-----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, Fx2+tHdXgYx6YIozEAb2oKsHUn7gHB6pF3JkZo7kH9bVl1MLytWodtsT7KO2OxNY /RPHyCj3wQArwlD0Eo0sAQ== 0000950109-02-001809.txt : 20020415 0000950109-02-001809.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950109-02-001809 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FULTON FINANCIAL CORP CENTRAL INDEX KEY: 0000700564 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232195389 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10587 FILM NUMBER: 02593955 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-K 1 d10k.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K --------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ---------- Commission File Number: 0-10587 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) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $2.50 Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of shares of common stock held by non-affiliates, calculated based on the average of the bid and asked prices on March 19, 2002, was approximately $1.9 billion. As of December 31, 2001 there were 82,612,000 shares of Fulton Financial Corporation common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference: Part of Form 10-K into Document which incorporated -------- ---------------------- Definitive Proxy Statement of Part III Fulton Financial Corporation dated March 4, 2002 PART I Item 1. Description of Business - ------------------------------- General Fulton Financial Corporation (the Corporation) was incorporated under the laws of Pennsylvania on February 8, 1982 and became a bank holding company through the acquisition of all of the outstanding stock of Fulton Bank on June 30, 1982. In 2000, the Corporation became a financial holding company as defined in the Gramm-Leach-Bliley Act (GLB Act), which allowed the Corporation to expand its financial services activities under its holding company structure (See "Competition" and "Regulation and Supervision"). At December 31, 2001, the Corporation owned 100% of the stock of eleven community banks, three financial services companies and five non-bank entities. The common stock of Fulton Financial Corporation is listed for quotation on the National Market System of the National Association of Securities Dealers Automated Quotation System under the symbol FULT. Bank and Financial Services Subsidiaries The Corporation's eleven subsidiary banks are located primarily in suburban or semi-rural geographical markets throughout a four state region (Pennsylvania, Maryland, New Jersey and Delaware). Pursuant to its "super-community" banking strategy, the Corporation operates the banks independently to maximize the advantage of community banking and service to its customers. Where appropriate, operations are centralized through common platforms and back-office functions; however, decision making remains with the local bank management. The subsidiary banks are located in areas which are home to a wide range of manufacturing, distribution, health care and other service companies. The Corporation and its banks are not dependent upon one or a few customers or any one industry and the loss of any single customer or a few customers would not have a material adverse impact on any of the subsidiary banks. Although the banks vary in terms of size, each offers a consistent variety of commercial and retail banking services to its customers. Included in the array of products are demand, savings and time deposits; commercial, consumer and mortgage loans; vehicle and equipment leasing and financing; VISA and MasterCard credit cards; VISA debit cards; cash management; international services such as letters of credit and currency exchange; and PC and telephone banking. The Corporation's subsidiary banks deliver their products and services through traditional branch banking, with a network of full service branch offices. Electronic delivery channels include a network of automated teller machines, telephone banking and PC banking through the Internet. These alternative delivery channels allow customers to access their account information and perform certain transactions such as transferring funds and paying bills at virtually any hour of the day. The Corporation continued to supplement its internal growth with strategic acquisitions during 2001. On July 1, 2001, the Corporation completed its merger with Drovers Bancshares Corporation (Drovers), an $820 million bank holding company located in York, Pennsylvania. 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. This merger allowed the Corporation to increase its presence in the desirable York County, Pennsylvania market, which is adjacent to its Lancaster County base. In June 2001, the Corporation assumed $315 million of deposits and purchased $53 million of loans in an acquisition of 18 branches located in New Jersey, Delaware and Pennsylvania. These branches were allocated among four of the Corporation's existing affiliate banks and strengthened its presence in current regions while allowing for expansion into new geographical markets. In January 2001, the Corporation completed its acquisition of investment management and advisory company Dearden, Maguire, Weaver and Barrett, LLC (Dearden Maguire). This acquisition complemented the Corporation's existing investment management and trust services business which is offered through Fulton Financial Advisors, N.A. Dearden Maguire, which is also a registered investment advisory firm, increased the Corporation's assets under management by approximately $1.3 billion on the acquisition date. The following table provides geographical and statistical information for the Corporation's banking and financial services subsidiaries.
Full-Time Main Office Total Total Equivalent Subsidiary Location Assets Deposits Employees Branches* - ---------------------------------------- --------------------- ------ -------- ---------- --------- (millions) Fulton Bank Lancaster, PA $3,489 $2,499 746 70 Lebanon Valley Farmers Bank Lebanon, PA 682 542 167 17 Swineford National Bank Hummels Wharf, PA 277 221 93 7 Lafayette Ambassador Bank Easton, PA 892 717 319 22 FNB Bank, N.A. Danville, PA 310 240 86 8 Hagerstown Trust Company Hagerstown, MD 422 337 154 15 Delaware National Bank Georgetown, DE 238 202 110 11 The Bank Woodbury, NJ 401 337 199 12 Woodstown National Bank Woodstown, NJ 423 358 154 17 Peoples Bank of Elkton Elkton, MD 102 86 33 2 Skylands Community Bank Hackettstown, NJ 288 248 77 8 Fulton Financial Advisors, N.A. and Fulton Insurance Services Group, Inc. Lancaster, PA -- -- 172 -- Dearden, Maguire, Weaver &Barrett West Conshohocken, PA -- -- 15 -- Fulton Financial (Parent Company) Lancaster, PA -- -- 493 -- ------ --- 2,818 189 ====== ===
*See additional information in "Item 2. Properties" Non-Bank Subsidiaries The Corporation also owns 100% of the stock of five non-bank subsidiaries: (i) Fulton Life Insurance Company, which engages in the business of reinsuring credit life and accident and health insurance directly related to extensions of credit by the banking subsidiaries of the Corporation; (ii) Fulton Financial Realty Company, which holds title to or leases certain properties upon which Corporation branch offices and other facilities are located; (iii) Central Pennsylvania Financial Corp., which owns certain limited partnership interests in partnerships invested in low and moderate income housing projects and two non-bank companies in various stages of liquidation; (iv) FFC Management, Inc., which owns certain investment securities and other passive investments; and (v) Drovers Capital Trust I (the "Trust"), a Delaware business trust whose sole asset is $7,735,000 of junior subordinated deferrable interest debentures to the Trust from the Corporation. In addition, the Corporation owns a 1/8th interest in Pennbanks Insurance Company, a joint venture with seven other Pennsylvania banks, which formed an offshore reinsurance company. Each bank in the venture owns a segregated cell through which it's respective premiums and losses from credit life and accident and health insurance are funded and for which each bank has sole responsibility. Competition The banking and financial services industries are highly competitive. Within its geographical region, the Corporation's subsidiary banks face direct competition from other commercial banks, varying in size from local community banks to larger regional and national banks, and credit unions. With the growth in electronic commerce and distribution channels, the banks also face competition from banks not physically located in the Corporation's geographical markets. The competition in the industry has also increased as a result of the passage of the GLB Act. Under the GLB Act, banks, insurance companies or securities firms may affiliate under a financial holding company structure, allowing expansion into non-banking financial services activities that were previously restricted. These include a full range of banking, securities and insurance activities, including securities and insurance underwriting, issuing and selling annuities and merchant banking activities. While the Corporation does not currently engage in all of these activities, the ability to do so without separate approval from the Federal Reserve Board enhances the ability of the Corporation - and financial holding companies in general - to compete more effectively in all areas of financial services. A bank holding company wishing to become a financial holding company - such as the Corporation, which did so in 2000 - must first satisfy several conditions, including requirements that all of its Federal Deposit Insurance Company (FDIC)-insured depository subsidiaries are well-capitalized, well-managed and have at least as "satisfactory" rating under the Community Reinvestment Act (CRA). As a result of the GLB Act, there is more competition for customers that were traditionally served by the banking industry. While the GLB Act increased competition, it also provided opportunities for the Corporation to expand its financial services offerings, such as insurance products through Fulton Insurance Services Group, Inc. The Corporation also competes through the variety of products that it offers and the quality of service that it provides to its customers. However, there is no guarantee that these efforts will insulate the Corporation from competitive pressure which could impact its pricing decisions for loans, deposits and other services and ultimately impact financial results. Market Share Although there are many ways to assess the size and strength of banks, deposit market share continues to be an important industry statistic. This information is compiled annually by the FDIC and is available to the public. The Corporation's banks maintain branch offices in 30 counties across four mid-Atlantic states. In ten of these counties, the Corporation ranks in the top three in deposit market share (based on deposits as of June 30, 2001). The following table summarizes information about the counties in which the Corporation has branch offices and its market position in each county.
No. of Financial Deposit Market Institutions Share(6/30/01) ---------------- -------------- Population Banking Banks/ Credit County State (2001 Est) Subsidiary Thrifts Unions Rank % - -------------- ------ ----------- --------------------------- ------- ------ ---- ---- Lancaster PA 474,259 Fulton Bank 19 12 1 21.9 Dauphin PA 252,873 Fulton Bank 20 14 6 5.2 Cumberland PA 215,061 Fulton Bank 16 8 12 1.8 York PA 384,922 Fulton Bank 18 20 3 12.5 Chester PA 437,817 Fulton Bank 36 8 24 0.9 Montgomery PA 756,627 Fulton Bank 50 33 46 0.1 Berks PA 376,429 Fulton Bank 20 18 9 3.6 Lebanon Valley Farmers Bank -- -- 22 0.4 Lebanon PA 120,824 Lebanon Valley Farmers Bank 9 2 1 32.4 Schuylkill PA 150,198 Lebanon Valley Farmers Bank 18 8 7 3.4 Snyder PA 37,611 Swineford National Bank 7 0 2 32.5 Union PA 42,033 Swineford National Bank 7 1 6 7.4 Northumberland PA 94,410 Swineford National Bank 17 3 11 2.7 FNB Bank, N.A. -- -- 5 6.6 Montour PA 18,274 FNB Bank, N.A. 5 3 1 37.7 Columbia PA 64,226 FNB Bank, N.A. 9 0 6 5.4 Lycoming PA 120,151 FNB Bank, N.A. 12 12 15 0.9
Northampton PA 268,832 Lafayette Ambassador Bank 16 16 1 14.1 Lehigh PA 313,671 Lafayette Ambassador Bank 22 14 5 4.1 Washington MD 132,742 Hagerstown Trust Company 9 3 1 22.3 Frederick MD 198,662 Hagerstown Trust Company 14 5 17 0.1 Cecil MD 87,047 Peoples Bank of Elkton 6 3 3 13.4 Sussex DE 159,894 Delaware National Bank 12 4 5 1.0 New Castle DE 504,678 Delaware National Bank 33 31 24 0.2 Camden NJ 509,594 The Bank 20 13 20 0.1 Gloucester NJ 256,538 The Bank 22 5 2 12.2 Woodstown National Bank -- -- 9 3.0 Salem NJ 64,226 Woodstown National Bank 8 4 1 35.6 Cape May NJ 102,878 Woodstown National Bank 14 1 13 0.6 Atlantic NJ 254,698 Woodstown National Bank 17 6 15 0.5 Warren NJ 103,138 Skylands Community Bank 14 3 6 7.5 Sussex NJ 145,156 Skylands Community Bank 11 1 11 0.8 Morris NJ 474,074 Skylands Community Bank 34 9 15 1.3
Supervision and Regulation The Corporation is a registered financial holding company and its subsidiary banks are depository institutions whose deposits are insured by the FDIC. The Corporation and its subsidiaries are subject to various regulations and examinations by regulatory authorities. The following table summarizes the charter types and primary regulators for each of the Corporation's subsidiary banks. State (Name) or National Primary Subsidiary Charter Regulator(s) - --------------------------------- ----------- ------------ Fulton Bank PA PA/FDIC Lebanon Valley Farmers Bank PA PA/FRB Swineford National Bank National OCC (1) Lafayette Ambassador Bank PA PA/FRB FNB Bank, N.A. National OCC Hagerstown Trust Company MD MD/FDIC Delaware National Bank National OCC The Bank NJ NJ/FDIC Woodstown National Bank National OCC Peoples Bank of Elkton MD MD/FDIC Skylands Community Bank NJ NJ/FDIC Fulton Financial Advisors, N.A. National OCC (2) Fulton Financial (Parent Company) N/A FRB (1) Office of the Comptroller of the Currency. (2) Fulton Financial Advisors, N.A. is chartered as an uninsured national trust bank. Federal statutes that apply to the Corporation and its subsidiaries include the GLB Act, the Bank Holding Company Act (BHCA), the Federal Reserve Act and the Federal Deposit Insurance Act. In general, these statutes define the eligible business activities of the Corporation, certain acquisition and merger restrictions, limitations on intercompany transactions such as loans and dividends, and capital adequacy requirements, among other regulations. The Corporation is subject to regulation and examination by the Federal Reserve Board (FRB), and is required to file periodic reports and to provide additional information that the FRB may require. The Bank Holding Company Act imposes certain restrictions upon the Corporation regarding the acquisition of substantially all of the assets of or direct or indirect ownership or control of any bank of which it is not already the majority owner. In addition, the FRB must approve certain proposed changes in organizational structure or other business activities before they occur. There are a number of restrictions on bank holding companies and FDIC-insured depository subsidiaries that are designed to minimize potential loss to depositors and the FDIC insurance funds. If an FDIC-insured depository subsidiary is "undercapitalized", the bank holding company is required to guarantee (subject to certain limits) the subsidiary's compliance with the terms of any capital restoration plan filed with its appropriate banking agency. Also, a bank holding company is required to serve as a source of financial strength to its depository institution subsidiaries and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the BHCA, the FRB has the authority to require a bank holding company to terminate any activity or to relinquish control of a nonbank subsidiary upon the FRB's determination that such activity or control constitutes a serious risk to the financial soundness and stability of a depository institution subsidiary of the bank holding company. Bank holding companies are required to comply with the FRB's risk-based capital guidelines which require a minimum ratio of total capital to risk-weighted assets of 8%. At least half of the total capital is required to be Tier 1 capital. In addition to the risk-based capital guidelines, the FRB has adopted a minimum leverage capital ratio under which a bank holding company must maintain a level of Tier 1 capital to average total consolidated assets of at least 3% in the case of a bank holding company which has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a leverage capital ratio of at least 1% to 2% above the stated minimum. There are also various restrictions on the extent to which the Corporation and its nonbank subsidiaries can receive loans from its banking subsidiaries. In general, these restrictions require that such loans be secured by designated amounts of specified collateral and are limited, as to any one of the Corporation or its nonbank subsidiaries, to 10% of the lending bank's capital stock and surplus (20% in the aggregate to all such entities). The Corporation is also limited in the amount of dividends that it may receive from its subsidiary banks. Dividend limitations vary, depending on the subsidiary bank's charter and whether or not it is a member of the Federal Reserve System. Generally, subsidiaries are prohibited from paying dividends when doing so would cause them to fall below the regulatory minimum capital levels. Additionally, limits exist on paying dividends in excess of net income for specified periods. Monetary and Fiscal Policy The Corporation and its subsidiary banks are affected by fiscal and monetary policies of the federal government, including those of the FRB, which regulates the national money supply in order to manage recessionary and inflationary pressures. Among the techniques available to the Federal Reserve Board are engaging in open market transactions of U.S. Government securities, changing the discount rate and changing reserve requirements against bank deposits. These techniques are used in varying combinations to influence the overall growth of bank loans, investments and deposits. Their use may also affect interest rates charged on loans and paid on deposits. The effect of monetary policies on the earnings of the Corporation cannot be predicted. Statistical Information Certain additional statistical information relating to the business of Fulton Financial Corporation is set forth in the following tables. FULTON FINANCIAL CORPORATION COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
Year Ended December 31 --------------------------------------------------------------- (Dollars in thousands) 2001 2000 - ----------------------------------------------------------------------------------------------------------- Average Yield/ Average Yield/ ASSETS Balance Interest Rate Balance Interest Rate - ----------------------------------------- ---------- -------- ----- ---------- -------- ------ Interest-earning assets: Loans and leases (1)................... $5,341,497 $424,025 7.94% $5,131,651 $433,686 8.45% Taxable investment securities (2)...... 1,300,169 77,701 5.98 1,101,946 68,629 6.23 Tax-exempt investment securities (2)... 216,783 9,465 4.37 231,375 10,187 4.40 Equity securities (2).................. 103,286 5,097 4.93 109,002 6,087 5.58 Short-term investments................. 44,405 1,890 4.26 14,456 1,038 7.18 ---------- -------- ---- ---------- -------- ---- Total interest-earning assets............ 7,006,140 518,178 7.40 6,588,430 519,627 7.89 Noninterest-earning assets: Cash and due from banks................ 241,660 246,694 Premises and equipment................. 124,003 106,020 Other assets (2)....................... 217,717 142,412 Less: Allowance for loan losses........ (69,449) (64,033) ---------- ---------- Total Assets................... $7,520,071 $7,019,523 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY - ---------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Demand deposits........................ $ 744,831 $ 8,795 1.18% $ 653,063 $ 9,878 1.51% Savings deposits....................... 1,313,880 25,381 1.93 1,186,721 32,895 2.77 Time deposits.......................... 2,786,513 152,793 5.48 2,568,238 144,828 5.64 Short-term borrowings.................. 355,953 13,150 3.69 521,608 30,447 5.84 Long-term debt......................... 500,162 27,843 5.57 476,590 25,826 5.42 ---------- -------- ---- ---------- -------- ---- Total interest-bearing liabilities....... 5,701,339 227,962 4.00 5,406,220 243,874 4.51 Noninterest-bearing liabilities: Demand deposits........................ 925,865 836,997 Other.................................. 113,853 102,335 ---------- ---------- Total Liabilities.............. 6,741,057 6,345,552 Shareholders' equity..................... 779,014 673,971 ---------- ---------- Total Liabilities and Shareholders' Equity......... $7,520,071 $7,019,523 ========== ========== Net interest income...................... 290,216 275,753 Net yield on interest-earning assets..... 4.14 4.19 Tax equivalent adjustment (3)............ 8,286 8,506 -------- ---- -------- ---- Net interest margin...................... $298,502 4.26% $284,259 4.31% ======== ==== ======== ==== Year Ended December 31 ----------------------------- (Dollars in thousands) 1999 - -------------------------------------------------------------------------- Average Yield/ ASSETS Balance Interest Rate - ----------------------------------------- ---------- -------- ----- Interest-earning assets: Loans and leases (1)................... $4,601,801 $378,705 8.23% Taxable investment securities (2)...... 1,177,455 71,028 6.03 Tax-exempt investment securities (2)... 218,482 9,903 4.53 Equity securities (2).................. 102,163 5,365 5.25 Short-term investments................. 6,035 297 4.92 ---------- -------- ---- Total interest-earning assets............ 6,105,936 465,298 7.62 Noninterest-earning assets: Cash and due from banks................ 233,898 Premises and equipment................. 93,419 Other assets (2)....................... 163,556 Less: Allowance for loan losses........ (63,179) ---------- Total Assets................... $6,533,630 ========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------- Interest-bearing liabilities: Demand deposits........................ $ 628,351 $ 8,162 1.30% Savings deposits....................... 1,166,781 27,616 2.37 Time deposits.......................... 2,441,926 125,681 5.15 Short-term borrowings.................. 380,343 17,619 4.63 Long-term debt......................... 381,219 20,050 5.26 ---------- -------- ---- Total interest-bearing liabilities....... 4,998,620 199,128 3.98 Noninterest-bearing liabilities: Demand deposits........................ 769,693 Other.................................. 101,476 ---------- Total Liabilities.............. 5,869,789 Shareholders' equity..................... 663,841 ---------- Total Liabilities and Shareholders' Equity......... $6,533,630 ========== Net interest income...................... 266,170 Net yield on interest-earning assets..... 4.36 Tax equivalent adjustment (3)............ 8,104 -------- ---- Net interest margin...................... $274,274 4.49% ======== ====
- ------------------------------------------------------------------------- (1) Includes nonperforming loans. (2) Balances include amortized historical cost for available for sale securities. The related unrealized holding gains (losses) on securities are included in other assets. (3) Based on marginal Federal income tax rate and statutory interest expense disallowances. FULTON FINANCIAL CORPORATION RATE/VOLUME TABLE The following table sets forth for the periods indicated a summary of changes in interest income and interest expense resulting from corresponding volume and rate changes:
2001 vs. 2000 2000 vs. 1999 Increase (decrease) due Increase (decrease) due To change in to change in ----------------------------- --------------------------- Volume Rate Net Volume Rate Net ------- -------- -------- ------- ------- ------- (in thousands) Interest income on: Loans and leases ................... $17,735 $(27,396) $ (9,661) $43,604 $11,377 $54,981 Taxable investment securities ...... 12,345 (3,273) 9,072 (4,555) 2,156 (2,399) Tax-exempt investment securities ... (642) (80) (722) 584 (300) 284 Equity securities .................. (319) (671) (990) 359 363 722 Short-term investments ............. 2,150 (1,298) 852 414 327 741 ------- -------- -------- ------- ------- ------- Total interest-earning assets .... $31,269 $(32,718) $ (1,449) $40,406 $13,923 $54,329 ======= ======== ======== ======= ======= ======= Interest expense on: Demand deposits .................... $ 1,388 $ (2,471) $ (1,083) $ 321 $ 1,395 $ 1,716 Savings deposits ................... 3,525 (11,039) (7,514) 472 4,807 5,279 Time deposits ...................... 12,309 (4,344) 7,965 6,501 12,646 19,147 Short-term borrowings .............. (9,670) (7,627) (17,297) 6,544 6,284 12,828 Long-term debt ..................... 1,277 740 2,017 5,016 760 5,776 ------- -------- -------- ------- ------- ------- Total interest-bearing liabilities $ 8,829 $(24,741) $(15,912) $18,854 $25,892 $44,746 ======= ======== ======== ======= ======= =======
Note: The rate/volume variances are allocated in the table above by applying the changes in volume times the prior period rate and by applying the changes in rate times the current period volume on a consistent basis throughout. FULTON FINANCIAL CORPORATION INVESTMENT PORTFOLIO The following table sets forth the carrying amount of investment securities held to maturity (HTM) and available for sale (AFS) as of the dates shown:
December 31 --------------------------------------------------------------------- 2001 2000 --------------------------------- --------------------------------- HTM AFS Total HTM AFS Total ------- ---------- ---------- ------- ---------- ---------- (in thousands) United States Treasury and U.S. Government agencies and Corporations....................... $ 8,170 $ 99,682 $ 107,852 $ 8,992 $ 212,109 $ 221,101 State and municipal..................... 9,840 218,181 228,021 12,971 211,734 224,705 Other securities........................ 165 300 465 720 18,322 19,042 Equity securities....................... -- 151,333 151,333 -- 133,938 133,938 Mortgage-backed securities.............. 31,382 1,218,291 1,249,673 62,079 794,030 856,109 ------- ---------- ---------- ------- ---------- ---------- Totals............................ $49,557 $1,687,787 $1,737,344 $84,762 $1,370,133 $1,454,895 December 31 ---------------------------------- 1999 ---------------------------------- HTM AFS Total ------- ---------- ----------- (in thousands) United States Treasury and U.S. Government agencies and Corporations....................... $ 11,879 $ 216,862 $ 228,741 State and municipal..................... 35,189 205,358 240,547 Other securities........................ 525 20,793 21,318 Equity securities....................... -- 135,957 135,957 Mortgage-backed securities.............. 59,237 748,418 807,655 -------- ---------- ---------- Totals............................ $106,830 $1,327,388 $1,434,218 ======== ========== ==========
FULTON FINANCIAL CORPORATION MATURITY DISTRIBUTION OF INVESTMENT SECURITIES The following tables set forth the maturities of investment securities at December 31, 2001 and the weighted average yields of such securities (calculated based upon historical cost). HELD TO MATURITY (at amortized cost) ----------------
MATURING ------------------------------------------------------------------------ After One But After Five But Within One Year Within Five Years Within Ten Years After Ten Years ------------------------------------------------------------------------ Amount Yield Amount Yield Amount Yield Amount Yield ------- ----- ------ -------- ------ ------- ------ ------ (dollars in thousands) United States Treasury and U.S. Government Agencies and corporations........ $ 4,374 4.27% $2,707 5.45% $ 749 6.30% $340 7.55% State and municipal (1)............. 4,174 6.14 4,606 7.60 1,060 8.21 -- -- Other securities.................... -- -- 165 6.64 -- -- -- -- ------- ---- ------ ---- ------ ---- ---- ---- Totals........................... $ 8,548 5.18% $7,478 6.80% $1,809 7.42% $340 7.55% ======= ==== ====== ==== ====== ==== ==== ==== Mortgage-backed securities (2)...... $31,382 6.55% ======= ====
AVAILABLE FOR SALE (at estimated fair value) ------------------
MATURING --------------------------------------------------------------------------- After One But After Five But Within One Year Within Five Years Within Ten Years After Ten Years --------------------------------------------------------------------------- Amount Yield Amount Yield Amount Yield Amount Yield ---------- ----- -------- ------ ------- ------ ------- ----- (dollars in thousands) United States Treasury and U.S. Government Agencies and corporations........ $ 34,986 5.37% $ 64,946 5.69% $ -- --% $ -- --% State and municipal (1)............. 1,173 6.07 164,604 6.38% 22,734 7.51 29,670 8.28 Other............................... -- -- 50 -- -- -- -- -- ---------- ---- -------- ---- ------- ---- ------- ---- Totals........................... $ 36,159 5.39% $229,600 6.18% $22,734 7.51% $29,670 8.28% ========== ==== ======== ==== ======= ==== ======= ==== Mortgage-backed securities (2)...... $1,218,291 5.79% ========== ====
(1) Weighted average yields on tax-exempt securities have been computed on a fully tax-equivalent basis assuming a tax rate of 35 percent. (2) Maturities for mortgage-backed securities are dependent upon the interest rate environment and prepayments on the underlying loans. For the purpose of this table, the entire balance and weighted average rate is shown in one period. FULTON FINANCIAL CORPORATION LOAN PORTFOLIO BY TYPE The following table sets forth the amount of loans outstanding (net of unearned income) as of the dates shown:
December 31 -------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (in thousands) Commercial, financial and agricultural... $1,495,380 $1,386,172 $1,212,807 $1,038,418 $ 939,689 Real-estate - construction .............. 267,627 247,382 171,351 138,798 166,056 Real-estate - mortgage .................. 2,896,865 2,929,351 2,633,270 2,410,025 2,332,583 Consumer ................................ 626,985 738,797 793,776 771,221 785,966 Leasing and other ....................... 86,163 72,957 71,402 62,019 51,023 -------------------------------------------------------------- $5,373,020 $5,374,659 $4,882,606 $4,420,481 $4,275,317 ==============================================================
MATURITY & SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES The following table summarizes the maturity and sensitivity of certain loan types to changes in interest rates as of December 31, 2001:
One One Year Through More Than or Less Five Years Five Years Total -------- ---------- ---------- ---------- (in thousands) Commercial, financial and agricultural: Floating rate .................... $303,109 $225,820 $380,655 $ 909,584 Fixed rate ....................... 173,247 330,224 82,325 585,796 -------- -------- -------- ---------- Total $476,356 $556,044 $462,980 $1,495,380 ======== ======== ======== ========== Real-estate - construction: Floating rate .................... $ 54,660 $ 47,033 $ 45,823 $ 147,516 Fixed rate ....................... 50,443 40,913 28,755 120,111 -------- -------- -------- ---------- Total $105,103 $ 87,946 $ 74,578 $ 267,627 ======== ======== ======== ==========
FULTON FINANCIAL CORPORATION RISK ELEMENTS IN LOAN PORTFOLIO The following table presents information concerning the aggregate amount of nonaccrual, past due and restructured loans and other nonperforming assets (4):
December 31 ----------------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- (in thousands) Nonaccrual loans (1) (2) (3) ............. $22,794 $21,790 $23,989 $20,716 $21,559 Accruing loans past due 90 days or more... 9,368 7,135 8,549 11,116 10,562 Other real estate ........................ 1,817 1,035 1,002 1,568 1,691 ------- ------- ------- ------- ------- Totals .............................. $33,979 $29,960 $33,540 $33,400 $33,812 ======= ======= ======= ======= =======
(1) Includes impaired loans as defined by Statement of Financial Accounting Standards No. 114 of approximately $8.7 million at December 31, 2001. (2) As of December 31, 2001, the gross interest income that would have been recorded during 2001 if nonaccrual loans had been current in accordance with their original terms was approximately $1.9 million. The amount of interest income on those nonaccrual loans that was included in 2001 net income was approximately $1.2 million. (3) Accrual of interest is generally discontinued when a loan becomes 90 days past due as to principal and interest. When interest accruals are discontinued, interest credited to income is reversed. Nonaccrual loans are restored to accrual status when all delinquent principal and interest becomes current or the loan is considered secured and in the process of collection. Certain loans, primarily residential mortgages, that are determined to be sufficiently collateralized may continue to accrue interest after reaching 90 days past due. (4) Excluded from the amounts presented at December 31, 2001 are $15.7 million in loans where possible credit problems of borrowers have caused management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms. These loans are subject to constant management attention and their classification is reviewed monthly. FULTON FINANCIAL CORPORATION SUMMARY OF LOAN LOSS EXPERIENCE An analysis of the Corporation's loss experience is as follows:
Year Ended December 31 -------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (dollars in thousands) Loans outstanding at end of year ............ $5,373,020 $5,374,659 $4,882,606 $4,420,481 $4,275,317 ========== ========== ========== ========== ========== Daily average balance of loans and leases ... $5,341,497 $5,131,651 $4,601,801 $4,323,585 $4,058,391 ========== ========== ========== ========== ========== Balance of allowance for loan losses at beginning of year ................... $ 65,640 $ 61,538 $ 61,327 $ 60,861 $ 57,023 Loans charged-off: Commercial, financial and agricultural 6,296 9,242 4,797 2,934 2,682 Real estate - construction .............. -- -- -- -- -- Real estate - mortgage .................. 767 1,922 1,604 1,403 1,636 Consumer ................................ 6,683 6,911 8,147 5,426 4,854 Leasing and other ....................... 529 282 124 134 397 ---------- ---------- ---------- ---------- ---------- Total loans charged-off ................. 14,275 18,357 14,672 9,897 9,569 ---------- ---------- ---------- ---------- ---------- Recoveries of loans previously charged-off: Commercial, financial and agricultural 703 1,518 2,027 1,223 2,182 Real estate - construction .............. -- -- -- -- -- Real estate - mortgage .................. 364 541 710 926 724 Consumer ................................ 2,683 2,724 2,202 1,364 1,357 Leasing and other ....................... 87 19 1 2 15 ---------- ---------- ---------- ---------- ---------- Total recoveries ........................ 3,837 4,802 4,940 3,515 4,278 ---------- ---------- ---------- ---------- ---------- Net loans charged-off ....................... 10,438 13,555 9,732 6,382 5,291 Provision for loan losses ................... 14,585 15,024 9,943 6,848 8,803 Allowance purchased ......................... 2,085 2,633 -- -- 326 ---------- ---------- ---------- ---------- ---------- Balance at end of year ...................... $ 71,872 $ 65,640 $ 61,538 $ 61,327 $ 60,861 ========== ========== ========== ========== ========== Ratio of net charge-offs during period to average loans .......................... 0.20% 0.26% 0.21% 0.15% 0.13% Ratio of allowance for loan losses to loans ========== ========== ========== ========== ========== outstanding at end of year ............. 1.34% 1.22% 1.26% 1.39% 1.42% ========== ========== ========== ========== ==========
FULTON FINANCIAL CORPORATION ALLOCATION OF ALLOWANCE FOR LOAN LOSSES The allowance for loan losses has been allocated as follows to provide for the possibility of losses being incurred within the following categories of loans at the dates indicated:
December 31 ------------------------------------------------------------------ 2001 2000 1999 -------------------- -------------------- -------------------- (dollars in thousands) % of % of % of Loans in Loans in Loans in each Each Each Allowance Category Allowance Category Allowance Category --------- -------- --------- -------- --------- -------- Commercial, financial & agriculture ....... $22,531 27.8% $21,193 25.8% $15,516 24.8% Real estate - construction & mortgages ......... 19,018 58.9 14,940 59.1 17,425 57.4 Consumer, leasing & other ............. 10,855 13.3 10,772 15.1 9,435 17.8 Unallocated .............. 19,468 -- 18,735 -- 19,162 -- ------- ----- ------- ----- ------- ----- Totals .............. $71,872 100.0% $65,640 100.0% $61,538 100.0% ======= ===== ======= ===== ======= ===== December 31 ------------------------------------------- 1998 1997 -------------------- -------------------- (dollars in thousands) % of % of loans in loans in each each Allowance category Allowance category --------- -------- --------- -------- Commercial, financial & agriculture ....... $16,077 23.5% $11,970 22.0% Real estate - construction & mortgages ......... 20,296 57.7 12,468 58.4 Consumer, leasing & other ............. 6,868 18.8 7,393 19.6 Unallocated .............. 18,086 -- 29,030 -- ------- ----- ------- ----- Totals .............. $61,327 100.0% $60,861 100.0% ======= ===== ======= =====
(1) Refer to the "Provision and Allowance for Loan Losses" section of Management's Discussion and Analysis of Financial Condition and Results of Operations for management's methodology for assessing the adequacy of the allowance for loan losses. FULTON FINANCIAL CORPORATION DEPOSITS The average daily balances of deposits and rates paid on such deposits are summarized for the periods indicated in the following table:
Year Ended December 31 ----------------------------------------------------------- 2001 2000 1999 ------------------ ------------------ ----------------- Amount Rate Amount Rate Amount Rate ---------- ----- ---------- ----- ---------- ---- (dollars in thousands) Noninterest-bearing demand deposits .. $ 925,865 --% $ 836,997 --% $ 769,693 --% Interest-bearing demand deposits ..... 744,831 1.18 653,063 1.51 628,351 1.30 Savings deposits ..................... 1,313,880 1.93 1,186,721 2.77 1,166,781 2.37 Time deposits ........................ 2,786,513 5.48 2,568,238 5.64 2,441,926 5.15 ---------- ---- ---------- ---- ---------- ---- Totals ............................... $5,771,089 3.24% $5,245,019 3.58% $5,006,751 3.22% ========== ==== ========== ==== ========== ====
Maturities of time deposits of $100,000 or more outstanding at December 31, 2001 are summarized as follows: Time Deposits $100,000 or more ----------------- (in thousands) Three months or less ....................... $139,339 Over three through six months .............. 95,860 Over six through twelve months ............. 84,384 Over twelve months ......................... 91,879 -------- Totals .................................... $411,462 ======== FULTON FINANCIAL CORPORATION SHORT-TERM BORROWINGS The following table presents information related to Federal funds purchased and securities sold under agreements to repurchase. No other categories of short-term borrowings exceeded 30% of shareholders' equity at December 31, 2001.
December 31 -------------------------------- 2001 2000 1999 -------- -------- -------- (dollars in thousands) Amount outstanding at December 31 ............... $394,659 $441,638 $507,278 Weighted average interest rate at year end ...... 1.75% 5.94% 5.03% Maximum amount outstanding at any month end ..... $529,763 $573,094 $541,618 Average amount outstanding during the year ...... $352,757 $517,306 $376,029 Weighted average interest rate during the year... 3.68% 5.83% 4.63%
FULTON FINANCIAL CORPORATION RETURN ON EQUITY AND ASSETS The ratio of net income to average shareholders' equity and to average total assets and certain other ratios are as follows:
Year Ended December 31 ----------------------------------------- 2001 2000 1999 1998 1997 ----- ----- ----- ----- ----- Percentage of net income to: Average shareholders' equity ............ 14.58% 15.85% 15.76% 15.01% 14.54% Average total assets .................... 1.51 1.52 1.60 1.56 1.46 Percentage of dividends declared per common share to basic net income per share ..... 48.0 44.9 41.9 41.4 41.1 Percentage of average shareholders' equity to average total assets ................. 10.36 9.60 10.16 10.39 10.05
Item 2. Properties - ------------------ The following table summarizes the Corporation's branch network, by subsidiary bank. Remote service facilities (mainly stand-alone ATM's) are excluded. Owned ------------------- Total Bank Bank (1) FFRC (2) Leased Term (3) Branches - ---- -------- -------- ------ -------- -------- Fulton Bank 24 2 44 2018 70 Lebanon Valley Farmers Bank 11 2 4 2018 17 Swineford National Bank 5 -- 2 2004 7 Lafayette Ambassador Bank 7 -- 15 2010 22 FNB Bank, N.A. 6 -- 2 2014 8 Hagerstown Trust Company 12 -- 3 2014 15 Delaware National Bank 8 -- 3 2006 11 The Bank 7 -- 5 2012 12 Woodstown National Bank 14 -- 3 2012 17 Peoples Bank of Elkton 1 -- 1 2016 2 Skylands Community Bank 3 -- 5 2013 8 -- -- -- --- Total 98 4 87 189 == == == === (1) Properties are owned by the bank, free and clear of encumbrances. (2) Properties are owned by Fulton Financial Realty Company and are leased to the banks. (3) Latest lease term expiration date. The following table summarizes the Corporation's other significant properties:
Owned/ Bank Property Location Leased - ---- ------------------- ------------------- --------- Fulton Bank/Fulton Financial Corp. Admin. Headquarters Lancaster, PA (1) Fulton Bank/Fulton Financial Corp. Operations Center Mantua, NJ Owned Fulton Bank/Fulton Financial Corp. Operations Center East Petersburg, PA Owned Lebanon Valley Farmers Bank Admin. Headquarters Lebanon, PA Owned Swineford National Bank Admin. Headquarters Hummels Wharf, PA Owned Lafayette Ambassador Bank Admin. Headquarters Easton, PA Owned FNB Bank, N.A. Admin. Headquarters Danville, PA Owned Great Valley Bank Admin. Headquarters Reading, PA Owned Hagerstown Trust Company Admin. Headquarters Hagerstown, MD Owned Delaware National Bank Admin. Headquarters Georgetown, DE Leased(2) Bank of Gloucester County Admin. Headquarters Woodbury, NJ Owned Woodstown National Bank Admin. Headquarters Woodstown, NJ Owned Peoples Bank of Elkton Admin. Headquarters Elkton, MD Owned Skylands Community Bank Admin. Headquarters Hackettstown, NJ Leased(3)
(1) Includes approximately 100,000 square feet which is owned by an independent third party who financed the construction through a loan from Fulton Bank. The Corporation is leasing this space from the third party in an arrangement accounted for as a capital lease. The lease term expires in 2027. The remainder of the Administrative Headquarters location is owned by the Corporation. (2) Lease expires in 2006. (3) Lease expires in 2004. Item 3. Legal Proceedings - ------------------------- There are no legal proceedings pending against Fulton Financial Corporation or any of its subsidiaries which are expected to have a material impact upon the financial position and/or the operating results of the Corporation. Item 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- No matters were submitted to a vote of security holders of Fulton Financial Corporation during the fourth quarter of 2001. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - ----------------------------------------------------------------------------- The information appearing under the heading "Common Stock" in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" is incorporated herein by reference. Item 6. Selected Financial Data - ------------------------------- FULTON FINANCIAL CORPORATION AND SUBSIDIARIES 5-YEAR CONSOLIDATED SUMMARY OF OPERATIONS
For the Year -------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (Dollars in thousands, except per-share data) SUMMARY OF INCOME - ----------------- Interest income ............. $ 518,178 $ 519,627 $ 465,298 $ 450,252 $ 423,515 Interest expense ............ 227,962 243,874 199,128 199,430 187,407 ---------- ---------- ---------- ---------- ---------- Net interest income ......... 290,216 275,753 266,170 250,822 236,108 Provision for loan losses.... 14,585 15,024 9,943 6,848 8,803 Other income ................ 100,994 74,998 66,668 63,534 52,666 Other expenses .............. 216,669 184,456 175,769 170,866 162,814 ---------- ---------- ---------- ---------- ---------- Income before income taxes... 159,956 151,271 147,126 136,642 117,157 Income taxes ................ 46,367 44,437 42,499 41,635 35,163 ---------- ---------- ---------- ---------- ---------- Net income .................. $ 113,589 $ 106,834 $ 104,627 $ 95,007 $ 81,994 ========== ========== ========== ========== ========== PER-SHARE DATA (1) - ------------------ Net income (basic) .......... $ 1.38 $ 1.32 $ 1.27 $ 1.16 $ 1.00 Net income (diluted) ........ 1.37 1.31 1.26 1.15 0.99 Cash dividends .............. 0.662 0.593 0.532 0.480 0.411 PERIOD-END BALANCES - ------------------- Total assets ................ $7,770,711 $7,364,804 $6,787,424 $6,433,612 $5,902,546 Net loans ................... 5,301,148 5,309,019 4,821,066 4,359,153 4,214,456 Deposits .................... 5,986,804 5,502,703 5,051,512 5,048,924 4,820,629 Long-term debt .............. 456,802 559,503 460,573 358,696 96,603 Shareholders' equity ........ 811,454 731,171 662,749 654,070 607,961 AVERAGE BALANCES - ---------------- Shareholders' equity ........ $ 779,014 $ 673,971 $ 663,841 $ 633,056 $ 563,808 Total assets ................ 7,520,071 7,019,523 6,533,630 6,093,496 5,608,602
(1) Adjusted for stock dividends and stock splits. Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operations ------------- This discussion concerns Fulton Financial Corporation (the Corporation), a financial holding company registered under the Bank Holding Company Act and 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 acquisition and growth strategies, market risk, expenses, the effect of competition on net interest margin and net interest income, investment strategy and income growth, investment securities gains, deposit and loan growth, asset quality, changes in organizational structure, balances of risk-sensitive assets to risk-sensitive liabilities, amortization of goodwill and intangible assets and other financial and business matters for future periods. The Corporation cautions that these forward-looking statements are subject to various assumptions, risks and uncertainties. Because of the possibility that the underlying assumptions may change, actual results could differ materially from these 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, actions of the Federal Reserve Board, creditworthiness of current borrowers 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. MERGER AND ACQUISITION ACTIVITY - ------------------------------- The Corporation has historically supplemented its internal growth with the strategic acquisition of community banks with similar operating philosophies. More recently, the Corporation has also looked to non-bank entities to support its noninterest income growth initiatives. In 2001, the Corporation continued its external growth by acquiring a bank holding company, a non-bank financial services company and additional branches. The accounting requirements for mergers and acquisitions were changed by the June 2001 issuance of 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 eliminated the use of pooling of interests for transactions initiated subsequent to June 30, 2001. 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 was required to be amortized through December 31, 2001. Drovers Bancshares Corporation - On July 1, 2001, the Corporation completed its merger with Drovers Bancshares Corporation (Drovers), an $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. 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. This business combination was accounted for as a pooling of interests and, as such, all financial information presented in this report has been restated to reflect the impact of Drovers for all periods presented. In connection with this transaction, the Corporation recorded merger-related expenses of approximately $9.8 million ($6.4 million, net of tax). These charges 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, 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 of 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 a core deposit intangible asset of $9.9 million and an unidentifiable intangible asset of $21.7 million. The core deposit intangible asset is being amortized on a straight-line basis over 10 years. Since this was a branch acquisition, the unidentifiable intangible asset does not qualify for the non-amortization provisions of Statement 142 and will continue to be amortized to expense on a straight-line basis over 25 years. Dearden, Maguire, Weaver and Barrett, LLC - On January 2, 2001, the Corporation completed its acquisition of investment management and advisory company Dearden, Maguire, Weaver and Barrett, LLC (Dearden Maguire). The acquisition was accounted for as a purchase and the accounts and results of operations of Dearden Maguire are included in the financial statements of the Corporation prospectively from the January 2, 2001 acquisition date. In connection with the acquisition, 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 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 was being amortized to expense on a straight-line basis over 20 years through December 31, 2001. Effective January 1, 2002, the goodwill is no longer being amortized to expense as required by Statement 142, but will be evaluated periodically for impairment. 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 0.86 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. As a result of the acquisition, SFC was merged with and into the Corporation and Skylands became the Corporation's third banking subsidiary located in New Jersey. The acquisition was accounted for as a purchase and 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. In connection with the acquisition, goodwill of approximately $17.5 million was recorded as the purchase price paid in excess of the net assets acquired. The goodwill was being amortized to expense on a straight line basis over 15 years through December 31, 2001. Effective January 1, 2002, the goodwill is no longer being amortized to expense as required by Statement 142, but will be evaluated periodically for impairment. In the discussion that follows, the acquisitions of Skylands, Dearden Maguire and the Branch Acquisition are collectively referred to as the "Purchase Acquisitions". RESULTS OF OPERATIONS - --------------------- Overview The Corporation's net income for 2001 was $113.6 million, or 1.37 per share (diluted), as compared to $106.8 million, or $1.31 per share (diluted) in 2000. The increase in net income for the year was $6.8 million, or 6.3%, and the increase in net income per share was $0.06, or 4.6%. Excluding non-recurring merger-related expenses associated with the acquisition of Drovers, the Corporation earned $120.0 million, or $1.44 per share, increases of 12.3% and 9.9%, respectively over 2000. The percentage increase in net income exceeded the percentage increase in net income per share as there were more shares outstanding in 2001 as a result of issuing stock to effect the Skylands acquisition in August, 2000. The growth in 2001 resulted from net interest income increases driven by the impact of the Purchase Acquisitions, augmenting minimal internal net interest income growth due to the effect of changes in short term interest rates enacted by the Federal Reserve Board (Federal Reserve). Growth was also evident in non-interest income sources, particularly investment securities gains, investment management and trust services income - due, in part, to the acquisition of Dearden Maguire - and mortgage sales gains - due to significant refinance activity resulting from lower mortgage interest rates. These increases were offset by non-interest expense increases. Net income for 2000 of $106.8 million increased $2.2 million, or 2.1% over 1999. Net income per share of $1.31 was an increase of $0.05, or 4.0%. The restatement of financial information to reflect Drovers had a significant impact on the earnings growth from 1999 to 2000. In 2000, Drovers experienced certain loan credit issues which resulted in a $4.7 million increase to the provision for loan losses. The Corporation's return on average assets (ROA), excluding merger-related charges, was 1.60% in 2001 as compared to 1.52% in 2000 and 1.60% in 1999. Return on average shareholders' equity (ROE), excluding merger-related charges, was 15.40% in 2001 as compared to 15.85% in 2000 and 15.76% in 1999. Including merger-related charges, the Corporation's ROA and ROE were 1.51% and 14.58%, respectively, in 2001. Net Interest Income Net interest income is the most significant component of the Corporation's net income, accounting for 77% of total revenues in 2001. The ability to manage net interest income over a variety of interest rate and economic environments is important to the success of a banking entity. Net interest income growth is generally dependent upon balance sheet growth and maintaining or growing the net interest margin. See also the discussion of "Interest Rate Risk" later in this section. Net interest income for 2001 was $290.2 million, a $14.5 million, or 5.2%, increase over 2000. Excluding the estimated contribution from the Purchase Acquisitions, internal net interest income growth was $3.6 million, or 1.3%. Net interest income in 2000 was $275.8 million, a $9.6 million, or 3.6% increase over 1999. The impact of Skylands was also evident in 2000 as internal growth was only $4.4 million, or 1.6%. The "Comparative Average Balance Sheets and Net Interest Income Analysis" on page 13 and the "Rate/Volume Table" on page 14 summarize the components of net interest income and illustrate variances as a result of changes in interest rates versus growth in assets and liabilities. The interest rate environment, as evidenced by the actions of the Federal Reserve, had an obvious impact on the Corporation's ability to grow net interest income over the past two years. In terms of net interest margin, however, the Corporation was successful in minimizing the effect during 2001. The net interest margin for 2001 was 4.26%, a five basis point decrease from 4.31% in 2000. In 1999, the Corporation's net interest margin was 4.49%. Management believes that its asset/liability management practices will continue to minimize the effects of interest rate fluctuations. 2001 v. 2000 Interest income decreased $1.4 million, or 0.3%, to $518.2 million in 2001 from $519.6 million in 2000. Excluding the estimated impact of the Purchase Acquisitions, the decrease was $13.7 million, or 2.7%. Interest income increased $31.3 million as a result of a $417.7 million increase in average interest-earning assets. However, this was more than offset by the $32.7 million reduction in interest income resulting from declining rates. The average yield on earning assets for the year dropped 49 basis points to 7.40% in 2001 from 7.89% in 2000. Average loans increased $209.8 million, or 4.1%, to $5.3 billion. Excluding the impact of the Purchase Acquisitions, the increase was $72.4 million, or 1.4%. This modest increase resulted from offsetting factors - strong commercial loan and commercial mortgage growth ($201.4 million, or 7.5%) was offset by a $78.7 million, or 8.0% decrease in residential mortgages and a $58.7 million, or 4.4% decrease in consumer loans. Residential mortgages decreased as a result of a relatively low interest rate environment generating healthy refinance activity and sales of the resulting fixed rate loans. Consumer loans decreased mainly in indirect auto loans. The average yield on loans during 2001 was 7.94%, a 51 basis point decline from 2000 which mirrored the decline in average rates on total interest earning assets. The interest rate reductions enacted by the Federal Reserve had a direct impact on the Corporation's prime lending rate, which declined to an average of 6.89% during 2001 as compared to 9.25% in 2000. This index is used for pricing a portion of the Corporation's adjustable rate loan portfolio, resulting in lower overall yields as compared to 2000. In addition, new loans were originated at lower rates than prior years as a result of the general interest rate environment. Average investment securities increased $177.9 million, or 12.3%, during 2001. This growth, which was realized mainly in taxable investment securities, resulted from the Branch Acquisition, as the excess of deposits assumed over loans acquired was approximately $250 million. A portion of these excess funds was used to purchase investment securities as the Corporation realized only modest loan growth. The average yield on investment securities also declined during 2001, although the reduction was not as pronounced as that realized on the loan portfolio - 5.69% average yield in 2001 as compared to 5.89% in 2000. Interest expense decreased $15.9 million, or 6.5%, to $228.0 million in 2001 from $243.9 million in 2000. Excluding the Purchase Acquisitions, the decrease was $19.9 million, or 8.3%. Unlike interest income, which was equally impacted by rates and volumes, the decrease in interest expense was mainly a result of decreases in rates ($24.7 million), somewhat offset by increases in balances ($8.8 million). This contrast resulted from short term borrowings and demand and savings deposits repricing to lower rates more quickly than assets. However, the Corporation's time deposits were more influenced by volume increases as these are generally longer term and have not yet completely repriced to lower rates. Average interest-bearing deposits increased $437.2 million, or 9.9%, to $4.8 billion in 2001. This increase was largely driven by the Purchase Acquisitions; excluding these acquisitions, the increase was $176.2 million, or 4.1%. All categories of deposits realized growth during 2001, despite the industry trend in recent years toward minimal deposit growth for banks. While uncertainty in the equity markets contributed to inflows of funds to FDIC insured organizations, the Corporation also benefited from aggressive marketing, particularly free checking accounts. Average demand deposits, excluding the impact of the Purchase Acquisitions, increased $84.0 million, or 5.8%, and average savings deposits increased $57.1 million, or 4.9%. Time deposits increased $81.5 million, or 3.2%. Average short-term borrowings decreased $165.7 million, or 31.8%, as excess funds from the Branch Acquisition were used to reduce short-term borrowings as well as to purchase investment securities. Long-term debt increased $23.6 million, or 4.9%, as the Corporation retained positions in longer maturities for balance sheet management purposes. Borrowings and debt were not significantly impacted by Skylands. Average interest rates paid on interest-bearing liabilities decreased 51 basis points to 4.00% in 2001 as compared to 4.51% in 2000. This change was comparable to the change in interest earning assets, thus minimizing the impact of rates on the Corporation's net interest margin for the year, which decreased only five basis points to 4.26% in 2001 from 4.31% in 2000. 2000 v. 1999 Interest income increased $54.3 million, or 11.7%, to $519.6 million in 2000 from $465.3 million in 1999. Excluding Skylands, the increase was $45.6 million, or 9.8%. This growth was mainly volume driven, with $40.4 million of the increase attributable to the growth in interest-earning assets ($482.5 million, or 7.9%) and the remaining $13.9 million the result of interest rate increases. On average, the yield on earning assets increased 27 basis points to 7.89% in 2000 from 7.62% in 1999. The growth in average interest-earning assets occurred mostly in loans, which increased $529.9 million, or 11.5% ($457.9 million, or 10.0%, excluding the impact of Skylands) to $5.1 billion. Commercial loans ($169.9 million, or 15.2% increase) and commercial mortgage loans ($228.9 million, or 18.8% increase) accounted for the majority of the growth. Consumer loans, primarily as a result of an increase in home equity lines of credit and second mortgage loans, grew $81.6 million, or 6.5%. Residential mortgage loans increased only $38.2 million, or 4.0%, as the Corporation continued to sell newly originated fixed rate mortgage loans. Offsetting the increase in average loans was a decline in investment securities balances, which decreased $55.8 million, or 3.7%, to $1.4 billion in 2000. In general, proceeds from maturities were used to support loan growth rather than being reinvested in securities. The 27 basis point increase in average yields on earning assets reflected the changes in the interest rate environment in general. In contrast to 2001, which saw interest rates declining throughout the year, 2000 was marked by several rate increases enacted by the Federal Reserve. As market rates rose in response, the Corporation's earning assets also gradually readjusted to higher rates. However, the average loan yield increased only 22 basis points to 8.45% despite a 125 basis point increase in the average prime lending rate to 9.25% in 2000 from 8.00% in 1999. This reflects competition from other lenders and the loan portfolio mix, which included longer-term fixed rate loans originated when rates were lower. Interest expense increased $44.7 million, or 22.5%, to $243.9 million in 2000 from $199.1 million in 1999 ($41.3 million, or 20.7%, increase, excluding Skylands). Unlike interest income, which was mainly volume driven, interest expense was affected to a larger degree by interest rates. Increases in average balances accounted for $18.9 million of the increase, while rate increases accounted for $25.9 million of the increase. Average interest-bearing deposits increased $171.0 million, or 4.0%, to $4.4 billion in 2000. This modest increase, however, was impacted by the Skylands acquisition, which added $76.7 million to the annual average balance. Growing deposits during 2000 was a challenge for the Corporation - and banks in general - as non-bank alternatives continued to be attractive to consumers. While most of the deposit increase, $85.1 million (excluding the impact of Skylands), was in more costly time deposits, the Corporation did have some success in raising noninterest-bearing demand deposits, which grew $48.7 million, or 6.3%. As deposit growth lagged the increase in earning assets, the Corporation turned to alternative funding sources. Average short-term borrowings, consisting of overnight repurchase agreements and Federal funds purchased, increased $141.3 million, or 37.1%, and long-term debt, consisting of advances from the Federal Home Loan Bank (FHLB), increased $95.4 million, or 25.0%. The increases in borrowings were not impacted by Skylands. Average interest rates paid on interest-bearing liabilities increased 53 basis points to 4.51% as compared to 3.98% in 1999. This increase far outpaced the increase in yields on earning assets and reflected the change in the funding mix from lower cost deposits to higher cost borrowings. As a result, the net interest margin declined to 4.31% in 2000 from 4.49% in 1999. Provision and Allowance for Loan Losses Additions to the Corporation's allowance for loan losses are charged to income through the provision for loan losses when, in the judgement of management and based on continuing analyses of the loan portfolio, it is believed that the allowance is not adequate. 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, adequacy of collateral, the mix and risk characteristics of loan types in the portfolio, and the balance of the allowance relative to total and non-performing loans. Additional consideration is given to regional and national economic conditions. The Corporation's policies for evaluating the adequacy of the allowance for loan losses conform to the provisions of the Securities and Exchange Commission's Staff Accounting Bulletin No. 102, "Selected Loan Loss Allowance Methodology and Documentation Issues." The tables below summarize non-performing assets (including accruing loans greater than 90 days past due) and net charge-offs by major loan category as of or for the years ended December 31, 2001, 2000 and 1999 (dollars in thousands).
Nonperforming Assets ------------------------------------------------------------ 2001 2000 1999 ------------------ ------------------ ------------------ Amount % Change Amount % Change Amount % Change ------- -------- ------- -------- ------- -------- Real estate loans ......... $19,101 2.4% $18,646 (4.8)% $19,580 7.4% Commercial & industrial loans...... 9,255 48.6 6,229 (29.0) 8,779 14.4 Consumer loans ............ 3,806 (6.0) 4,050 (3.1) 4,179 (29.6) Other real estate owned.... 1,817 75.6 1,035 3.3 1,002 (36.1) ------- ---- ------- ----- ------- ----- Total...................... $33,979 13.4% $29,960 (10.7)% $33,540 0.4% ======= ==== ======= ===== ======= ===== Non-performing assets/Total assets... 0.44% 0.41% 0.49% ======= ======= ======= Non-performing loans/Total loans..... 0.60% 0.54% 0.67% ======= ======= =======
Net Charge-Offs ------------------------------------------------------------ 2001 2000 1999 ------------------ ------------------ ------------------ Amount % Change Amount % Change Amount % Change ------- -------- ------- -------- ------ --------- Real estate loans ......... $ 403 (70.8)% $ 1,381 54.5% $ 894 87.4% Commercial & industrial loans...... 5,593 (27.6) 7,724 178.9 2,769 61.8 Consumer loans ............ 4,442 (0.2) 4,450 (26.7) 6,069 44.7 ------- ----- ------- ----- ------ ---- Total ..................... $10,438 (23.0)% $13,555 39.3% $9,732 52.5% ======= ===== ======= ==== ====== ==== Net charge-offs/ Average loans......... 0.20% 0.26% 0.21% ======= ======= ======
The provision for loan losses for 2001 totaled $14.6 million. Of this amount, $2.7 million was related to the Drovers merger. 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 decreased $3.1 million, or 20.9%. In 2000, Drovers experienced significant charge-offs related to specific credits which have since been worked out, resulting in an increase to the provision. No comparable situations existed in 2001, thus resulting in a lower provision. The 2000 provision of $15.0 million was $5.1 million, or 51.1%, higher than the 1999 provision of $9.9 million. Net charge-offs as a percentage of average loans were 0.20%, a six basis point improvement from 2000. In addition, total net charge-offs decreased 23.0% compared to 2000. Total non-performing assets to total assets increased three basis points to 0.44% at December 31, 2001 as compared to 0.41% at the end of 2000. This modest increase reflects the change in general economic conditions at the end of 2001 as compared to the prior year. As a result of economic uncertainty and the change in the mix of the portfolio to proportionately more commercial loans, the Corporation provided for loan losses in an amount exceeding its realized net charge-offs for the year ($11.9 million provision, excluding $2.7 million related to Drovers, as compared to $10.4 million in net charge-offs). The Corporation's periodic loan portfolio review and allowance calculations resulted in 73% of the total balance being allocated to specific loans and loan types at December 31, 2001 as compared to 71% at December 31, 2000. The allowance for loan losses as a percentage of total loans increased to 1.34% at December 31, 2001 from 1.22% at December 31, 2000. This increase reflects the impact of the additional provision recorded for the Drovers portfolio. Management believes that the allowance balance of $71.9 million at December 31, 2001 is sufficient to cover losses incurred in the loan portfolio and is appropriate based on applicable accounting standards. Other Income Other income - excluding investment securities gains - increased $22.0 million, or 33.3%, to $88.4 million in 2001 as compared to $66.4 million in 2000. This growth resulted mainly from investment management and trust services (IMTS) income and mortgage sale gains. Skylands did not contribute significantly to the growth from 2000 to 2001. IMTS income increased $6.5 million, or 31.7%, to $27.1 million for 2001. This increase resulted mainly from the January, 2001 acquisition of Dearden Maguire, which accounted for $3.7 million of the increase. Internal growth of $2.8 million, or 13.5% was also strong as Fulton Financial Advisors, N.A. (Advisors) continued to grow its business throughout the Corporation's affiliate network. IMTS income was negatively impacted by the performance of the equity markets as many fees are based on the current values of accounts. IMTS income of $20.6 million in 2000 was an increase of $3.1 million, or 17.7% over 1999, driven mainly by the formation of Advisors in May, 2000. Service charges on deposit accounts increased $6.2 million, or 23.5%, to $32.4 million in 2001 primarily due to the increase in savings and demand deposit accounts, which generate the majority of these fees. The average balance of these accounts increased 11.5% from 2000 to 2001. Also contributing to the increase were changes in fee structures and the Purchase Acquisitions, which accounted for $1.8 million of the increase. Other service charges and fees increased $1.4 million, or 8.9%, to $17.1 million in 2001, following an increase of $3.0 million, or 23.2%, in 2000. The Corporation continued to realize steady increases in merchant fees ($654,000, or 22.0%, increase in 2001 and $760,000, or 34.3%, increase in 2000), and debit card income ($630,000, or 18.4%, increase in 2001 and $678,000, or 24.7%, increase in 2000) over the past two years. Income from ATM fees has leveled off in recent years as consumer habits have changed in response to such fees. Mortgage banking income increased $8.0 million, or 211.5%, to $11.8 million in 2001. This increase was entirely due to mortgage sales gains as servicing income remained unchanged. The relatively low interest rate environment generated significant levels of refinance activity as borrowers sought lower fixed rate loans. To minimize interest rate risk, the Corporation sells all eligible fixed rate mortgage loans in the secondary market. Servicing income remained flat as a portion of the refinance activity came from the Corporation's existing serviced loan portfolio. In 2000, mortgage banking income decreased $1.3 million, or 24.9%, as rates were relatively higher compared to 1999 and refinance activity, therefore, decreased. Investment securities gains increased $3.9 million, or 45.3%, to $12.6 million in 2001 following an increase of $298,000, or 3.6%, in 2000. The Corporation maintains an equity investment portfolio consisting of common stocks of financial institutions, many of which are located in and around the Corporation's general geographic market area. This portfolio has traditionally been the source of investment securities gains. In 2001, gains from this portfolio totaled $9.5 million, a $674,000, or 7.6% increase over 2000. Additional investment security gains in 2001 resulted from the restructuring of Drovers' investment portfolio to be consistent with the Corporation's investment philosophy. Other Expenses Noninterest expenses for 2001 increased $32.2 million, or 17.5%, to $216.7 million. This followed a 2000 increase of $8.7 million, or 4.9%, to $184.5 million. Excluding the impact of the Purchase Acquisitions and merger-related expenses, the 2001 increase was $14.5 million, or 8.0%. The Corporation's efficiency ratio, which is the ratio of noninterest expenses (excluding intangible amortization) to fully taxable equivalent revenues (excluding securities gains) increased slightly to 52.9% in 2001, as compared to 52.1% in 2000 and 52.5% in 1999. Salaries and employee benefits increased $13.7 million, or 13.3%, in 2001 to $116.9 million, as compared to a $5.5 million, or 5.6%, increase to $103.2 million in 2000. Excluding the impact of the Purchase Acquisitions, the 2001 increase was $8.9 million, or 8.7%. The salary expense component increased $5.9 million, or 7.1% due to normal merit increases and additions to staff to build infrastructure in key lines of business. Total average full-time equivalent employees were 2,761 in 2001 as compared to 2,649 in 2000 and 2,579 in 1999. Excluding the Purchase Acquisitions, employee benefits increased $2.7 million, or 18.1%, driven mainly by continued increases in health insurance costs, which grew by $2.1 million, or 34.4%. The smaller rate of increase in salaries and benefits expenses in 2000 resulted from salary increases of $5.8 million, or 6.9%, being offset by decreases in employee benefits expenses. This was realized primarily in retirement plan expenses, which decreased $93,000, or 1.4%, as the defined benefit plan was grandfathered and new employees were being enrolled in the profit sharing plan (see "Note J - Employee Benefit Plans" in the Notes to Consolidated Financial Statements). Net occupancy expense increased $1.6 million, or 10.6% to $17.1 million, following a 2000 increase of only $644,000, or 4.4%. Equipment expense increased $891,000, or 7.8%, in 2001 following an increase of $509,000, or 4.7%, in 2000. In 2001, the Corporation completed construction of its new office space in Lancaster, Pennsylvania as well as a new operations center in New Jersey. These items contributed to the increase in occupancy expense in 2001. Equipment expense increased as the Corporation continued strategic investments in technology to improve efficiency and customer service. Data processing expense increased $550,000, or 4.9%, in 2001, compared to a decrease of $190,000, or 1.7%, in 2000. In 2000, the Corporation's contract with its third party loan and deposit processor was renegotiated, resulting in savings to the Corporation. As the Corporation grew during 2001 through the addition of new affiliates and branches, the resulting processing volume increases have generated moderate increases in data processing costs. Intangible amortization consists primarily of the amortization of purchase accounting goodwill and unidentifiable intangible assets related to branch acquisitions. In 2001, intangible amortization increased $2.9 million, or 160.3% due to the Purchase Acquisitions. It is expected that amortization expense will decrease by approximately $3.1 million in 2002 as the goodwill related to certain business combinations accounted for as purchases will no longer be amortized (see "Note A - Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements). Other noninterest expenses increased $5.4 million, or 13.1%, in 2001, to $46.7 million, following an increase of $1.7 million, or 4.2% in 2000. Excluding the impact of Purchase Acquisitions, the 2001 increase was $4.6 million, or 11.8%. The most significant increase was realized in state taxes ($1.7 million, or 55.3% increase) -- which consist mainly of Pennsylvania bank shares tax expense -- due to fewer tax credits on qualified contributions. The remaining increases of 7.2% in 2001 and 4.2% in 2000 supported the continued growth of the Corporation. Income Taxes Income taxes increased $1.9 million, or 4.3%, in 2001 to $46.4 million, following an increase of $1.9 million, or 4.6%, in 2000. The effective tax rates were 29.0%, 29.4% and 28.9% in 2001, 2000 and 1999, respectively. In general, the variances from the 35% Federal statutory rate consisted of tax-exempt interest income and investments in low and moderate income housing partnerships, which qualify for Federal tax credits. Net credits of $3.6 million, $3.0 million and $2.9 million were recognized in 2001, 2000 and 1999, respectively. See also "Note I - Income Taxes" in the Notes to Consolidated Financial Statements. FULTON FINANCIAL CORPORATION AND SUBSIDIARIES AVERAGE CONSOLIDATED BALANCE SHEETS
December Monthly Averages ------------------------------------ 2001 2000 1999 ---------- ---------- ---------- (in thousands) ASSETS - ------ Cash and due from banks .............................. $ 263,627 $ 248,393 $ 276,285 Other interest-earning assets ........................ 15,682 23,288 3,663 Investment securities ................................ 1,788,840 1,434,058 1,454,412 Loans, including loans held for sale ................. 5,360,152 5,381,137 4,841,792 Less: Allowance for loan losses ...................... (72,207) (65,846) (63,297) ---------- ---------- ---------- Net Loans ................................... 5,288,945 5,315,291 4,778,495 ---------- ---------- ---------- Premises and equipment ............................... 126,491 115,921 95,762 Other assets ......................................... 204,097 183,793 161,242 ---------- ---------- ---------- Total Assets ................................ $7,686,682 $7,320,744 $6,769,859 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Deposits: Noninterest-bearing ................................ $1,016,111 $ 881,370 $ 786,036 Interest-bearing ................................... 4,884,846 4,560,280 4,250,468 ---------- ---------- ---------- Total Deposits .............................. 5,900,957 5,441,650 5,036,504 ---------- ---------- ---------- Short-term borrowings ................................ 395,818 483,410 527,770 Long-term debt ....................................... 467,593 561,573 429,036 Other liabilities .................................... 109,491 119,998 105,063 ---------- ---------- ---------- Total Liabilities ........................... 6,873,859 6,606,631 6,098,373 ---------- ---------- ---------- Total Shareholders' Equity .................. 812,823 714,113 671,486 ---------- ---------- ---------- Total Liabilities and Shareholders' Equity... $7,686,682 $7,320,744 $6,769,859 ========== ========== ==========
FINANCIAL CONDITION - ------------------- The Corporation functions as a financial intermediary and its financial condition is analyzed in terms of its sources and uses of funds. The table above highlights the trends in the balance sheet over the past two years. Because annual averages may conceal trends and ending balances can be distorted by one-day fluctuations, the average balances for the month of December in 2001, 2000 and 1999 are provided to give a better indication of trends in the balance sheet. All references within the discussion that follows are to these December average balances unless specifically noted otherwise. The Corporation's balance sheet continued to grow in 2001, as assets increased $365.9 million, or 5.0%, to $7.7 billion, as compared to $7.3 billion in 2000. The growth during 2001 was influenced by the Branch Acquisition, which added approximately $300 million of deposits to the Corporation. However, these funds were used to pay down borrowings as well as to purchase new investments, so the entire $300 million did not contribute to asset growth. Total assets increased $550.9 million, or 8.1%, in 2000. Loans Loans outstanding (net of unearned income) decreased $21.0 million, or 0.4%, in 2001. As noted in the "Net Interest Income" discussion, increases in commercial loans ($66.7 million, or 4.8%) and commercial mortgages ($92.1 million, or 5.9%) were offset by decreases in residential mortgage loans ($150.4 million, or 14.7%) and consumer loans ($38.4 million, or 2.8%). Residential mortgages decreased due to heavy refinance activity and consumer loans decreased due to less emphasis on indirect auto lending. In 2000, loans increased $539.3 million, or 11.1%, to reach a level of $5.4 billion. Excluding Skylands, loans increased $364.8 million, or 7.5%. Commercial loans and mortgages accounted for most of the growth. In 2000, commercial loans increased $193.5 million, or 16.3%, while commercial mortgage loans increased $240.8 million, or 18.4%. Residential mortgages also showed moderate growth of $54.4 million, or 5.6%, as interest rates were higher and refinance volumes were lower. Investment Securities Total investment securities increased $354.8 million, or 24.7%, to reach a balance of $1.8 billion in 2001. The funds for this growth were provided by the deposits from the Branch Acquisition as well as internal deposit growth. Since net loan balances were essentially unchanged, excess funds were used to purchase investment securities, particularly mortgage-backed securities, which increased $456.6 million, or 55.2%. In 2000, investment securities decreased $20.4 million, or 1.4% ($77.9 million, or 5.4%, excluding the impact of Skylands), to $1.4 billion. In 2000, the Corporation experienced stronger net loan growth which limited the amount of funds available for investment securities. The Corporation classified virtually its entire investment portfolio (97%, or $1.7 billion) as available for sale at December 31, 2001 and, as such, these investments were recorded at their estimated fair values. The decrease in interest rates during 2001 resulted in total net unrealized gains of $15.0 million on non-equity investments at December 31, 2001, a shift of $20.1 million from $5.1 million in net unrealized losses at December 31, 2000. The Corporation also maintains an equity investment portfolio, consisting of FHLB and other government agency stock ($44.3 million), as well as stocks of other financial institutions ($61.3 million). This portfolio has historically been a source of capital appreciation and realized gains ($9.5 million in 2001, $8.6 million in 2000 and $8.3 million in 1999). Management periodically sells bank stocks when valuations and market conditions warrant such sales. Premises and Equipment Premises and equipment increased $10.6 million, or 9.1%, in 2001 to $126.5 million, following a $20.2 million, or 21.1%, increase in 2000. The increases in both years were due to the construction of new office and operations facilities and continued investments in technology. Cash and Due from Banks Cash and due from banks increased $15.2 million, or 6.1%, to $263.6 million in 2001, following a $27.9 million, or 10.1%, decrease in 2000. The 2001 increase resulted from growth in the Corporation's branch network. The 2000 decrease resulted from the Year 2000 contingency planning precautions whereby the Corporation maintained higher than normal balances of cash near the end of 1999. Other Assets Other assets increased $20.3 million, or 11.0%, in 2001 to $204.1 million, following a $22.6 million, or 14.0%, increase in 2000. The net increase in 2001 resulted from goodwill and intangible assets recorded for Dearden Maguire ($16.0 million) and the Branch Acquisition ($31.6 million). These increases were offset by a $12.0 million decrease in the net deferred tax asset due to an increase in unrealized gains on investment securities and an $8.0 million decrease in accumulated cash surrender value as the Corporation reduced its position in certain insurance investments. The 2000 increase resulted from $17.5 million of goodwill recorded in connection with the Skylands acquisition. The Corporation continued to increase its participation in affordable housing and community development projects through investments in partnerships. An equity commitment of $2.8 million was made to one new project in 2001. The Corporation made its initial investment of this type during 1989 and is now involved in 45 projects, all located in the communities served by its subsidiary banks. The carrying value of these investments was approximately $33.3 million at December 31, 2001. With these investments, the Corporation not only improves the quantity and quality of available housing for low income individuals in support of its banks' Community Reinvestment Act compliance effort, but also becomes eligible for tax credits under Federal and, in some cases, state programs. Deposits and Borrowings Deposits increased $459.3 million, or 8.4%, to $5.9 billion in 2001 ($179.4 million, or 3.3%, increase, excluding the impact of the Branch Acquisition). This compares to an increase of $405.1 million, or 8.0%, in 2000 ($172.3 million, or 3.4%, excluding Skylands). The trend over the past two years has been moderate internal growth in deposit funding, supplemented by acquisitions. The difference between the two years has been the mix of the growth. With respect to internal growth, during 2001, as interest rates continued to trend downward, time deposits decreased $141.3 million, or 5.3%. Funds from maturing certificates of deposit were moved to lower rate savings and demand deposits. Although customers were earning less with these deposit types, they were reluctant to lock into longer-term time deposits. Demand deposits increased $177.1 million, or 11.3%, particularly in non-interest bearing types which grew by $105.7 million, or 12.0%. Savings deposits increased $143.6 million, or 11.9%. In 2000, the increases were more evenly spread among the various deposit types. Demand deposits increased $63.1 million, or 4.4%, savings deposits increased $56.9 million, or 2.2% and time deposits grew $115.4 million, or 4.7%. During 2000, time deposits were still attractive to customers due to relatively higher interest rates. Short-term borrowings, which consist mainly of Federal funds purchased and customer repurchase agreements, decreased $87.6 million, or 18.1%, in 2001 to $395.8 million after decreasing $44.4 million, or 8.4%, in 2000. The decrease in 2001 resulted from the Branch Acquisition funds, which were used to reduce short-term borrowings and to purchase investment securities since net loans were unchanged. The 2000 decrease resulted from a change in borrowing mix from short-term borrowings to long-term debt as the Corporation managed its interest rate risk. Long-term debt, increased $132.5 million, or 30.9% during 2000, followed by a $94.0, or 16.7% decrease in 2001 as maturing FHLB advances were not replaced. Shareholders' Equity Total shareholders' equity increased $80.3 million, or 11.0%, to $811.5 million at December 31, 2001. This compares to a $68.4 million, or 10.3%, increase in 2000. The growth in 2001 was the result of net income of $113.6 million, $16.9 million of stock issuances and an $11.8 million improvement in net unrealized gains on investment securities. These increases were offset by $54.0 million in cash dividends paid to shareholders. The growth in 2000 resulted from net income of $106.8 million and a $16.7 million increase in net unrealized gains on investment securities. These increases were offset by $46.9 million in cash dividends to shareholders. Although shareholders' equity also increased $31.9 million as a result of the Skylands acquisition in 2000, this was offset by $45.2 million in repurchases of stock during the period, the majority of which was reissued to consummate the merger. The Corporation accounted for the acquisition of Drovers under the pooling of interests 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 and fourth quarters of 2001, the Corporation acquired 366,000 shares of its stock. 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 1.1 million shares through the end of 2000. The second was an open market repurchase program of up to 2.2 million shares. The second plan was adopted to minimize the increase in the number of outstanding shares of the Corporation as a result of its acquisition of Skylands. Under the second plan, 2.1 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, 450,000 shares were repurchased through the plan's termination date on December 27, 2000. On January 15, 2002, the Board of Directors approved a plan to repurchase up to 2.5 million shares of the Corporation's common stock through June 30, 2002. This amount equates to approximately 3% of the Corporation's total shares outstanding. Shares repurchased under this plan will be added to the corporate treasury and will be used for general corporate purposes. The Corporation and its subsidiary banks are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that could have a material effect on the Corporation's financial statements. The regulations require that banks maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and Tier I capital to average assets (as defined). As of December 31, 2001, 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. Item 7a. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- 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 $61.3 million at December 31, 2001), U.S. Government and agency stock (cost basis of approximately $44.3 million) and money market mutual funds (cost basis of approximately $40.7 million). The Corporation's equity investments had a total estimated fair value of $151.3 million at December 31, 2001. The $5.0 million net unrealized gain was primarily attributable to the financial institutions stock. Although the carrying value of equity investments accounted for only 1.9% 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 here since none of them have maturity dates. In addition to its equity portfolio, the Corporation's investment management and trust services revenue could be impacted by fluctuations in the securities markets. A portion of the Corporation's revenue is based on the value of the underlying investment portfolios. If securities markets contract, the Corporation's revenue could be negatively impacted. In addition, the ability of the Corporation to sell its brokerage services is dependent upon the consumers' level of confidence in the outlook for rising securities prices. 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. At December 31, 2001, liquid assets (defined as cash and due from banks, short-term investments, securities available for sale, and non-mortgage-backed securities held to maturity due in one year or less) totaled $2.1 billion, or 26.5%, of total assets. This compares to $1.7 billion, or 22.6%, of total assets at December 31, 2000. The loan portfolio provides an additional source of liquidity due to the Corporation's ability to participate in the secondary mortgage market. Sales of residential mortgages into the secondary market of $420.2 million and $152.7 million in 2001 and 2000, respectively, provided the necessary funding which allowed the Corporation to meet the needs of its customers for new mortgage financing. From a funding standpoint, the Corporation has been able to rely over the years on a stable base of "core" deposits. Even though the Corporation has experienced notable changes in the composition and interest sensitivity of this deposit base, it has been able to rely on this base to provide needed liquidity. The Corporation also has access to sources of large denomination or jumbo time deposits and repurchase agreements as potential sources of liquidity. However, the Corporation has attempted to minimize its reliance upon these more volatile short-term funding sources and to use them primarily to meet the requirements of its existing customer base or when it is profitable to do so. Each of the Corporation's subsidiary banks is a member of the FHLB and has access to FHLB overnight and term credit facilities. At December 31, 2001, the Corporation had $452.3 million in term advances from the FHLB with an additional $845 million of borrowing capacity (including both short-term funding on its lines of credit and long-term borrowings). This availability, along with Federal funds lines at various correspondent commercial banks, provides the Corporation with additional liquidity. 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. FULTON FINANCIAL CORPORATION INTEREST RATE SENSITIVITY
(dollars in thousands) Expected Maturity Period --------------------------------------------------------------------- Estimated 2002 2003 2004 2005 2006 Beyond Total Fair Value ---------- ---------- -------- -------- -------- ---------- ---------- ---------- Fixed rate loans (1) $ 983,779 $ 680,302 $517,738 $327,690 $247,186 $ 677,316 $3,434,011 $3,572,995 Average rate (1) 7.21% 7.84% 7.81% 7.87% 7.71% 7.21% 7.52% Floating rate loans (2) 614,415 241,346 178,465 151,118 125,758 627,907 1,939,009 1,902,943 Average rate 6.09% 6.51% 6.69% 6.76% 6.01% 5.49% 6.05% Fixed rate investments (3) 489,362 441,004 219,592 121,336 73,773 205,285 1,550,352 1,565,955 Average rate 5.98% 5.97% 5.95% 5.87% 6.04% 4.98% 5.78% Floating rate investments (3) -- 1,000 -- -- -- 19,706 20,706 20,991 Average rate -- 3.61% -- -- -- 5.18% 5.10% Other interest-earning assets 25,342 -- -- -- -- -- 25,342 25,342 Average rate 5.36% -- -- -- -- -- 5.36% ----------------------------------------------------------------------------------------------- Total $2,112,898 $1,363,652 $915,795 $600,144 $446,717 $1,530,214 $6,969,420 $7,088,226 Average rate 6.58% 7.00% 7.15% 7.19% 6.96% 6.18% 6.70% ----------------------------------------------------------------------------------------------- Fixed rate deposits (4) $1,821,366 $ 453,325 $167,770 $ 73,955 $ 53,109 $ 21,565 $2,591,090 $2,635,783 Average rate 4.66% 4.77% 4.71% 5.77% 5.01% 5.22% 4.73% Floating rate deposits (5) 804,739 166,784 166,784 166,784 166,784 1,923,839 3,395,714 3,395,714 Average rate 1.81% 0.63% 0.63% 0.63% 0.63% 0.42% 0.79% Fixed rate borrowings (6) 11,273 39,003 1,018 84,103 253 306,155 441,805 448,836 Average rate 6.31% 5.37% 5.88% 6.29% 5.59% 5.38% 5.58% Floating rate borrowings (7) 410,332 -- 5,000 -- -- -- 415,332 415,332 Average rate 1.83% -- 2.23% -- -- -- 1.83% ----------------------------------------------------------------------------------------------- Total $3,047,710 $ 659,112 $340,572 $324,842 $220,146 $2,251,559 $6,843,941 $6,895,665 Average rate 3.53% 3.76% 2.68% 3.27% 1.69% 1.14% 2.65% -----------------------------------------------------------------------------------------------
Assumptions: 1) Amounts are based on contractual 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. 4) Amounts are based on contractual maturities of time deposits. 5) Money market and Super NOW deposits are shown in first year. NOW and savings accounts are spread based on history of deposit flows. 6) Amounts are based on expected payoffs and calls 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. The preceding table and discussion addressed the liquidity implications of interest rate risk and focused on expected contractual cash flows from financial instruments. Expected contractual maturities, however, do not necessarily estimate the net income impact of interest rate changes. Certain financial instruments, such as adjustable rate loans, have repricing periods that differ from contractual cash flows. The Corporation uses three complementary methods to measure and manage interest rate risk. They are static gap analysis, simulation of earnings, and estimates of economic value of equity. Using these 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 December 31, 2001 was 1.05. The following is a summary of the interest sensitivity gaps for three different time intervals as of December 31, 2001: 0-90 91-180 181-365 Days Days Days ---- ------ ------- GAP ............................... 1.16 0.70 1.07 CUMULATIVE GAP .................... 1.16 1.05 1.05 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 December 31, 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%, 5% and 9% 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 December 31, 2001, downward shocks of 100, 200 and 300 basis points were estimated to have negative effects upon economic value of equity of 2%, 4% and 7%, respectively. Common Stock - ------------ As of December 31, 2001, the Corporation had 82.6 million shares of $2.50 par value common stock outstanding held by 17,145 shareholders of record. The common stock of the Corporation is traded on the national market system of the National Association of Securities Dealers Automated Quotation System (NASDAQ) under the symbol FULT. The following table presents the quarterly high and low prices of the Corporation's common stock and per-share cash dividends declared for each of the quarterly periods in 2001 and 2000. Per-share amounts have been retroactively adjusted to reflect the effect of stock dividends. Price Range --------------- Per-Share High Low Dividend ------ ------ --------- 2001 - ---- First Quarter................. $21.96 $19.34 $0.152 Second Quarter................ 22.44 18.27 0.170 Third Quarter................. 23.00 20.80 0.170 Fourth Quarter................ 22.40 20.86 0.170 2000 - ---- First Quarter................. $19.10 $14.46 $0.136 Second Quarter................ 21.66 16.19 0.152 Third Quarter................. 20.89 18.10 0.152 Fourth Quarter................ 22.74 18.51 0.152 Item 8. Financial Statements and Supplementary Data - -------------------------------------------------------------------------------- FULTON FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- (Dollars in thousands, except per-share data)
December 31 ----------------------- 2001 2000 ---------- ---------- Assets - ----------------------------------------------------------------------------------------------------------------- Cash and due from banks ............................................................... $ 356,539 $ 282,586 Interest-bearing deposits with other banks ............................................ 6,968 8,417 Mortgage loans held for sale .......................................................... 18,374 5,241 Investment securities: Held to maturity (estimated fair value- $50,492 in 2001 and $83,836 in 2000) ..... 49,557 84,762 Available for sale ............................................................... 1,687,787 1,370,133 Loans, net of unearned income ......................................................... 5,373,020 5,374,659 Less: Allowance for loan losses ................................................. (71,872) (65,640) ---------- ---------- Net Loans .................................................... 5,301,148 5,309,019 ---------- ---------- Premises and equipment ................................................................ 125,617 116,407 Accrued interest receivable ........................................................... 43,388 44,747 Intangible assets...................................................................... 73,286 26,643 Other assets .......................................................................... 108,047 116,849 ---------- ---------- Total Assets ................................................. $7,770,711 $7,364,804 ========== ========== Liabilities - ----------------------------------------------------------------------------------------------------------------- Deposits: Noninterest-bearing .............................................................. $1,094,158 $ 915,308 Interest-bearing ................................................................. 4,892,646 4,587,395 ---------- ---------- Total Deposits ............................................... 5,986,804 5,502,703 ---------- ---------- Short-term borrowings: Securities sold under agreements to repurchase.................................... 289,659 281,538 Federal funds purchased........................................................... 105,000 160,100 Demand notes of U.S. Treasury .................................................... 5,676 4,791 ---------- ---------- Total Short-Term Borrowings .................................. 400,335 446,429 ---------- ---------- Accrued interest payable .............................................................. 35,926 47,713 Other liabilities ..................................................................... 71,890 69,785 Federal Home Loan Bank advances and long-term debt .................................... 456,802 559,503 Corporation-obligated mandatorily redeemable capital securities of subsidiary trust.... 7,500 7,500 ---------- ---------- Total Liabilities ............................................ 6,959,257 6,633,633 ---------- ---------- Shareholders' Equity - ----------------------------------------------------------------------------------------------------------------- Common stock ($2.50 par) Shares: Authorized 400 million Issued 83.2 million; Outstanding 82.6 million in 2001 and 82.0 million in 2000..................................................... 207,962 198,612 Capital surplus ....................................................................... 536,235 472,829 Retained earnings ..................................................................... 65,649 76,615 Accumulated other comprehensive income................................................. 12,970 1,148 Less: Treasury stock (572,000 shares in 2001 and 1.1 million shares in 2000)........... (11,362) (18,033) ---------- ---------- Total Shareholders' Equity ................................... 811,454 731,171 ---------- ---------- Total Liabilities and Shareholders' Equity ................... $7,770,711 $7,364,804 ========== ==========
- -------------------------------------------------------------------------------- See notes to consolidated financial statements - ---------------------------------------------- FULTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME - -------------------------------------------------------------------------------- (Dollars in thousands, except per-share data)
Year Ended December 31 ------------------------------ 2001 2000 1999 -------- -------- -------- Interest Income - ------------------------------------------------------------------------------------------------- Loans, including fees .......................................... $424,025 $433,686 $378,705 Investment securities: Taxable ................................................... 77,701 68,629 71,028 Tax-exempt ................................................ 9,465 10,187 9,903 Dividends ................................................. 5,097 6,087 5,365 Other interest income .......................................... 1,890 1,038 297 -------- -------- -------- Total Interest Income ................ 518,178 519,627 465,298 Interest Expense - ------------------------------------------------------------------------------------------------- Deposits ....................................................... 186,969 187,601 161,459 Short-term borrowings .......................................... 13,150 30,447 17,619 Long-term debt ................................................. 27,843 25,826 20,050 -------- -------- -------- Total Interest Expense ................ 227,962 243,874 199,128 -------- -------- -------- Net Interest Income ................... 290,216 275,753 266,170 Provision for Loan Losses ...................................... 14,585 15,024 9,943 -------- -------- -------- Net Interest Income After Provision for Loan Losses ...... 275,631 260,729 256,227 -------- -------- -------- Other Income - ------------------------------------------------------------------------------------------------- Investment management and trust services ....................... 27,138 20,609 17,508 Service charges on deposit accounts ............................ 32,388 26,233 23,013 Other service charges and fees ................................. 17,125 15,728 12,764 Mortgage banking income ........................................ 11,782 3,782 5,035 Investment securities gains .................................... 12,561 8,646 8,348 -------- -------- -------- 100,994 74,998 66,668 Other Expenses - ------------------------------------------------------------------------------------------------- Salaries and employee benefits ................................. 116,907 103,209 97,702 Net occupancy expense .......................................... 17,074 15,440 14,796 Equipment expense .............................................. 12,345 11,454 10,945 Data processing ................................................ 11,782 11,232 11,422 Merger-related expenses ........................................ 7,105 -- -- Intangible amortization ........................................ 4,786 1,839 1,297 Other .......................................................... 46,670 41,282 39,607 -------- -------- -------- 216,669 184,456 175,769 -------- -------- -------- Income Before Income Taxes ............ 159,956 151,271 147,126 Income Taxes ................................................... 46,367 44,437 42,499 -------- -------- -------- Net Income ............................ $113,589 $106,834 $104,627 ======== ======== ======== - ------------------------------------------------------------------------------------------------- Per-Share Data: Net Income (Basic) ............................................. $ 1.38 $ 1.32 $ 1.27 Net Income (Diluted) ........................................... 1.37 1.31 1.26 Cash Dividends ................................................. 0.662 0.593 0.532 - -------------------------------------------------------------------------------------------------
See notes to consolidated financial statements - ---------------------------------------------- FULTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Other Comprehen- Common Capital Retained sive Income (Dollars in thousands, except per-share data) Stock Surplus Earnings (Loss) - ---------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1999........................................... $172,182 $313,125 $ 149,038 $ 24,151 Comprehensive Income: Net income................................................. 104,627 Other - unrealized loss on securities (net of $21.4 million tax benefit).......................................... (39,681) Total comprehensive income............................ Stock dividend issued - 10% (7.3 million shares)................ 16,515 106,336 (122,925) Stock issued (371,000 shares, including 214,000 shares of treasury stock)............................................ 338 (18) Acquisition of treasury stock (970,000 shares).................. Cash dividends - $0.532 per share............................... (42,783) -------------------------------------------- Balance at December 31, 1999......................................... 189,035 419,443 87,957 (15,530) Comprehensive Income: Net income................................................. 106,834 Other - unrealized gain on securities (net of $9.0 million tax expense) 16,678 Total comprehensive income............................ Stock dividend issued - 5% (4.0 million shares)................. 9,442 61,767 (71,287) Stock issued (380,000 shares, including 326,000 shares of treasury stock)............................................ 135 (960) Stock issued for acquisition of Skylands Financial Corporation (2.2 million shares of treasury stock) (7,421) Acquisition of treasury stock (2.5 million shares).............. Cash dividends - $0.593 per share............................... (46,889) -------------------------------------------- Balance at December 31, 2000......................................... 198,612 472,829 76,615 1,148 Comprehensive Income: Net income................................................. 113,589 Other - unrealized gain on securities (net of $6.4 million tax expense).......................................... 11,822 Total comprehensive income............................ Stock dividend issued - 5% (3.6 million shares)................. 9,103 61,377 (70,554) Stock issued (1.0 million shares, including 906,000 shares of treasury stock).................................. 247 2,029 Acquisition of treasury stock (366,000 shares).................. Cash dividends - $0.662 per share............................... (54,001) -------------------------------------------- Balance at December 31, 2001......................................... $207,962 $536,235 $ 65,649 $ 12,970 ============================================ Treasury (Dollars in thousands, except per-share data) Stock Total - ------------------------------------------------------------------------------------------- Balance at January 1, 1999........................................... $ (4,426) $654,070 Comprehensive Income: Net income................................................. 104,627 Other - unrealized loss on securities (net of $21.4 million tax benefit).......................................... (39,681) -------- Total comprehensive income............................ 64,946 -------- Stock dividend issued - 10% (7.3 million shares)................ (74) Stock issued (371,000 shares, including 214,000 shares of treasury stock)............................................ 4,054 4,374 Acquisition of treasury stock (970,000 shares).................. (17,784) (17,784) Cash dividends - $0.532 per share............................... (42,783) ------------------- Balance at December 31, 1999......................................... (18,156) 662,749 Comprehensive Income: Net income................................................. 106,834 Other - unrealized gain on securities (net of $9.0 million tax expense) 16,678 -------- Total comprehensive income............................ 123,512 -------- Stock dividend issued - 5% (4.0 million shares)................. (78) Stock issued (380,000 shares, including 326,000 shares of treasury stock)............................................ 6,003 5,178 Stock issued for acquisition of Skylands Financial Corporation (2.2 million shares of treasury stock) 39,282 31,861 Acquisition of treasury stock (2.5 million shares).............. (45,162) (45,162) Cash dividends - $0.593 per share............................... (46,889) ------------------- Balance at December 31, 2000......................................... (18,033) 731,171 Comprehensive Income: Net income................................................. 113,589 Other - unrealized gain on securities (net of $6.4 million tax expense).......................................... 11,822 -------- Total comprehensive income............................ 125,411 -------- Stock dividend issued - 5% (3.6 million shares)................. (74) Stock issued (1.0 million shares, including 906,000 shares of treasury stock).................................. 14,593 16,869 Acquisition of treasury stock (366,000 shares).................. (7,922) (7,922) Cash dividends - $0.662 per share............................... (54,001) ------------------- Balance at December 31, 2001......................................... $(11,362) $811,454 =================== - -------------------------------------------------------------------------------------------
See notes to consolidated financial statements - ---------------------------------------------- FULTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- (In Thousands)
Year Ended December 31 ----------------------------------- 2001 2000 1999 --------- --------- --------- Cash Flows from Operating Activities: Net income ....................................................... $ 113,589 $ 106,834 $ 104,627 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for loan losses ...................................... 14,585 15,024 9,943 Depreciation and amortization of premises and equipment ........ 12,990 11,574 11,178 Net amortization of investment security premiums ............... 147 462 1,435 Deferred income tax expense (benefit) .......................... 1,520 (2,638) 1,237 Gain on sale of investment securities .......................... (12,561) (8,646) (8,348) Gain on sale of mortgage loans ................................. (10,260) (9,299) (3,295) Proceeds from sale of mortgage loans ........................... 420,220 152,745 239,681 Originations of mortgage loans held for sale ................... (423,093) (147,671) (228,533) Amortization of intangible assets .............................. 4,786 1,839 1,297 Decrease (increase) in accrued interest receivable ............. 1,359 (8,300) 5,466 (Increase) decrease in other assets ............................ (5,448) (4,238) 4,364 (Decrease) increase in accrued interest payable ................ (11,787) 10,446 (926) (Decrease) increase in other liabilities ....................... (1,640) 3,558 (837) --------- --------- --------- Total adjustments ........................................ (9,182) 14,856 32,662 --------- --------- --------- Net cash provided by operating activities ............. 104,407 121,690 137,289 --------- --------- --------- Cash Flows from Investing Activities: Proceeds from sales of securities available for sale ........... 206,688 85,256 52,653 Proceeds from maturities of securities held to maturity ........ 42,342 46,542 105,538 Proceeds from maturities of securities available for sale ...... 478,310 163,842 297,949 Purchase of securities held to maturity ........................ (7,200) (3,001) (1,500) Purchase of securities available for sale ...................... (970,779) (222,071) (413,169) Decrease (increase) in short-term investments .................. 1,449 (5,544) 876 Net increase in loans .......................................... (6,714) (335,854) (472,737) Cash acquired from Skylands Financial Corporation .............. -- 11,632 -- Net cash paid for Dearden Maguire .............................. (16,224) -- -- Net cash paid for Branch Acquisition ........................... (28,820) -- -- Purchase of premises and equipment, net ........................ (22,200) (28,198) (15,568) --------- --------- --------- Net cash used in investing activities ................. (323,148) (287,396) (445,958) --------- --------- --------- Cash Flows from Financing Activities: Net increase (decrease) in demand and savings deposits ......... 516,439 129,061 (31,325) Net (decrease) increase in time deposits ....................... (32,337) 106,191 33,913 Addition to long-term debt ..................................... -- 242,000 90,238 Repayment of long-term debt .................................... (102,701) (135,571) (10,860) (Decrease) increase in short-term borrowings ................... (46,094) (73,755) 276,415 Dividends paid ................................................. (51,486) (45,741) (41,856) Net proceeds from issuance of common stock ..................... 16,795 5,100 4,300 Acquisition of treasury stock .................................. (7,922) (45,162) (17,784) --------- --------- --------- Net cash provided by financing activities ............. 292,694 182,123 303,041 --------- --------- --------- Net Increase (Decrease) in Cash and Due From Banks ............. 73,953 16,417 (5,628) Cash and Due From Banks at Beginning of Year ................... 282,586 266,169 271,797 --------- --------- --------- Cash and Due From Banks at End of Year ......................... $ 356,539 $ 282,586 $ 266,169 ========= ========= ========= Cash paid during the year for: Interest .................................................. $ 239,749 $ 233,427 $ 200,054 Income taxes .............................................. 46,633 40,624 32,916 - ------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements - ---------------------------------------------- FULTON FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- Business: Fulton Financial Corporation (Parent Company) is a multi-bank financial holding company which provides a full range of banking and financial services to businesses and consumers through its wholly-owned banking subsidiaries: Fulton Bank, Lebanon Valley Farmers Bank, Swineford National Bank, Lafayette Ambassador Bank, FNB Bank, N.A., Hagerstown Trust, Delaware National Bank, The Bank (formerly The Bank of Gloucester County), Woodstown National Bank, The Peoples Bank of Elkton and Skylands Community Bank; as well as its financial services subsidiaries: Fulton Financial Advisors, N.A., Dearden, Maguire, Weaver and Barrett, LLC and Fulton Insurance Services Group, Inc. In addition, the Parent Company owns six other non-banking subsidiaries: Fulton Financial Realty Company, Fulton Life Insurance Company, Pennbanks Insurance Company, Central Pennsylvania Financial Corp., FFC Management, Inc. and Drovers Capital Trust I. Collectively, the Parent Company and its subsidiaries are referred to as the Corporation. The Corporation's primary source of revenue is interest income on loans and investment securities and fee income on its products and services. Its expenses consist of interest expense on deposits and borrowed funds, provision for loan losses and other operating expenses. The Corporation's primary competition is other financial services providers operating in its region. Competitors also include financial services providers located outside the Corporation's geographical market as electronic delivery systems have become more prominent. The Corporation is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by such regulatory authorities. The Corporation offers, through its banking subsidiaries, a full range of retail and commercial banking services throughout central and eastern Pennsylvania, western and northern Maryland, Delaware and western New Jersey. Approximately half of the Corporation's business is conducted in the south central Pennsylvania region. Industry diversity is the key to the economic well-being of this region and the Corporation is not dependent upon any single customer or industry. Basis of Financial Statement Presentation: The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include the accounts of the Parent Company and all wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. Investments: Debt securities are classified as held to maturity at the time of purchase when the Corporation has both the intent and ability to hold these investments until they mature. Such debt securities are carried at cost, adjusted for amortization of premiums and accretion of discounts using the effective yield method. The Corporation does not engage in trading activities, however, since the investment portfolio serves as a source of liquidity, most debt securities and all marketable equity securities are classified as available for sale. Securities available for sale are carried at estimated fair value with the related unrealized holding gains and losses reported in shareholders' equity as a component of other comprehensive income, net of tax. Realized security gains and losses are computed using the specific identification method and are recorded on a trade date basis. Revenue Recognition: Loan and lease financing receivables are stated at their principal amount outstanding, except for mortgage loans held for sale which are carried at the lower of aggregate cost or market value. Interest income on loans is accrued as earned. Unearned income on installment loans is recognized on a basis which approximates the effective yield method. Accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal or interest. When interest accruals are discontinued, unpaid interest credited to income is reversed. Nonaccrual loans are restored to accrual status when all delinquent principal and interest become current or the loan is considered secured and in the process of collection. Loan Origination Fees and Costs: Loan origination fees and the related direct origination costs are offset and the net amount is deferred and amortized over the life of the loan as an adjustment to interest income. For mortgage loans sold, the net amount is included in gain or loss upon the sale of the related mortgage loan. Mortgage Servicing Rights: The estimated fair value of mortgage servicing rights (MSR's) related to loans sold is recorded as an asset upon the sale of such loans. MSR's are amortized as a reduction to servicing income over the estimated lives of the underlying loans. In addition, MSR's are periodically tested for impairment and, if necessary, additional write-offs are recorded. During 2001, the Corporation recorded MSR's of approximately $3.6 million. At December 31, 2001, the Corporation had $3.2 million of unamortized MSR's. Allowance for Loan Losses: The allowance for loan losses is increased by charges to income and decreased by charge-offs, net of recoveries. Management's periodic evaluation of the adequacy of the allowance for loan losses is based on the Corporation's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay, the estimated fair value of the underlying collateral, and current economic conditions. Management believes that the allowance for loan losses is adequate, however, future additions to the allowance may be necessary based on changes in any of these factors. Impaired loans, as defined by Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (Statement 114), are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price or fair value of the collateral if the loan is collateral dependent. A loan is considered to be impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization is generally computed using the straight-line method over the estimated useful lives of the related assets, which are a maximum of 50 years for buildings and improvements and eight years for furniture and equipment. Interest costs incurred during the construction of major bank premises are capitalized. During 2001 and 2000, the Corporation capitalized approximately $390,000 and $780,000, respectively, in interest expense related to the construction of new office space at its headquarters location. Other Real Estate Owned: Assets acquired in settlement of mortgage loan indebtedness are recorded as other real estate owned and are included in other assets initially at the lower of the estimated fair value of the asset less estimated selling costs or the carrying amount of the loan. Costs to maintain the assets and subsequent gains and losses on sales are included in other income and other expense. Income Taxes: The provision for income taxes is based upon the results of operations, adjusted primarily for the effect of tax-exempt income and net credits received as a result of investments in low and moderate income housing partnerships. Certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate. Deferred income tax expenses or benefits are based on the changes in the deferred tax asset or liability from period to period. 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. Option grants which would not have a dilutive impact on average shares are not included in the calculation. A reconciliation of the weighted average shares outstanding used to calculate basic net income per share and diluted net income per share follows. There is no adjustment to net income to arrive at diluted net income per share. 2001 2000 1999 ------ ------ ------ (in thousands) Weighted average shares outstanding (basic) ...... 82,597 81,213 82,296 Impact of common stock equivalents ............... 554 485 497 ------ ------ ------ Weighted average shares outstanding (diluted) .... 83,151 81,698 82,793 ====== ====== ====== Comprehensive Income: The following table summarizes the reclassification adjustment for realized security gains (net of taxes) for each of the indicated periods:
2001 2000 1999 ------- ------- -------- (in thousands) Unrealized holding gains (losses) arising during period ........ $19,987 $22,298 $(34,255) Reclassification adjustment for gains included in net income ... 8,165 5,620 5,426 ------- ------- -------- Net unrealized gains (losses) on securities .................... $11,822 $16,678 $(39,681) ======= ======= ========
Disclosures about Segments of an Enterprise and Related Information: The Corporation does not have any operating segments which require disclosure of additional information. While the Corporation owns eleven separate banks, each engages in similar activities, provides similar products and services, and operates in the same general geographical area. The Corporation's non-banking activities are immaterial and, therefore, separate information has not been disclosed. Business Combinations and Intangible Assets - In June 2001, the Financial Accounting Standards Board (FASB) issued Statements 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 eliminated the use of pooling of interests for transactions initiated subsequent to June 30, 2001. Statement 142 eliminated 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 was required to be amortized through December 31, 2001. The Corporation evaluated its recorded goodwill under Statement 142 as of January 1, 2002 and concluded that there was no impairment at that date. As a result, no additional write-off during 2002 is expected. In addition, as a result of eliminating amortization of goodwill in 2002, the Corporation expects to realize a pre-tax benefit of $3.1 million. The Corporation will also recognize income of $848,000 from the reversal of negative goodwill balances as of January 1, 2002. During 2001, the Corporation recognized $3.1 million in amortization expense related to goodwill which will no longer be amortized in 2002. Accounting for the Impairment or Disposal of Long-Lived Assets - In August, 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (Statement 144). Statement 144 supersedes Statement 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and certain other related accounting standards. In general, Statement 144 established a single accounting model for a segment of a business to be accounted for as a discontinued operation and resolved significant implementation issues related to Statement 121. Statement 144 was effective for years beginning after December 15, 2001. The Corporation adopted Statement 144 on January 1, 2002 and there was no material impact on its balance sheet, comprehensive income or net income. 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 138, 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. Reclassifications and Restatements: Certain amounts in the 2000 and 1999 consolidated financial statements and notes have been reclassified to conform to the 2001 presentation. All information has been restated for the July, 2001 merger with Drovers Bancshares Corporation, which was accounted for as a pooling of interests. All share and per-share data have been restated to reflect the impact of the 5% stock dividend paid on May 25, 2001. NOTE B - RESTRICTIONS ON CASH AND DUE FROM BANKS - -------------------------------------------------------------------------------- The Corporation's subsidiary banks are required to maintain reserves, in the form of cash and balances with the Federal Reserve Bank, against their deposit liabilities. The average amount of such reserves during 2001 and 2000 was approximately $56.0 million and $58.4 million, respectively. NOTE C - INVESTMENT SECURITIES - -------------------------------------------------------------------------------- The following tables summarize the amortized cost and estimated fair values of investment securities as of December 31 (in thousands):
Gross Gross Estimated Amortized Unrealized Unrealized Fair 2001 Held to Maturity Cost Gains Losses Value - ----------------------------------- ---------- ---------- ---------- ---------- U.S. Government and agency securities ............ $ 8,170 $ 147 $ -- $ 8,317 State and municipal securities .... 9,840 163 -- 10,003 Debt securities issued by foreign governments ....... 150 -- -- 150 Corporate debt securities ......... 15 -- -- 15 Mortgage-backed securities ........ 31,382 628 (3) 32,007 ---------- ------- ------- ---------- $ 49,557 $ 938 $ (3) $ 50,492 ========== ======= ======= ========== 2001 Available for Sale - ----------------------------------- Equity securities ................. $ 146,349 $ 8,751 $(3,767) $ 151,333 U.S. Government and agency securities ............ 97,285 2,397 -- 99,682 State and municipal securities .... 214,843 3,511 (173) 218,181 Debt securities issued by foreign governments ....... 50 -- -- 50 Corporate debt securities ......... 250 -- -- 250 Mortgage-backed securities ........ 1,209,073 11,564 (2,346) 1,218,291 ---------- ------- ------- ---------- $1,667,850 $26,223 $(6,286) $1,687,787 ========== ======= ======= ========== 2000 Held to Maturity - ----------------------------------- U.S. Government and agency securities ............ $ 8,992 $ 88 $(1,219) $ 7,861 State and municipal securities .... 12,971 152 (28) 13,095 Debt securities issued by foreign governments ....... 205 4 -- 209 Corporate debt securities ......... 515 4 -- 519 Mortgage-backed securities ........ 62,079 289 (216) 62,152 ---------- ------- ------- ---------- $ 84,762 $ 537 $(1,463) $ 83,836 ========== ======= ======= ==========
2000 Available for Sale - ----------------------------------- Equity securities.................. $ 124,559 $10,759 $ (3,923) $ 131,395 U.S. Government and agency securities............. 212,142 622 (216) 212,548 State and municipal securities 212,480 1,196 (1,503) 212,173 Debt securities issued By foreign governments........ 250 -- -- 250 Corporate debt securities.......... 19,028 -- (918) 18,110 Mortgage-backed securities......... 799,923 3,232 (7,498) 795,657 ---------- ------- -------- ---------- $1,368,382 $15,809 $(14,058) $1,370,133 ========== ======= ======== ==========
The amortized cost and estimated fair value of debt securities at December 31, 2001 by contractual maturity are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Held to Maturity Available for Sale ---------------------- ----------------------- Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value --------- ---------- ---------- ---------- (in thousands) Due in one year or less........... $ 8,548 $ 8,604 $ 35,541 $ 36,159 Due from one year to five years... 7,478 7,605 225,324 229,600 Due from five years to ten years.. 1,809 1,880 22,571 22,734 Due after ten years............... 340 396 28,992 29,670 ------- ------- ---------- ---------- 18,175 18,485 312,428 318,163 Mortgage-backed securities........ 31,382 32,007 1,209,073 1,218,291 ------- ------- ---------- ---------- $49,557 $50,492 $1,521,501 $1,536,454 ======= ======= ========== ==========
Pre-tax gains totaling $9.6 million, $8.8 million and $7.9 million were realized on the sale of equity securities during 2001, 2000 and 1999, respectively. Pre-tax gains totaling $3.0 million and $393,000 were realized on the sale of available for sale debt securities during 2001 and 1999, respectively. Pre-tax losses of $220,000 were realized on the sale of available for sale debt securities during 2000. Securities carried at $956.5 million and $828.0 million at December 31, 2001 and 2000, respectively, were pledged as collateral to secure public and trust deposits and for other purposes. NOTE D - LOANS AND ALLOWANCE FOR LOAN LOSSES - -------------------------------------------------------------------------------- Gross loans are summarized as follows as of December 31: 2001 2000 ---------- ---------- (in thousands) Commercial, financial and agricultural ......... $1,495,380 $1,386,172 Real estate-construction ....................... 267,627 247,382 Real estate-mortgage: First and second-residential ................ 1,468,799 1,569,637 Commercial .................................. 1,428,066 1,359,714 Consumer ....................................... 626,985 738,797 Leasing and other .............................. 86,163 72,957 ---------- ---------- $5,373,020 $5,374,659 ========== ========== Changes in the allowance for loan losses were as follows for the years ended December 31: 2001 2000 1999 -------- -------- -------- (in thousands) Balance at January 1........................ $ 65,640 $ 61,538 $ 61,327 Loans charged off........................... (14,275) (18,357) (14,672) Recoveries of loans previously charged off.. 3,837 4,802 4,940 -------- -------- -------- Net loans charged off.................. (10,438) (13,555) (9,732) -------- -------- -------- Provision for loan losses................... 11,885 15,024 9,943 Provision for loan losses, merger-related 2,700 -- -- -------- -------- -------- Total provision for loan losses........ 14,585 15,024 9,943 -------- -------- -------- Allowance purchased......................... 2,085 2,633 -- -------- -------- -------- Balance at December 31...................... $ 71,872 $ 65,640 $ 61,538 ======== ======== ======== Nonaccrual loans aggregated approximately $22.8 million at December 31, 2001, $21.8 million at December 31, 2000 and $24.0 million at December 31, 1999. Interest of approximately $1.9 million, $1.8 million and $1.9 million was not recognized as interest income due to the nonaccrual status of loans during 2001, 2000 and 1999, respectively. The recorded investment in loans that were considered to be impaired as defined by Statement 114 was $24.4 million and $25.6 million at December 31, 2001 and 2000, respectively. At December 31, 2001, $8.7 million of impaired loans were included in nonaccrual loans and at December 31, 2000, $15.0 million of impaired loans were included in nonaccrual loans. At December 31, 2001 and 2000, impaired loans had related allowances for loan losses of $1.8 million and $4.0 million, respectively. The average recorded investment in impaired loans during the years ended December 31, 2001, 2000 and 1999 was approximately $21.1 million, $21.0 million, and $13.7 million, respectively. The Corporation applies all payments received on nonaccruing impaired loans to principal until such time as the principal is paid off, after which time any additional payments received are recognized as interest income. Payments received on accruing impaired loans are applied to principal and interest according to the original terms of the loan. The Corporation recognized interest income of approximately $980,000, $934,000 and $1.7 million on impaired loans in 2001, 2000, and 1999, respectively. The Corporation has extended credit to the officers and directors of the Corporation and to their associates. Related-party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. The aggregate dollar amount of these loans, including unadvanced commitments, was $136.3 million and $149.7 million at December 31, 2001 and 2000, respectively. During 2001, $36.0 million of new advances were made and repayments totaled $49.4 million. The total portfolio of mortgage loans serviced by the Corporation for unrelated third parties at December 31, 2001 and 2000 was $871.6 million and $699.6 million, respectively. NOTE E - PREMISES AND EQUIPMENT - -------------------------------------------------------------------------------- The following is a summary of premises and equipment as of December 31: 2001 2000 --------- --------- (in thousands) Premises and leasehold improvements .............. $ 146,916 $ 116,801 Furniture and equipment .......................... 83,781 77,731 Construction in progress ......................... 4,313 26,450 --------- --------- 235,010 220,982 Less: Accumulated depreciation and amortization (109,393) (104,575) --------- --------- $ 125,617 $ 116,407 ========= ========= NOTE F - FEDERAL HOME LOAN BANK ADVANCES AND LONG-TERM DEBT - -------------------------------------------------------------------------------- Federal Home Loan Bank Advances and long-term debt included the following as of December 31: 2001 2000 -------- -------- (in thousands) Federal Home Loan Bank Advances .................. $452,316 $554,573 Other long-term debt ............................. 4,486 4,931 -------- -------- $456,802 $559,504 ======== ======== The Corporation had a series of collateralized Federal Home Loan Bank advances totaling $452.3 million at December 31, 2001 and $554.6 million at December 31, 2000. These advances mature through January, 2027, and carry a weighted average interest rate of 5.47%. As of December 31, 2001 the Corporation had an additional borrowing capacity of approximately $845 million with the Federal Home Loan Bank. Advances from the Federal Home Loan Bank are secured by qualifying residential mortgages, investments and other assets. The following table summarizes the scheduled maturity periods of Federal Home Loan Bank advances as of December 31, 2001: Amount Year Maturing - ------------------------------ -------- (in thousands) 2002 ......................... $ 83,000 2003 ......................... 167,900 2004 ......................... 25,000 2005 ......................... 29,116 2006 ......................... -- Thereafter ................... 147,300 -------- $452,316 ======== NOTE G - CAPITAL SECURITIES OF SUBSIDIARY TRUST - -------------------------------------------------------------------------------- The Parent Company owns all of the common stock of Drovers Capital Trust I (Trust), a Delaware business trust. The Trust has issued $7.5 million of 9.25% preferred securities to investors in conjunction with the Parent Company issuing $7.7 million of junior subordinated deferrable interest debentures to the Trust. The debentures are the sole asset of the Trust. The terms of the junior subordinated deferrable interest debentures are the same as the terms on the preferred securities. The Parent Company's obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Parent Company of the Trust's obligations under the preferred securities. The preferred securities are redeemable on or after September 30, 2004, or earlier if the deduction of related interest for Federal income taxes is prohibited, treatment as Tier 1 capital is no longer permitted, or certain other contingencies arise. The preferred securities must be redeemed upon maturity of the debentures on September 30, 2027. NOTE H - REGULATORY MATTERS - -------------------------------------------------------------------------------- Dividend and Loan Limitations The dividends that may be paid by subsidiary banks to the Parent Company are subject to certain legal and regulatory limitations. Under such limitations, the total amount available for payment of dividends by subsidiary banks was approximately $142 million at December 31, 2001. Under current Federal Reserve regulations, the subsidiary banks are limited in the amount they may loan to their affiliates, including the Parent Company. Loans to a single affiliate may not exceed 10%, and the aggregate of loans to all affiliates may not exceed 20% of each bank subsidiary's capital and surplus. At December 31, 2001, the maximum amount available for transfer from the subsidiary banks to the Parent Company in the form of loans and dividends was approximately $197 million. Regulatory Capital Requirements The Corporation's subsidiary banks are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the subsidiary banks must meet specific capital guidelines that involve quantitative measures of the subsidiary banks' assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The subsidiary banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the subsidiary banks to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets (as defined in the regulations). Management believes, as of December 31, 2001, that all of its bank subsidiaries meet the capital adequacy requirements to which they are subject. As of December 31, 2001 and 2000, the Corporation's three significant subsidiaries -- Fulton Bank, Lebanon Valley Farmers Bank and Lafayette Ambassador Bank -- were well capitalized under the regulatory framework for prompt corrective action based on their capital ratio calculations. To be categorized as well capitalized, these banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since December 31, 2001 that management believes have changed the institutions' categories. The following tables present the total risk-based, Tier I risk-based and Tier I leverage requirements for the Corporation and its significant subsidiaries.
As of December 31, 2001 --------------------------------------------------------------- To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------ ------------------ -------- ----- Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- -------- ----- (Dollars in thousands) Total Capital (to Risk Weighted Assets): Corporation ........................ $800,952 13.5% $475,707 8.0% $594,634 10.0% Fulton Bank ........................ 321,911 11.2 229,420 8.0 286,775 10.0 Lebanon Valley Farmers Bank ........ 67,806 14.0 38,714 8.0 48,392 10.0 Lafayette Ambassador Bank .......... 80,208 11.9 54,137 8.0 67,671 10.0 Tier I Capital (to Risk Weighted Assets): Corporation ........................ $729,064 12.3% $237,854 4.0% $356,781 6.0% Fulton Bank ........................ 288,758 10.1 114,710 4.0 172,065 6.0 Lebanon Valley Farmers Bank ........ 62,335 12.9 19,357 4.0 29,035 6.0 Lafayette Ambassador Bank .......... 72,269 10.7 27,068 4.0 40,603 6.0 Tier I Capital (to Average Assets): Corporation ........................ $729,064 9.6% $227,938 3.0% $379,897 5.0% Fulton Bank ........................ 288,758 8.5 101,659 3.0 169,432 5.0 Lebanon Valley Farmers Bank ........ 62,335 9.0 20,698 3.0 34,497 5.0 Lafayette Ambassador Bank .......... 72,269 7.7 28,163 3.0 46,938 5.0
As of December 31, 2000 --------------------------------------------------------------- To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------ ------------------ -------- ----- Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- -------- ----- (Dollars in thousands) Total Capital (to Risk Weighted Assets): Corporation ........................ $773,583 14.0% $440,634 8.0% $550,793 10.0% Fulton Bank ........................ 334,416 11.3 237,626 8.0 297,032 10.0 Lebanon Valley Farmers Bank ........ 73,401 14.0 41,855 8.0 52,319 10.0 Lafayette Ambassador Bank .......... 79,404 12.3 51,836 8.0 64,796 10.0 Tier I Capital (to Risk Weighted Assets): Corporation ........................ $713,314 13.0% $220,317 4.0% $330,476 6.0% Fulton Bank ........................ 310,677 10.5 118,813 4.0 178,219 6.0 Lebanon Valley Farmers Bank ........ 67,312 12.9 20,928 4.0 31,392 6.0 Lafayette Ambassador Bank .......... 71,996 11.1 25,918 4.0 38,877 6.0 Tier I Capital (to Average Assets): Corporation ........................ $713,314 9.8% $218,146 3.0% $363,576 5.0% Fulton Bank ..................... 310,677 8.6 108,302 3.0 180,503 5.0 Lebanon Valley Farmers Bank ........ 67,312 9.7 20,843 3.0 34,739 5.0 Lafayette Ambassador Bank .......... 71,996 8.3 25,899 3.0 43,166 5.0
NOTE I - INCOME TAXES - -------------------------------------------------------------------------------- The components of the provision for income taxes are as follows: Year ended December 31 ---------------------------- 2001 2000 1999 ------- -------- ------- Current tax expense: Federal ............................ $44,625 $ 46,765 $41,132 State .............................. 222 310 130 ------- -------- ------- 44,847 47,075 41,262 Deferred tax expense (benefit)........... 1,520 (2,638) 1,237 ------- -------- ------- $46,367 $ 44,437 $42,499 ======= ======== ======= The differences between the effective income tax rate and the Federal statutory income tax rate are as follows: Year ended December 31 ---------------------- 2001 2000 1999 ---- ---- ---- Statutory tax rate .......................... 35.0% 35.0% 35.0% Effect of tax-exempt income ................. (3.4) (3.6) (3.5) Effect of low income housing investments..... (2.6) (2.5) (2.7) Other, net .................................. -- 0.5 0.1 ---- ---- ---- Effective income tax rate ................... 29.0% 29.4% 28.9% ==== ==== ==== The net deferred tax asset recorded by the Corporation is included in other assets and consists of the following tax effects of temporary differences at December 31:
2001 2000 ------- ------- (in thousands) Deferred tax assets: Allowance for loan losses .................................. $25,156 $22,859 Deferred compensation ...................................... 3,853 2,449 Investments in low income housing .......................... 3,425 1,868 Post-retirement benefits ................................... 3,220 3,224 Other accrued expenses ..................................... 1,573 894 Alternative minimum tax credit carryforward ................ 675 765 Other ...................................................... 1,953 2,729 ------- ------- Total gross deferred tax assets ....................... 39,855 34,788 Deferred tax liabilities: Direct leasing ............................................. 8,962 8,440 Unrealized holding gains on securities available for sale... 6,981 1,192 Mortgage servicing rights .................................. 1,145 34 Fixed asset depreciation ................................... 414 673 Other ...................................................... 426 446 ------- ------- Total gross deferred tax liabilities .................. 17,928 10,785 Net deferred tax asset ................................ $21,927 $24,003 ======= =======
As of December 31, 2001 and 2000, the Corporation had not established any valuation allowance against deferred tax assets since these tax benefits are realizable either through carryback availability against prior years' taxable income or the reversal of existing deferred tax liabilities. NOTE J - EMPLOYEE BENEFIT PLANS - -------------------------------------------------------------------------------- Substantially all eligible employees of the Corporation are covered by one of the following plans or combination of plans: Profit Sharing Plan - A noncontributory defined contribution plan where employer contributions are based on a formula providing for an amount not to exceed 15% of each eligible employee's annual salary (10% for employees hired subsequent to January 1, 1996). Participants are 100% vested in balances after five years of eligible service. In addition, the profit sharing plan includes a 401(k) feature which allows employees to defer a portion of their pre-tax salary on an annual basis, with no employer match. Contributions under this feature are 100% vested. Defined Benefit Pension Plan and 401(k) Plan - The Corporation maintains two defined benefit plans, the Fulton Financial Affiliates' Defined Benefit Pension Plan (Fulton Pension Plan) and the Drovers & Mechanics Pension Plan. Contributions to the defined benefit plans are actuarially determined and funded annually. Plan assets are invested in certificates of deposit, corporate bonds, U.S. Treasury securities, money market funds, common stocks and common stock mutual funds. The Fulton Pension Plan was closed to new participants effective January 1, 1999. Employees participating in the plans as of that date continue to accrue benefits according to the terms of the plan. Employees covered under the defined benefit plans are also eligible to participate in the Fulton Financial Affiliates 401(k) Savings Plan (Fulton Plan) or the Drovers Salary Deferral Plan (Drovers Plan). The Fulton Plan allows employees to defer up to 15% of their pre-tax salary on an annual basis. At its discretion, the Corporation may also make a matching contribution up to 3%. The Drovers Plan allows employees to defer up to 20% of their pre-tax salary on an annual basis. The Corporation makes a matching contribution up to 3%. The following summarizes the Corporation's expense under the above plans for the years ended December 31: 2001 2000 1999 ------ ------ ------ (in thousands) Profit-sharing plan ............................. $5,050 $5,203 $4,920 Defined benefit plan ............................ 989 1,287 1,585 401(k) plan ..................................... 597 682 676 ------ ------ ------ $6,636 $7,172 $7,181 ====== ====== ====== Defined Benefit Pension Plan The net periodic pension cost for the Corporation's defined benefit plans, as determined by consulting actuaries, consisted of the following components for the years ended December 31: 2001 2000 1999 ------- ------- ------- (in thousands) Service cost - benefits earned during period .. $ 1,873 $ 1,845 $ 1,923 Interest cost on projected benefit obligation.. 2,472 2,282 1,992 Actual return on assets ....................... 3,103 (4,655) (3,863) Net amortization and deferral ................. (6,459) 1,815 1,533 ------- ------- ------- Net periodic pension cost ..................... $ 989 $ 1,287 $ 1,585 ======= ======= ======= The valuation date of the defined benefit plans is September 30. The following table summarizes the changes in the projected benefit obligation (PBO) and fair value of plan assets for the indicated periods:
Oct. 1, 2000 Oct. 1, 1999 Through Through Sept. 30, 2001 Sept. 30, 2000 ------------------------------- (in thousands) Projected benefit obligation, beginning .......... $33,671 $31,067 Service cost ..................................... 1,873 1,845 Interest cost .................................... 2,472 2,282 Distributions .................................... (1,861) (1,237) Change due to change in assumptions .............. 1,378 -- Experience loss at September 30 .................. (326) (286) ------- ------- Projected benefit obligation, ending ............. $37,207 $33,671 ======= ======= Fair value of plan assets, beginning ............. $39,624 $35,062 Employer contributions ........................... 773 1,144 Actual return on assets .......................... (3,103) 4,655 Distributions .................................... (1,861) (1,237) ------- ------- Fair value of plan assets, ending ................ $35,433 $39,624 ======= =======
The funded status of the plans and the amounts included in other liabilities as of December 31 follows: 2001 2000 -------- -------- (in thousands) Projected benefit obligation ........................... $(37,207) $(33,671) Fair value of plan assets .............................. 35,433 39,624 -------- -------- Funded status ..................................... (1,774) 5,953 Unrecognized net transition asset ...................... (81) (6) Unrecognized prior service cost ........................ 25 32 Unrecognized net loss (gain) ........................... 1,379 (6,214) -------- -------- Pension liability recognized in the consolidated balance sheets ....................... $ (451) $ (235) ======== ======== The following rates were used to calculate net periodic pension cost and present value of benefit obligations: 2001 2000 1999 ---- ---- ---- Discount rate-projected benefit obligation ............. 7.25% 7.50% 7.50% Rate of increase in compensation level ................. 5.00 5.00 5.00 Expected long-term rate of return on plan assets ....... 8.00 8.00 8.00 Post-retirement Benefits The Corporation currently provides medical and life insurance benefits to retired full-time employees who were employees of the Corporation prior to January 1, 1998. Full-time employees may become eligible for these discretionary benefits if they reach normal retirement age while working for the Corporation. Benefits are based on a graduated scale for years of service after attaining the age of 40. The components of the expense for post-retirement benefits other than pensions are as follows: 2001 2000 1999 ----- ----- ----- (in thousands) Service cost-benefits earned during the period ...... $ 240 $ 268 $ 250 Interest cost on accumulated benefit obligation ..... 393 422 364 Actual return on plan assets ........................ (7) (12) (9) Net amortization and deferral ....................... (375) (304) (289) ----- ----- ----- Net nonpension post-retirement benefit cost ......... $ 251 $ 374 $ 316 ===== ===== ===== The following table summarizes the changes in the projected benefit obligation and fair value of plan assets for the years ended December 31: 2001 2000 ------ ------ (in thousands) Projected benefit obligation, beginning .................... $5,540 $6,063 Service cost ............................................... 240 268 Interest cost .............................................. 393 422 Benefit payments ........................................... (411) (315) Change due to change in experience ......................... (122) (257) Change due to change in assumptions ........................ 158 (641) ------ ------ Projected benefit obligation, ending ....................... $5,798 $5,540 ====== ====== Fair value of plan assets, beginning ....................... $ 192 $ 203 Employer contributions ..................................... 397 292 Actual return on assets .................................... 7 12 Benefit payments ........................................... (411) (315) ------ ------ Fair value of plan assets, ending .......................... $ 185 $ 192 ====== ====== The funded status of the plan and the amounts included in other liabilities as of December 31 follows: 2001 2000 ------- ------- (in thousands) Projected benefit obligation ............................. $(5,798) $(5,540) Fair value of plan assets ................................ 185 192 ------- ------- Funded status ....................................... (5,613) (5,348) Unrecognized prior service cost .......................... (1,358) (1,584) Unrecognized net gain .................................... (1,892) (2,076) ------- ------- Post-retirement benefits liability recognized in the consolidated balance sheets .................. $(8,863) $(9,008) ======= ======= For measuring the post-retirement benefit obligation, a 5.5% annual increase in the per capita cost of health care benefits was assumed. This health care cost trend rate has a significant impact on the amounts reported. Assuming a 1% increase in the health care cost trend rate above the assumed annual increase, the accumulated post-retirement benefit obligation would increase by approximately $685,000 and the current period expense would increase by approximately $87,000. Conversely, a 1% decrease in the health care cost trend rate would decrease the accumulated post-retirement benefit obligation by approximately $573,000 and the current period expense by approximately $71,000. The discount rate used in determining the accumulated post-retirement benefit obligation was 7.25% at December 31, 2001 and 7.50% at December 31, 2000. NOTE K - STOCK-BASED COMPENSATION PLANS AND SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------- Incentive Stock Option Plan and Employee Stock Purchase Plan The Corporation has an Incentive Stock Option Plan (Option Plan) and an Employee Stock Purchase Plan (ESPP). Under the Option Plan, options are granted to key personnel for terms of up to 10 years at option prices equal to the fair market value of the Corporation's stock on the date of grant. Options are 100% vested immediately upon grant. Options assumed from Skylands retained their original vesting schedules. The Plan has reserved 1.0 million additional shares for future grant through 2006. The number of options granted in any year is dependent upon the Corporation's performance relative to that of a self-defined peer group. A summary of stock option activity under the current and prior plan follows: Option Price Per Share -------------------------- Stock Weighted Options Range Average --------- --------------- -------- Balance at January 1, 1999............ 1,732,291 $ 3.15 - $20.47 $11.73 Granted............................. 316,851 18.48 18.48 Exercised........................... (172,717) 3.15 - 17.90 7.54 Canceled............................ (13,966) 17.90 - 20.47 18.88 --------- Balance at December 31, 1999.......... 1,862,459 3.15 - 20.47 13.21 Granted............................. 386,327 16.88 16.88 Exercised........................... (231,292) 3.15 - 18.90 8.38 Assumed from Skylands............... 262,452 3.89 - 15.01 10.37 Canceled............................ (3,907) 12.10 12.10 --------- Balance at December 31, 2000.......... 2,276,039 3.15 - 20.47 13.98 Granted............................. 346,900 20.47 20.47 Exercised........................... (375,542) 3.15 - 20.47 10.65 Canceled............................ (20,018) 13.30 - 20.47 19.58 --------- Balance at December 31, 2001.......... 2,227,379 $ 3.15 - $20.47 $15.49 ========= Exercisable at December 31, 2001...... 2,164,656 $ 3.15 - $20.47 $15.63 ========= The following table summarizes information concerning options outstanding at December 31, 2001: Total Weighted Weighted Range of Unexercised Average Average Exercisable Exercise Stock Remaining Exercise Stock Prices Options Life (Years) Price Options - --------------- ----------- ------------ -------- ----------- $ 0.00 - $ 5.00 52,428 2.22 $ 3.34 52,428 $ 5.00 - $10.00 497,021 3.40 8.97 445,766 $10.00 - $15.00 336,585 5.02 11.83 336,585 $15.00 - $20.00 731,995 7.39 18.33 720,527 $20.00 - $25.00 609,350 8.29 20.47 609,350 --------- ---- ------ --------- 2,227,379 6.27 $15.49 2,164,656 ========= ==== ====== ========= The ESPP allow eligible employees to purchase stock in the Corporation at 85% of the fair market value of the stock on the date of exercise. Under the terms of the ESPP, 71,000 shares, 78,000 shares and 88,000 shares were issued in 2001, 2000 and 1999, respectively. A total of 994,000 shares have been issued since the inception of the ESPP in 1986. As of December 31, 2001, 425,000 shares have been reserved for future issuances under the ESPP. The Corporation accounts for both the Option Plan and the ESPP under Accounting Principles Board Opinion No. 25, and, accordingly, no compensation expense has been recognized in the financial statements of the Corporation. Had compensation cost for these plans been recorded in the financial statements of the Corporation consistent with the fair value provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (Statement 123), the Corporation's net income and net income per share would have been reduced to the following pro-forma amounts (in thousands, except per-share data):
2001 2000 1999 -------- -------- -------- Net income: As reported.... $113,589 $106,834 $104,627 Pro-forma...... 111,959 105,274 103,290 Net income per share (basic): As reported.... $ 1.38 $ 1.32 $ 1.27 Pro-forma...... 1.36 1.30 1.26 Net income per share (diluted): As reported.... $ 1.37 $ 1.31 $ 1.26 Pro-forma...... 1.35 1.29 1.25 Weighted average fair value of options granted... $ 5.25 $ 5.07 $ 4.75
Because the Statement 123 method has not been applied to options granted prior to January 1, 1995, the resulting pro-forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants: 2001 2000 1999 ------- ------- ------- Risk-free interest rate ....................... 5.32% 6.43% 5.84% Volatility of Corporation's stock ............. 23.80 22.71 19.71 Expected dividend yield ....................... 3.13 3.25 2.88 Expected life of options ...................... 8 Years 8 Years 8 Years Shareholder Rights On June 20, 1989, the Board of Directors of the Corporation declared a dividend of one common share purchase right (Original Rights) for each outstanding share of common stock, par value $2.50 per share of the Corporation. The dividend was paid to the shareholders of record as of the close of business on July 6, 1989. On April 27, 1999, the Board of Directors approved an amendment to the Original Rights and the agreement. The significant terms of the amendment included extending the expiration date from June 20, 1999 to April 27, 2009 and resetting the purchase price to $90.00 per share. As of December 31, 2001, the purchase price had adjusted to $74.21 per share as a result of stock dividends. The Rights are not exercisable or transferable apart from the common stock prior to distribution. Distribution of the Rights will occur ten business days following (1) a public announcement that a person or group of persons ("Acquiring Person") has acquired or obtained the right to acquire beneficial ownership of 20% or more of the outstanding shares of common stock (the "Stock Acquisition Date") or (2) the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 25% or more of such outstanding shares of common stock. The Rights are redeemable in full, but not in part, by the Corporation at any time until ten business days following the Stock Acquisition Date, at a price of $0.01 per Right. NOTE L - LEASES - -------------------------------------------------------------------------------- Certain branch offices and equipment are leased under agreements which expire at varying dates through 2018. Most leases contain renewal provisions at the Corporation's option. Total rental expense was approximately $5.1 million in 2001, $4.3 million in 2000 and $4.2 million in 1999. Future minimum payments as of December 31, 2001 under noncancelable operating leases are as follows: Minimum Year Rent - --------------------------------------- ------- (in thousands) 2002................................... $ 5,216 2003................................... 4,818 2004................................... 4,122 2005................................... 3,494 2006................................... 3,062 Thereafter............................. 13,984 ------- $34,696 ======= NOTE M - COMMITMENTS AND CONTINGENCIES - -------------------------------------------------------------------------------- The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, letters of credit, and guarantees which involve, to varying degrees, elements of credit and interest rate risk that are not recognized in the consolidated balance sheets. Exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in making commitments as it does for on-balance-sheet instruments. The Corporation had outstanding commitments to fund loans of $2.1 billion and $1.8 billion as of December 31, 2001 and 2000, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments is expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income producing commercial properties. Commitments under outstanding standby letters of credit were $317.4 million at December 31, 2001 and $261.3 million at December 31, 2000. From time to time, the Corporation and its subsidiary banks may be defendants in legal proceedings relating to the conduct of their banking business. Most of such legal proceedings are a normal part of the banking business, and in management's opinion, the financial position and results of operations of the Corporation would not be affected materially by the outcome of such legal proceedings. NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- The following are the estimated fair values of the Corporation's financial instruments as of December 31, 2001 and 2000 followed by a general description of the methods and assumptions used to estimate such fair values. These fair values are significantly affected by assumptions used, principally the timing of future cash flows and the discount rate. Because assumptions are inherently subjective in nature, the estimated fair values cannot be substantiated by comparison to independent market quotes and, in many cases, the estimated fair values could not necessarily be realized in an immediate sale or settlement of the instrument. Further, certain financial instruments and all nonfinancial instruments are excluded. Accordingly, the aggregate fair value amounts presented do not necessarily represent management's estimation of the underlying value of the Corporation.
2001 2000 ----------------------- ----------------------- Estimated Estimated FINANCIAL ASSETS Book Value Fair Value Book Value Fair Value - ----------------------------------- ---------- ---------- ---------- ---------- (in thousands) Cash and due from banks ........... $ 356,539 $ 356,539 $ 282,586 $ 282,586 Interest-bearing deposits with other banks ............. 6,968 6,968 8,417 8,417 Mortgage loans held for sale ...... 18,374 18,374 5,241 5,241 Securities held to maturity ....... 49,557 50,492 84,762 83,836 Securities available for sale ..... 1,687,787 1,687,787 1,370,133 1,370,133 Net loans ......................... 5,301,148 5,404,066 5,309,019 5,340,861 Accrued interest receivable ....... 43,388 43,388 44,747 44,747
2001 2000 ----------------------- ----------------------- Estimated Estimated FINANCIAL LIABILITIES Book Value Fair Value Book Value Fair Value - ----------------------------------- ---------- ---------- ---------- ---------- (in thousands) Demand and savings deposits ....... $3,341,641 $3,341,641 $2,825,201 $2,825,201 Time deposits ..................... 2,645,163 2,689,856 2,677,502 2,697,497 Short-term borrowings ............. 400,335 400,335 446,429 446,429 Accrued interest payable .......... 35,926 35,926 47,713 47,713 Other financial liabilities ....... 33,714 33,714 28,839 28,839 Federal Home Loan Bank advances and long-term debt ............. 456,802 463,833 559,503 557,413 Corporation-obligated mandatorily redeemable capital securites of subsidiary trust ............... 7,500 7,238 7,500 7,443
For short-term financial instruments, defined as those with remaining maturities of 90 days or less, the carrying amount was considered to be a reasonable estimate of fair value. The following instruments are predominantly short-term: Assets Liabilities - ---------------------------- --------------------------- Cash and due from banks Demand and savings deposits Interest bearing deposits Short-term borrowings Accrued interest receivable Accrued interest payable Mortgage loans held for sale Other financial liabilities For those components of the above-listed financial instruments with remaining maturities greater than 90 days, fair values were determined by discounting contractual cash flows using rates which could be earned for assets with similar remaining maturities and, in the case of liabilities, rates at which the liabilities with similar remaining maturities could be issued as of the balance sheet date. As indicated in Note A, securities available for sale are carried at their estimated fair values. The estimated fair values of securities held to maturity as of December 31, 2001 and 2000 were generally based on quoted market prices, broker quotes or dealer quotes. For short-term loans and variable rate loans which reprice within 90 days, the carrying value was considered to be a reasonable estimate of fair value. For other types of loans, fair value was estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. In addition, for loans secured by real estate, appraisal values for the collateral were considered in the fair value determination. The fair value of long-term debt was estimated by discounting the remaining contractual cash flows using a rate at which the Corporation could issue debt with a similar remaining maturity as of the balance sheet date. The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter-parties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations. NOTE O - MERGERS AND ACQUISITIONS - -------------------------------------------------------------------------------- Drovers Bancshares Corporation - On July 1, 2001, the Corporation completed its merger with 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. 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. This business combination 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 years ended December 31, 2000 and 1999 follows. The Fulton Financial per-share amounts have been restated to reflect the impact of the 5% stock dividend paid on May 25, 2001. Fulton Drovers Year Ended December 31, 2000 Financial Bancshares Adjustments Restated - ---------------------------- --------- ---------- ----------- -------- (in thousands, except per-share data) Net interest income $252,100 $23,325 $ 328 $275,753 Other income 69,611 5,707 (320) 74,998 -------- ------- ----- -------- Total income $321,711 $29,032 $ 8 $350,751 -------- ------- ----- -------- Net income $103,804 $ 3,108 $ (78) $106,834 -------- ------- ----- -------- Net income per share (basic) $ 1.39 $ 0.61 -- $ 1.32 Net income per share (diluted) 1.38 0.61 -- 1.31 Year Ended December 31, 1999 - ---------------------------- Net interest income $243,903 $22,276 $ (9) $266,170 Other income 61,358 5,349 (39) 66,668 -------- ------- ----- -------- Total income $305,261 $27,625 $ (48) $332,838 -------- ------- ----- -------- Net income $ 97,226 $ 7,601 $(200) $104,627 -------- ------- ----- -------- Net income per share (basic) $ 1.28 $ 1.54 -- $ 1.27 Net income per share (diluted) 1.27 1.52 -- 1.26 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 this transaction, the Corporation recorded merger-related expenses of approximately $9.8 million ($6.4 million, net of tax). These charges 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 a core deposit intangible asset of $9.9 million and an unidentifiable intangible asset of $21.7 million. The core deposit intangible is being amortized on a straight-line basis over 10 years. Since this was a branch acquisition, the unidentifiable intangible asset does not qualify for the non-amortization provisions of Statement 142 and will be amortized to expense on a straight-line basis over 25 years. Dearden, Maguire, Weaver and Barrett, LLC - On January 2, 2001, the Corporation completed its acquisition of investment management and advisory company Dearden, Maguire, Weaver and Barrett, LLC (Dearden Maguire). The acquisition was accounted for as a purchase and the accounts and results of operations of Dearden Maguire are included in the financial statements of the Corporation prospectively from the January 2, 2001 acquisition date. In connection with the acquisition, 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 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 was being amortized to expense on a straight-line basis over 20 years through December 31, 2001. Effective January 1, 2002, the goodwill is no longer being amortized to expense as required by Statement 142, but will be evaluated periodically for impairment. 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 0.86 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 the Corporation and Skylands became the Corporation's third banking subsidiary located in New Jersey. The acquisition was accounted for as a purchase and 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. In connection with the acquisition, goodwill of approximately $17.5 million was recorded as the purchase price paid in excess of the net assets acquired. The goodwill was being amortized to expense on a straight line basis over 15 years through December 31, 2001. Effective January 1, 2002, the goodwill is no longer being amortized to expense as required by Statement 142, but will be evaluated periodically for impairment. NOTE P - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - -------------------------------------------------------------------------------- CONDENSED BALANCE SHEETS - ------------------------ (in thousands) December 31 --------------------- 2001 2000 -------- -------- ASSETS - ------ Cash, securities, and other assets ................................ $ 2,171 $ 3,053 Receivable from bank subsidiaries ............................... 9 8 Investment in: Bank subsidiaries ............................... 696,416 649,038 Nonbank subsidiaries ............................ 157,531 135,107 -------- -------- Total Assets .................................... $856,127 $787,206 ======== ======== December 31 --------------------- 2001 2000 -------- -------- LIABILITIES AND EQUITY - ---------------------- Short - term borrowings ...................................... $ 10,500 $ 11,425 Long-term debt ....................................... 7,735 7,735 Payable to nonbank subsidiaries ............................ 3,998 16,177 Other liabilities .................................... 22,440 20,698 -------- -------- Total Liabilities ............................... 44,673 56,035 Shareholders' equity ................................. 811,454 731,171 -------- -------- Total Liabilities and Shareholders' Equity ............................ $856,127 $787,206 ======== ======== CONDENSED STATEMENTS OF INCOME - ------------------------------
Year ended December 31 -------------------------------- 2001 2000 1999 -------- -------- -------- (in thousands) Income: Dividends from bank subsidiaries ............ $126,897 $ 73,982 $ 68,580 Other ....................................... 24,417 9,636 10,098 -------- -------- -------- 151,314 83,618 78,678 Expenses ......................................... 38,772 18,760 16,214 -------- -------- -------- Income before income taxes and equity in undistributed net income of subsidiaries .... 112,542 64,858 62,464 Income tax benefit ............................... (6,329) (3,020) (2,437) -------- -------- -------- 118,871 67,878 64,901 Equity in undistributed net income (loss) of: Bank subsidiaries ........................... (14,367) 28,908 31,041 Nonbank subsidiaries ........................ 9,085 10,048 8,685 -------- -------- -------- Net Income ............................. $113,589 $106,834 $104,627 ======== ======== ========
CONDENSED STATEMENTS OF CASH FLOWS - ----------------------------------
Year ended December 31 -------------------------------- 2001 2000 1999 -------- -------- -------- (in thousands) Cash Flows From Operating Activities: Net Income .................................................. $113,589 $106,834 $104,627 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Decrease (increase) in other assets ...................... 706 1,571 (783) Decrease (increase) in investment in subsidiaries ........ 5,282 (39,034) (39,926) (Decrease) increase in other liabilities and payable to non-bank subsidiaries .................... (12,951) 10,726 4,664 Gain on sale of investment securities .................... -- -- (140) -------- -------- -------- Total adjustments .................................... (6,963) (26,737) (36,185) -------- -------- -------- Net cash provided by operating activities ............ 106,626 80,097 68,442 -------- -------- -------- Cash Flows From Investing Activities: Investment in subsidiaries ............................... (47,039) (5,759) (14,529) Net cash paid for Dearden Maguire ........................ (16,224) -- -- Purchase of securities available for sale ................ -- (227) (459) Proceeds from sales of securities available for sale ..... -- 14 309 -------- -------- -------- Net cash used in investing activities ................ (63,263) (5,972) (14,679) Cash Flows From Financing Activities: Net (decrease) increase in short-term borrowings ......... (925) 11,857 1,564 Dividends paid ........................................... (51,486) (45,740) (41,856) Net proceeds from issuance of common stock ............... 16,795 5,099 4,300 Acquisition of treasury stock ............................ (7,922) (45,162) (17,784) -------- -------- -------- Net cash used in financing activities ................ (43,538) (73,946) (53,776) -------- -------- -------- Net (Decrease) Increase in Cash and Cash Equivalents ............ (175) 179 (13) Cash and Cash Equivalents at Beginning of Year .................. 286 107 120 -------- -------- -------- Cash and Cash Equivalents at End of Year ........................ $ 111 $ 286 $ 107 ======== ======== ======== Cash paid during the year for: Interest .................................................. $ 3,319 $ 3,210 $ 1,556 Income taxes .............................................. 46,633 40,624 32,916
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Fulton Financial Corporation We have audited the accompanying consolidated balance sheets of Fulton Financial Corporation (a Pennsylvania corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Drovers Bancshares Corporation, a company acquired during 2001 in a transaction accounted for as a pooling of interests, as discussed in Note O. Such statements are included in the consolidated financial statements of Fulton Financial Corporation and reflect total assets of 10 percent in 2000 and interest income of 11 percent and 10 percent in 2000 and 1999, respectively, of the consolidated totals. These statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to amounts included for Drovers Bancshares Corporation, is based solely upon the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Fulton Financial Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. Lancaster, Pennsylvania January 22, 2002 FULTON FINANCIAL CORPORATION QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED) (In thousands, except per-share data) Three Months Ended ----------------------------------------- For the Year 2001 March 31 June 30 Sept. 30 Dec. 31 - ------------------------------ -------- -------- -------- -------- Interest income .............. $133,253 $130,472 $130,009 $124,444 Interest expense ............. 63,395 59,135 56,625 48,807 -------- -------- -------- -------- Net interest income .......... 69,858 71,337 73,384 75,637 Provision for loan losses .... 3,179 3,199 5,533 2,674 Other income ................. 22,363 25,992 27,043 25,596 Other expenses ............... 49,020 51,402 61,499 54,748 -------- -------- -------- -------- Income before income taxes ... 40,022 42,728 33,395 43,811 Income taxes ................. 11,771 12,401 9,233 12,962 -------- -------- -------- -------- Net income ................... $ 28,251 $ 30,327 $ 24,162 $ 30,849 ======== ======== ======== ======== Per-share data: Net income (basic) ...... $ 0.34 $ 0.37 $ 0.29 $ 0.37 Net income (diluted) .... 0.34 0.36 0.29 0.37 Cash dividends .......... 0.152 0.170 0.170 0.170 Three Months Ended ----------------------------------------- For the Year 2001 March 31 June 30 Sept. 30 Dec. 31 - ------------------------------ -------- -------- -------- -------- Interest income .............. $122,483 $126,472 $133,437 $137,235 Interest expense ............. 55,507 58,762 63,182 66,423 -------- -------- -------- -------- Net interest income .......... 66,976 67,710 70,255 70,812 Provision for loan losses .... 3,026 5,226 2,746 4,026 Other income ................. 17,732 18,413 18,326 20,527 Other expenses ............... 44,108 44,291 46,186 49,871 -------- -------- -------- -------- Income before income taxes ... 37,574 36,606 39,649 37,442 Income taxes ................. 10,872 10,616 11,532 11,417 -------- -------- -------- -------- Net income ................... $ 26,702 $ 25,990 $ 28,117 $ 26,025 ======== ======== ======== ======== Per-share data: Net income (basic) ...... $ 0.33 $ 0.32 $ 0.35 $ 0.32 Net income (diluted) .... 0.33 0.32 0.34 0.32 Cash dividends .......... 0.136 0.152 0.152 0.152 Item 9. Changes in and Disagreements with Accountants on Accounting and - ----------------------------------------------------------------------- Financial Disclosure -------------------- None. PART III Item 10. Directors and Executive Officers of the Registrant - ----------------------------------------------------------- Incorporated by reference herein is the information appearing under the heading "Information about Nominees and Continuing Directors" on pages 5 through 11 of the 2002 Proxy Statement and under the heading "Executive Officers and Stock Ownership" on page 11 of the 2002 Proxy Statement. Item 11. Executive Compensation - ------------------------------- Incorporated by reference herein is the information appearing under the heading "Executive Compensation" on pages 12 through 13 of the 2002 Proxy Statement and under the heading "Compensation of Directors" on page 17 of the 2002 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management - ----------------------------------------------------------------------- Incorporated by reference herein is the information appearing under the heading "Voting of Shares and Principal Holders Thereof" on page 3 of the 2002 Proxy Statement and under the heading "Information about Nominees and Continuing Directors" on pages 5 through 11 of the 2002 Proxy Statement. Item 13. Certain Relationships and Related Transactions - ------------------------------------------------------- Incorporated by reference herein is the information appearing under the heading "Transactions with Directors and Executive Officers" on page 17 of the 2002 Proxy Statement, and the information appearing in Note D - Loans and Allowance for Loan Losses, of the Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data". PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - ------------------------------------------------------------------------- (a) The following documents are filed as part of this report: 1. Financial Statements -- The following consolidated financial statements of Fulton Financial Corporation and subsidiaries are incorporated herein by reference in response to Item 8 above: (i) Consolidated Balance Sheets - December 31, 2001 and 2000. (ii) Consolidated Statements of Income - Years ended December 31, 2001, 2000 and 1999. (iii) Consolidated Statements of Shareholders' Equity - Years ended December 31, 2001, 2000 and 1999. (iv) Consolidated Statements of Cash Flows - Years ended December 31, 2001, 2000 and 1999. (v) Notes to Consolidated Financial Statements (vi) Report of Independent Public Accountants. 2. Financial Statement Schedules -- All financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and have therefore been omitted. 3. Exhibits -- The following is a list of the Exhibits required by Item 601 of Regulation S-K and filed as part of this report: (i) 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. (ii) Rights Amendment 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. (iii) 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. (iv) Subsidiaries of the Registrant. (v) Consents of Independent Public Accountants. (vi) Representations of Independent Public Accountants. (b) Reports on Form 8-K - None. (c) Exhibits - The exhibits required to be filed as part of this report are submitted as a separate section of this report. (d) Financial Statement Schedules - None required. SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) 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 (Registrant) Dated: March 19, 2002 By: /s/ Rufus A. Fulton, Jr. --------------------------- Rufus A. Fulton, Jr., Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been executed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Capacity Date - --------- -------- ---- /s/ Jeffrey G. Albertson Director March 19, 2002 - --------------------------------- Jeffrey G. Albertson, Esq. Director - --------------------------------- James P. Argires, M.D. /s/ Donald M. Bowman, Jr. Director March 19, 2002 - --------------------------------- Donald M. Bowman, Jr. /s/ Beth Ann L. Chivinski Senior Vice President March 19, 2002 - --------------------------------- and Controller Beth Ann L. Chivinski (Principal Accounting Officer) /s/ Harold D. Chubb Director March 19, 2002 - --------------------------------- Harold D. Chubb /s/ William H. Clark, Jr. Director March 19, 2002 - --------------------------------- William H. Clark, Jr., C.P.A.
Signature Capacity Date - --------- -------- ---- /s/ Craig A. Dally Director March 19, 2002 - -------------------------------- Craig A. Dally, Esq. /s/ Frederick B. Fichthorn Director March 19, 2002 - -------------------------------- Frederick B. Fichthorn /s/ Patrick J. Freer Director March 19, 2002 - -------------------------------- Patrick J. Freer /s/ Rufus A. Fulton, Jr. Chairman, Chief Executive March 19, 2002 - -------------------------------- Officer and Director Rufus A. Fulton, Jr. (Principal Executive Officer) /s/ Eugene H. Gardner Director March 19, 2002 - -------------------------------- Eugene H. Gardner /s/ Robert D. Garner Director March 19, 2002 - -------------------------------- Robert D. Garner /s/ Charles V. Henry III, Esq. Director March 19, 2002 - -------------------------------- Charles V. Henry III, Esq. Director - -------------------------------- J. Robert Hess /s/ George W. Hodges Director March 19, 2002 - -------------------------------- George W. Hodges /s/ Carolyn R. Holleran Director March 19, 2002 - -------------------------------- Carolyn R. Holleran /s/ Clyde W. Horst Director March 19, 2002 - -------------------------------- Clyde W. Horst Director - -------------------------------- Samuel H. Jones, Jr.
Signature Capacity Date - --------- -------- ---- Director - -------------------------------- Donald W. Lesher, Jr. /s/ Charles J. Nugent Senior Executive Vice President March 19, 2002 - -------------------------------- and Chief Financial Officer Charles J. Nugent (Principal Financial Officer) Director - -------------------------------- Joseph J. Mowad, M.D. /s/ Stuart H. Raub, Jr. Director March 19, 2002 - -------------------------------- Stuart H. Raub, Jr. /s/ Mary Ann Russell Director March 19, 2002 - -------------------------------- Mary Ann Russell /s/ John O. Shirk Director March 19, 2002 - -------------------------------- John O. Shirk, Esq. /s/ R. Scott Smith, Jr. President and Chief Operating March 19, 2002 - -------------------------------- Officer and Director R. Scott Smith, Jr. Director - -------------------------------- James K. Sperry Director - -------------------------------- Gary A. Stewart Director - -------------------------------- Kenneth G. Stoudt
EXHIBIT INDEX ------------- Exhibits Required Pursuant to Item 601 of Regulation S-K - ----------------------------- 3. Articles of Incorporation, as amended and restated, and Bylaws of Fulton Financial Corporation, as amended - Incorporated by reference from Exhibit 3 of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. 4. Rights Amendment dated June 20, 1989, as amended and restated on April 27, 1999, between Fulton Financial Corporation and Fulton Bank - Incorporated by reference from Exhibit 1 of the Fulton Financial Corporation Current Report on Form 8-K dated April 27, 1999. 10. Material Contracts - Executive Compensation Agreements and Plans: (a) Severance Agreements entered into between Fulton Financial and: Rufus A. Fulton, Jr., as of April 17, 1984; R. Scott Smith, Jr., as of May 17, 1988; Richard J. Ashby, Jr., as of May 17, 1988; and Charles J. Nugent, as of November 19, 1992 - Incorporated by reference from Exhibit 10(a) of the Fulton Financial Corporation Quarterly Report on Form 10-Q for 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. 21. Subsidiaries of the Registrant. 23. Consents of Independent Public Accountants. 99. Representations of Independent Public Accountants. EX-21 3 dex21.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21 - Subsidiaries of the Registrant The following are the subsidiaries of Fulton Financial Corporation:
State of Incorporation Name Under Which Subsidiary or Organization Business is Conducted ---------- --------------- ----------------------- Fulton Bank Pennsylvania Fulton Bank One Penn Square P.O. Box 4887 Lancaster, Pennsylvania 17604 Lebanon Valley Farmers Bank Pennsylvania Lebanon Valley Farmers Bank 555 Willow Street P. O. Box 1285 Lebanon, Pennsylvania 17042 Swineford National Bank Pennsylvania Swineford National Bank 227 East Main Street Middleburg, Pennsylvania 17842 Lafayette Ambassador Bank Pennsylvania Lafayette Ambassador Bank 360 Northampton Street Easton, Pennsylvania 18042 Fulton Financial Realty Company Pennsylvania Fulton Financial Realty Company One Penn Square P.O. Box 4887 Lancaster, Pennsylvania 17604 Fulton Life Insurance Company Arizona Fulton Life Insurance Company One Penn Square P.O. Box 4887 Lancaster, Pennsylvania 17604 FNB Bank, N.A. Pennsylvania FNB Bank, N.A. 354 Mill Street P.O. Box 279 Danville, Pennsylvania 17821 Hagerstown Trust Company Maryland Hagerstown Trust 83 West Washington Street Hagerstown, Maryland 21740 Central Pennsylvania Financial Corp. Pennsylvania Central Pennsylvania Financial Corp. One Penn Square P.O. Box 4887 Lancaster, Pennsylvania 17604
Exhibit 21 - Subsidiaries of the Registrant (Continued)
State of Incorporation Name Under Which Subsidiary or Organization Business is Conducted ---------- --------------- ----------------------- Delaware National Bank Delaware Delaware National Bank Route 113 North P. O. Box 520 Georgetown, DE 19947 The Bank New Jersey The Bank 100 Park Avenue P.O. Box 832 Woodbury, NJ 08096 FFC Management, Inc. Delaware FFC Management, Inc. 900 Market Street, Second Floor Wilmington, DE 19801 Woodstown National Bank New Jersey Woodstown National Bank 1 South Main Street Woodstown, NJ 08098 The Peoples Bank of Elkton Maryland The Peoples Bank of Elkton 130 North Street P.O. Box 220 Elkton, MD 21922 Skylands Community Bank New Jersey Skylands Community Bank 176 Mountain Avenue Hackettstown, NJ 07840 Fulton Financial Advisors, N.A. Pennsylvania Fulton Financial Advisors, N.A. One Penn Square P.O. Box 7989 Lancaster, Pennsylvania 17604 Fulton Insurance Pennsylvania Fulton Insurance Services Group, Inc. Services Group, Inc. One Penn Square P.O. Box 7989 Lancaster, Pennsylvania 17604 Dearden, Maguire, Weaver and Pennsylvania Dearden ,Maquire, Weaver Barrett LLC and Barrett LLC One Tower Bridge 100 Front Street Suite 560 West Conshohocken, PA 19428 Drovers Capital Trust I Delaware Drovers Capital Trust I 103 Faulk Road, Suite 202 Wilmington, DE 19803 Pennbanks Insurance Company Cayman Islands Pennbanks Insurance Company Genesis Building P O Box 1363 GT Grand Cayman, B.W.I
EX-23 4 dex23.txt CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23 - Consent of Independent Public Accountants To: Fulton Financial Corporation As independent public accountants, we hereby consent to the incorporation of our report dated January 22, 2002 included in this Form 10-K, into the Company's previously filed Registration Statement File No. 33-37835, File No. 333-05481, File No. 333-44788, File No. 333-81377, File No. 333-64744, File No. 333-61268, File No. 333-76600, File No. 333-76596, and File No. 333-76594. /s/ Arthur Andersen LLP - ----------------------- Lancaster, Pa., March 26, 2002 EX-23.1 5 dex231.txt CONSENT OF STAMBAUGH NESS, PC Exhibit 23.1 - Consent of Independent Auditors We hereby consent to incorporation by reference in the 2001 annual report of Fulton Financial Corporation and Form 10-K, of our report included herein. /s/ Stambaugh Ness, PC - ---------------------- York, Pennsylvania March 29, 2002 EX-99 6 dex99.txt REPRESENTATIONS OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 99 - Representations of Independent Public Accountants Securities and Exchange Commission Washington, DC Arthur Andersen LLP has represented to Fulton Financial Corporation that its audit was subject to Andersen's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards, that there was appropriate continuity of Arthur Andersen personnel working on the audit and availability of national office consultation. -----END PRIVACY-ENHANCED MESSAGE-----