8.43%. 15 Loan growth was supported in part through funds provided by maturities and payoffs of investment securities. Average investments decreased $104.2 million, or 7.8%, during the first nine months of 2000. In general, investments have lower yields than loans, and the change in the mix of interest-earning assets from investments to loans had a positive impact on overall yields, which increased 23 basis points to 7.94%. Total interest expense increased $24.2 million, or 18.8%, from $128.8 million in 1999 to $153.1 million in 2000. This increase was primarily a result of higher interest rates, which contributed $14.6 million to the increase, with the remaining $9.6 million attributable to an increase in average balances. Average total interest-bearing deposits increased $86.5 million, or 2.3%, to $3.9 billion for the first nine months of 2000. Time deposits provided the majority of this growth, increasing $62.4 million, or 2.8%, mainly in maturities of between one and two years. As deposit growth lagged loan growth, the shortfall in funding was made up with borrowings. Average short-term borrowings, consisting mainly of overnight federal funds purchased, increased $174.2 million, or 55.7%, to $486.7 million. Long-term debt increased $37.2 million, or 12.5%. The use of more costly short-term borrowings and time deposits as the primary funding source for loan growth, as well as the increase in rates in general, caused the Corporation's cost of funds to increase 44 basis points from 1999 to 2000. As a result of the cost of funds increasing more dramatically than the yield on earning assets (44 bp vs. 23 bp), the Corporation also registered a decline in its net interest margin for the year to date period (4.42% for the first nine months of 2000 as compared to 4.56% in the prior year). 16 Provision for Loan Losses - ------------------------- The following table summarizes the activity in the Corporation's allowance for loan losses:
Nine Months Ended -------------------------------- September 30 2000 1999 ----------- ----------- (dollars in thousands) Loans outstanding at end of period (net of unearned)......... $ 4,803,699 $ 4,282,314 =========== =========== Daily average balance of loans and leases.................... $ 4,579,734 $ 4,121,791 =========== =========== Balance of allowance for loan losses at beginning of period.................................. $ 57,631 $ 57,415 Loans charged-off: Commercial, financial and agricultural................... 3,380 1,810 Real estate - mortgage................................... 1,032 1,029 Consumer................................................. 4,778 5,358 Leasing and other........................................ 219 539 ----------- ----------- Total loans charged-off.................................. 9,409 8,736 ----------- ----------- Recoveries of loans previously charged-off: Commercial, financial and agricultural................... 1,333 1,425 Real estate - mortgage................................... 650 555 Consumer................................................. 1,824 1,519 Leasing and other........................................ 15 53 ----------- ----------- Total recoveries......................................... 3,822 3,552 ----------- ----------- Net loans charged-off........................................ 5,587 5,184 Allowance acquired (Skylands)................................ 2,633 - Provision for loan losses.................................... 6,395 6,049 ----------- ----------- Balance at end of period..................................... $ 61,072 $ 58,280 =========== =========== Net charge-offs to average loans (annualized)................ 0.16% 0.17% =========== =========== Allowance for loan losses to loans outstanding............... 1.27% 1.36% =========== ===========
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 2000, net charge-offs totaled $5.6 million, or 0.16%, of average loans on an annualized basis. This compares to $5.2 million, or 0.17%, for the first nine months of 1999 and 0.19% for all of 1999. Non-performing loans, including loans 90 days past due and still accruing, to total loans were 0.52% at September 30, 2000 as compared to 0.57% at September 30, 1999 and 0.61% at December 31, 1999. The provision for loan losses of $6.4 million for the first nine months of 2000 was $346,000, or 5.7%, higher than 1999. This increase resulted from loan growth offset by the impact of the continuing improvement of the quality of the Corporation's loan portfolio. The Corporation's periodic loan portfolio review and allowance calculation resulted in an unallocated allowance for loan losses of 23% at September 30, 2000 and 32% at December 31, 1999. Management believes that the allowance balance of $61.1 million is sufficient to cover losses incurred in the loan portfolio and appropriate based on applicable accounting standards. 17 Other Income - ------------ Other income for the nine months ended September 30, 2000 was $50.6 million. This was an increase of $4.8 million, or 10.5%, over the comparable period in 1999. Excluding investment security gains, which decreased from $6.3 million in 1999 to $5.9 million in 2000, other income increased $5.2 million, or 13.2%. The most significant increase, $2.7 million, or 22.2%, was realized in investment management and trust services income as a result of the formation of FFA and the continued roll out of brokerage services to all of the Corporation's affiliate banks. Service charges on deposit accounts increased $2.3 million, or 14.6%, as a result of cash management income ($973,000, or 36.8% increase) and overdraft fees ($633,000, or 11.4% increase). Other service charges and fees increased $1.5 million, or 17.7%, as a result of higher debit card revenue ($429,000, or 23.8% increase) and merchant fees ($634,000, or 41.4% increase). Mortgage banking income decreased $1.2 million, or 35.6% as a result of higher interest rates reducing refinance volume. Other Expenses - -------------- Total other expenses for the first nine months of 2000 of $121.4 million showed a moderate increase of $2.5 million, or 2.1%, over 1999. Excluding the expenses of Skylands in 2000, total other expenses increased $1.3 million, or 1.1%. The Corporation's efficiency ratio continued to improve during the first nine months of 2000, declining to 51.2% as compared to 52.7% in 1999. Salaries and employee benefits increased to $69.4 million, a $3.4 million, or 5.1%, increase in comparison to the first nine months of 1999. In general, this was attributable to normal merit increases as well as growth in the employee base from an average of 2,352 full-time equivalent employees in 1999 to 2,407 in 2000. Excluding salaries and benefits expense, other expenses decreased $908,000, or 1.7%. This decrease resulted from the Corporation's efforts to control expenses, as well as the benefits noted in the quarter discussion. Income Taxes - ------------ Income tax expense for the first nine months of 2000 was $32.7 million as compared to $30.1 million for the comparable period in 1999, a $2.6 million, or 8.6%, increase. The effective tax rate was fairly consistent at 29.7% in 2000 and 29.5% in 1999. FINANCIAL CONDITION - ------------------- At September 30, 2000, the Corporation had total assets of $6.5 billion, reflecting an increase of $408.8 million, or 6.7%, from December 31, 1999. Of this increase, approximately $258 million was attributable to the acquisition of Skylands and the recording of the resulting goodwill on the transaction. The increase in assets was realized almost entirely in loans, which grew $381.3 million, or 8.6%, to $4.8 billion at September 30, 2000 as compared to $4.4 billion at December 31, 1999. As discussed in the "Net Interest Income" section, most of this growth was in commercial loans and mortgages. Investment securities were essentially flat, increasing $3.8 million, or 0.3%, from December 31, 1999. This was due to available funds being used to support the strong loan growth rather than investing in lower yielding securities. Premises and equipment increased $14.5 million, or 18.3%, as construction continued on the new building at the Corporation's headquarters in Lancaster, PA. Other assets increased $10.0 million, or 8.1%, mainly as a result of recording $17.5 million in goodwill related to the acquisition of Skylands. Total deposits increased $277.7 million, or 6.1%, mainly in non-interest bearing, which grew $82.9 million, or 11.4%. Long-term debt increased $120.3 million, or 36.7%, as the Corporation lengthened the maturities of its funding sources through advances from the Federal Home Loan Bank. This was done to reduce the 18 impact of changes in short-term rates on the Corporation's cost of funds. These advances replaced short-term borrowings, which decreased $31.4 million, or 6.4%. Capital Resources - ----------------- Shareholders' equity increased $32.7 million, or 5.3%, during the first nine months of 2000. This growth occurred due to net income of $77.3 million, offset by $32.9 million in dividends paid to shareholders, a 42.5% payout ratio. Although shareholders' equity also increased $31.9 million as a result of the Skylands acquisition, this was offset by $45.2 million in stock repurchases during the period, the majority of which was reissued to consummate the merger. Common stock, capital surplus and retained earnings were also adjusted during the first half of the year for the impact of the 5% stock dividend paid on May 31, 2000. See Note B to the financial statements. During 2000, the Corporation repurchased shares of its stock under two separate plans approved by its Board of Directors. The first was an open market repurchase program for up to 1.05 million shares through December 31, 2000. The second was an open market repurchase program of up to 2.1 million shares. The second plan was adopted as a means to minimize any increase in the number of outstanding shares of the Corporation as a result of its merger with SFC. Under the second plan, 2.0 million shares were repurchased during 2000 and all were reissued in connection with the Skylands acquisition. This plan was cancelled as of the August 1, 2000 acquisition date. Under the first plan, 429,000 shares had been repurchased through September 30, 2000. 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 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, 2000, the Corporation and each of its bank subsidiaries met the minimum capital requirements. In addition, the Corporation and each of its bank subsidiaries' capital ratios exceeded the amounts required to be considered "well-capitalized" as defined in the regulations. 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 $53.1 million) and U.S. Government agency stock (cost basis of approximately $34.3 million). The Corporation's financial institutions stock portfolio had net unrealized gains of approximately $6.8 million at September 30, 2000. 19 Although the book value of equity investments accounted for only 1.5% 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 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. 20 FULTON FINANCIAL CORPORATION INTEREST RATE SENSITIVITY (dollars in thousands)
Expected Maturity Period Estimated ------------------------ *1 Year 1-2 Years 2-3 Years 3-4 Years 4-5 Years **5 Years Total Fair Value ---------- --------- --------- --------- --------- --------- ----------- ------------ Fixed rate loans (1) $ 890,348 $620,289 $ 485,177 $ 349,596 $ 227,894 $ 772,694 $3,345,998 $ 3,305,770 Average rate (1) 8.14% 7.95% 7.91% 7.89% 7.94% 7.75% 7.94% Floating rate loans (2) 485,872 158,295 149,141 110,531 91,169 462,693 1,457,701 1,450,873 Average rate 9.81% 9.60% 9.59% 9.66% 8.68% 8.77% 9.35% Fixed rate investments (3) 226,568 220,763 262,209 117,923 111,151 204,363 1,142,977 1,117,453 Average rate 5.82% 6.20% 6.12% 6.20% 6.29% 6.45% 6.18% Floating rate investments (3) 250 50 1,000 - - 14,360 15,660 15,483 Average rate 8.36% 7.50% 6.42% - - 6.87% 6.87% Other interest-earning assets 6,828 - - - - - 6,828 6,828 Average rate 6.46% - - - - - 6.46% ----------------------------------------------------------------------------------------------------- Total $1,609,866 $999,397 $ 897,527 $ 578,050 $ 430,214 $1,454,110 $5,969,164 $ 5,896,407 Average rate 8.31% 7.82% 7.66% 7.88% 7.67% 7.88% 7.94% ----------------------------------------------------------------------------------------------------- Fixed rate deposits (4) $1,368,308 $642,618 $ 196,122 $ 33,016 $ 46,798 $ 19,005 $2,305,867 $ 2,303,400 Average rate 5.56% 6.13% 6.10% 5.54% 6.29% 5.62% 5.78% Floating rate deposits (5) 572,857 85,477 81,649 81,649 74,913 814,427 1,710,972 1,710,972 Average rate 3.66% 2.03% 1.97% 1.97% 1.89% 1.55% 2.34% Fixed rate borrowings (6) 136,115 150,840 130,345 27,851 358 3,066 448,575 439,869 Average rate 6.06% 5.44% 5.32% 5.01% 6.35% 5.79% 5.57% Floating rate borrowings (7) 456,180 - - - - - 456,180 456,180 Average rate 5.98% - - - - - 5.98% ----------------------------------------------------------------------------------------------------- Total $2,533,460 $878,935 $ 408,116 $ 142,516 $ 122,069 $ 836,498 $4,921,594 $ 4,910,421 Average rate 5.23% 5.61% 5.02% 3.39% 3.59% 1.66% 4.58% -----------------------------------------------------------------------------------------------------
* denotes less than ** denotes greater than 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, Super NOW, NOW and savings accounts are placed based on history of deposit flows. 6) Amounts are based on contractual maturities of Federal Home Loan Bank advances. 7) Amounts are Federal Funds purchased and securities sold under agreements to repurchase, which mature in less than one year. 21 The Corporation uses three complementary methods to measure and manage interest rate risk. They are static gap analysis, simulation of net interest income, 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 analysis 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 for sale 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 percent of total earning assets. The Corporation was positioned within this range throughout the first six months of 2000. At September 30, 2000, the cumulative 6-month gap was 0.98. 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. As of September 30, 2000, the Corporation's net interest income at risk of loss over the next twelve months was 2.3% where interest rates are shocked upward by 200 or 300 basis points. Net interest income at risk of loss was 2.1%, 2.0% and 3.9% when 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 in interest rates. As of September 30, 2000, upward shocks of 100, 200 and 300 basis points were estimated to have negative effects upon economic value of 2.6%, 5.1% and 7.6%, respectively. 22 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 endedas of November 19, 1992 - Incorporated by reference 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. (4) Financial Data Schedule - September, 2000 (b) Reports on Form 8-K : (1) Form 8-K dated August 10, 2000 reporting the acquisition of Skylands Financial Corporation on August 1, 2000. (2) Form 8-K dated September 20, 2000 reporting 30 days of combined results of operations for Fulton Financial Corporation and Skylands Financial Corporation subsequent to August 1, 2000 acquisition. 23 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 10, 2000 \s\ Rufus A. Fulton, Jr. ---------------------------- --------------------------------- Rufus A. Fulton, Jr. Chairman, President and Chief Executive Officer Date: November 10, 2000 \s\ Charles J. Nugent ----------------------------- --------------------------------- Charles J. Nugent Executive Vice President and Chief Financial Officer 24 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. Financial data schedule - September 30, 2000. 25 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FULTON FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2000 AND THE RELATED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND OTHER FINANCIAL DATA INCLUDED WITHIN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 237,913 3,161 0 0 1,130,482 96,590 95,277 4,803,699 61,072 6,478,773 4,824,494 456,180 102,499 448,575 182,051 0 0 464,973 6,478,773 287,357 52,515 489 340,361 119,268 153,066 187,295 6,395 5,895 121,409 110,065 77,342 0 0 77,342 1.09 1.08 4.42 17,779 7,226 0 0 57,631 9,409 3,822 61,072 61,072 0 14,047
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