-----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, Qr+oYeEXz1eIoqm1yPx+x8y8U0hKrqNbBYbMrk8OkE4a5LkkBOIT9fMpDwhm+1x6 aDjgtGi6frDfyADA/9jVaw== 0000950109-98-003458.txt : 19980527 0000950109-98-003458.hdr.sgml : 19980527 ACCESSION NUMBER: 0000950109-98-003458 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980327 ITEM INFORMATION: FILED AS OF DATE: 19980526 SROS: NASD 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: 8-K/A SEC ACT: SEC FILE NUMBER: 000-10587 FILM NUMBER: 98631161 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 8-K/A 1 FORM 8-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20459 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 Date of Report: May 21, 1998 ----------------- Date of earliest event reported: March 27, 1998 ----------------- Commission File No. 0-10587 ----------- FULTON FINANCIAL CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2195389 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Penn Square, P.O. Box 4887 Lancaster, Pennsylvania 17604 ------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (717) 291-2411 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Fulton Financial Corporation ("FFC") hereby amends its current report on Form 8-K dated March 31, 1998 to include the financial statements and pro-forma financial information required by Item 7 of Form 8-K. Item 7. Financial Statements and Exhibits - ----------------------------------------- (a) Financial Statements of Businesses Acquired The financial statements of Keystone Heritage Group, Inc. ("KHG") as of and for each of the years in the three year period ended December 31, 1997 are attached as Exhibit 99.2. KHG was acquired by FFC on March 27, 1998. (b) Pro-Forma financial information The unaudited pro-forma condensed balance sheet and the unaudited pro-form condensed statement of income of FFC set forth below give effect, using the pooling-of-interests method of accounting, to the acquisition of KHG. This pro-forma information is based upon an exchange ratio of 2.288 shares of FFC common stock for each share of KHG common stock (the exchange ratio reflects the impact of the 5-for-4 stock split declared by FFC on April 14, 1998). The unaudited pro-forma combined balance sheet is presented as though the merger between FFC and KHG was consummated as of December 31, 1997. The unaudited pro-forma combined condensed statement of income is presented as though the merger was consummated at the beginning of 1997. The unaudited pro forma financial information, including the notes thereto set forth below, is not necessarily indicative of the financial condition or results of operations of FFC as they would have been had the acquisition of KHG occurred during the period presented or as they may be in the future. The unaudited pro forma financial information set forth below should be read in conjunction with the financial statements and footnotes to financial statements of FFC, included in Items 8 and 14 of FFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, which are hereby incorporated by reference, and the financial statements of KHG, including the notes thereto, which are included in this Current Report under Item 7(a). Unaudited pro-forma financial information for the years ended December 31, 1996 and 1995 was previously filed with FFC's Registration Statement on Form S-4 (File No. 333-41335) under the caption "Pro-Forma Combined Financial Information," and is hereby incorporated by reference. (c) Exhibits 23 Consent of KPMG Peat Marwick LLP. /1/99.1 Financial Statements of FFC as of and for the three years ended December 31, 1997. 99.2 Financial Statements of KHG as of and for the three years ended December 31, 1997. /2/99.3 Unaudited pro-forma financial information for the years ended December 31, 1996 and 1995. /1/Incorporated by reference to Items 8 and 14 of FFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. /2/Incorporated by reference to "Pro-Forma Combined Financial Information" of FFC's Registration Statement on Form S-4 (File No. 333-41335). FULTON FINANCIAL CORPORATION PRO-FORMA CONDENSED BALANCE SHEET (UNAUDITED) DECEMBER 31, 1997
PRO- FORMA FFC KHG ADJ COMBINED ----------- ----------- ----------- ----------- ASSETS Cash and Due from Banks $ 172,392 $ 24,593 $ 196,985 Interest-bearing deposits 1,042 200 1,242 Mortgage loans held for sale 1,118 828 1,946 Investment securities 854,575 137,005 (345)(b) 991,235 Loans, net 3,260,606 468,401 3,729,007 Premises and equipment 61,647 7,968 69,615 Accrued interest receivable 26,771 3,799 30,570 Other assets 82,672 5,801 85 (b) 88,558 ----------- ----------- ----------- ----------- Total Assets $ 4,460,823 $ 648,595 ($260) $ 5,109,158 =========== =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $ 3,621,569 $ 556,265 $ 4,177,834 Short-term borrowings 236,762 12,145 248,907 Accrued interest payable 25,618 5,885 31,503 Other liabilities 53,885 3,816 57,701 Long Term debt 47,695 2,350 50,045 ----------- ----------- ----------- ----------- Total Liabilities 3,985,529 580,461 0 4,565,990 ----------- ----------- ----------- ----------- Shareholders' equity: Common Stock 101,610 20,358 (2,152)(a) 119,816 Other shareholders' equity 373,684 47,776 2,152 (a) 423,352 (260)(b) ----------- ----------- ----------- ----------- Total shareholders' equity 475,294 68,134 (260) 543,168 ----------- ----------- ----------- ----------- Total liabilities and shareholders' equity $ 4,460,823 $ 648,595 ($260) $ 5,109,158 ----------- ----------- ----------- -----------
Notes to Pro Forma combined Balance Sheets: - ------------------------------------------- (a) Adjusts capital accounts to reflect the issuance of 2.288 shares of FFC Common Stock, $2.50 par value per share, for each of the 3.9 million shares of KHG Common Stock, $5.00 par value per share, outstanding. (b) Transfer of 2,666 shares of KHG stock owned by FFC ($53,000 cost, $148,000 market) and 6,050 shares of FFC stock owned by KHG ($50,000 cost, $197,000 market) to treasury. FULTON FINANCIAL CORPORATION PRO-FORMA CONDENSED STATEMENT OF INCOME (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1997
PRO- FORMA FFC KHG ADJ COMBINED ---------- ---------- ---------- ---------- Interest Income: Loans, including fees $271,791 $39,460 $311,251 Investment securities 47,550 8,687 56,237 Other interest income 287 449 736 ---------- ---------- ---------- ---------- Total Interest Income 319,628 48,596 0 368,224 ---------- ---------- ---------- ---------- Interest Expense: Deposits 124,786 20,605 145,391 Short-term borrowings 8,836 537 9,373 Long-term debt 3,396 321 3,717 ---------- ---------- ---------- ---------- Total Interest Expense 137,018 21,463 0 158,481 ---------- ---------- ---------- ---------- Net Interest Income 182,610 27,133 0 209,743 ---------- ---------- ---------- ---------- Provision for Loan Losses 7,742 0 7,742 ---------- ---------- ---------- ---------- Net Interest Income After Provision for loan losses 174,868 27,133 0 202,001 ---------- ---------- ---------- ---------- Other Income 41,055 7,159 48,214 Other Expenses 122,293 20,580 142,873 ---------- ---------- ---------- ---------- Income Before Income Taxes 93,630 13,712 0 107,342 ---------- ---------- ---------- ---------- Income taxes 28,431 4,442 32,873 ---------- ---------- ---------- ---------- Net Income $65,199 $9,270 $0 $74,469 ========== ========== ========== ========== Per-share Data: Net Income (basic) 1.29 2.34 1.25 Net Income (diluted) 1.28 2.31 1.24
EX-23.2 2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23 - Consent of Independent Public Accountants [LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE] Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the inclusion of our report dated January 30, 1998, with respect to the consolidated balance sheets of Keystone Heritage Group, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 1997, which report appears in the Form 8-K of Fulton Financial Corporation dated May 21, 1998. KPMG Peat Marwick LLP May 21, 1998 EX-99.2 3 FINANCIAL STATEMENTS OF KEYSTONE HERITAGE GP. INC Exhibit 99.2 - Financial Statements of Keystone Heritage Group, Inc. KPMG Peat Marwick LLP 225 Market Street Suite 300 P. O. Box 1100 Harrisburg, PA 17108-1190 The Board of Directors Keystone Heritage Group, Inc. We have audited the accompanying consolidated balance sheets of Keystone Heritage Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion of these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Keystone Heritage Group, Inc. and subsidiaries as of December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP January 30, 1998 Consolidated Balance Sheets (December 31, 1997 and 1996) (Dollars in thousands) ================================================================================ Assets 1997 1996 ================================================================================ Cash and due from banks $ 24,593 $ 22,832 - -------------------------------------------------------------------------------- Interest bearing deposits with banks 200 181 - -------------------------------------------------------------------------------- Investment securities available for sale 60,795 62,596 - -------------------------------------------------------------------------------- Investment securities held to maturity (fair value of $76,627 and $92,081 for 1997 and 1996, respectively) 76,210 91,652 - -------------------------------------------------------------------------------- Loans held for sale 828 6,019 - -------------------------------------------------------------------------------- Loans 476,873 422,534 - -------------------------------------------------------------------------------- Less: Allowance for loan losses (8,472) (7,736) - -------------------------------------------------------------------------------- Loans, net 468,401 414,798 - -------------------------------------------------------------------------------- Other real estate owned 115 695 - -------------------------------------------------------------------------------- Premises and equipment, net 7,968 8,132 - -------------------------------------------------------------------------------- Deferred tax asset, net 2,715 2,604 - -------------------------------------------------------------------------------- Accrued interest receivable 3,799 3,677 - -------------------------------------------------------------------------------- Other assets 2,971 3,121 - -------------------------------------------------------------------------------- Total assets $648,595 $616,307 ================================================================================ Liabilities - -------------------------------------------------------------------------------- Deposits: - -------------------------------------------------------------------------------- Non-interest bearing demand $ 80,779 $ 72,683 - -------------------------------------------------------------------------------- Interest bearing demand 57,434 57,284 - -------------------------------------------------------------------------------- Savings 131,689 127,090 - -------------------------------------------------------------------------------- Time 286,364 269,776 - -------------------------------------------------------------------------------- Total deposits 556,265 526,833 - -------------------------------------------------------------------------------- Short-term borrowings 12,145 12,478 - -------------------------------------------------------------------------------- Other borrowings 2,350 6,438 - -------------------------------------------------------------------------------- Accrued interest payable 5,885 5,184 - -------------------------------------------------------------------------------- Other liabilities 3,816 3,135 - -------------------------------------------------------------------------------- Total liabilities 580,461 554,068 - -------------------------------------------------------------------------------- Stockholders' Equity - -------------------------------------------------------------------------------- Common stock, $5.00 par value; Authorized 10,000,000 shares; 4,071,683 shares issued at December 31, 1997 and December 31, 1996, respectively 20,358 20,358 - -------------------------------------------------------------------------------- Capital surplus 22,083 22,078 - -------------------------------------------------------------------------------- Retained earnings 26,727 21,418 - -------------------------------------------------------------------------------- Treasury Stock, 105,434 shares for 1997 and 93,700 shares for 1996, at cost (2,481) (2,123) - -------------------------------------------------------------------------------- Net unrealized gain on investment securities available for sale, net of taxes 1,447 508 - -------------------------------------------------------------------------------- Total stockholders' equity 68,134 62,239 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $648,595 $616,307 ================================================================================ See accompanying notes to consolidated financial statements. 2 Consolidated Statements of Income
(Years Ended December 31, 1997, 1996 and 1995) (Dollars in thousands, except per share data) ======================================================================================================= Interest Income 1997 1996 1995 ======================================================================================================= Interest and fees on loans $ 39,460 $ 36,725 $ 34,946 - ------------------------------------------------------------------------------------------------------- Interest on money market investments 449 309 539 - ------------------------------------------------------------------------------------------------------- Interest and dividends on investment securities available for sale: - ------------------------------------------------------------------------------------------------------- Taxable investment securities 3,487 2,858 2,685 - ------------------------------------------------------------------------------------------------------- Equity investments 264 217 195 - ------------------------------------------------------------------------------------------------------- Interest and dividends on investment securities held to maturity: - ------------------------------------------------------------------------------------------------------- Taxable investment securities 4,164 4,335 4,419 - ------------------------------------------------------------------------------------------------------- Non-taxable investment securities 772 530 447 - ------------------------------------------------------------------------------------------------------- Total interest income 48,596 44,974 43,231 - ------------------------------------------------------------------------------------------------------- Interest Expense - ------------------------------------------------------------------------------------------------------- Interest on deposits 20,605 18,490 17,836 - ------------------------------------------------------------------------------------------------------- Interest on short-term borrowings 537 486 466 - ------------------------------------------------------------------------------------------------------- Interest on other borrowings 321 518 766 - ------------------------------------------------------------------------------------------------------- Total interest expense 21,463 19,494 19,068 - ------------------------------------------------------------------------------------------------------- Net interest income 27,133 25,480 24,163 - ------------------------------------------------------------------------------------------------------- Provision for loan losses 0 0 0 - ------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 27,133 25,480 24,163 - ------------------------------------------------------------------------------------------------------- Other Operating Income - ------------------------------------------------------------------------------------------------------- Fees and other service charges 1,429 1,625 1,499 - ------------------------------------------------------------------------------------------------------- Service charges on deposits 1,459 1,331 1,292 - ------------------------------------------------------------------------------------------------------- Trust income 1,339 1,310 1,277 - ------------------------------------------------------------------------------------------------------- Net gain on sale of residential mortgage loans 932 940 209 - ------------------------------------------------------------------------------------------------------- Net gain on sale of credit card loans 618 0 0 - ------------------------------------------------------------------------------------------------------- Net realized gain on investment securities available for sale 513 79 126 - ------------------------------------------------------------------------------------------------------- Gain on sale of other real estate owned, net 112 60 410 - ------------------------------------------------------------------------------------------------------- Other income 757 586 598 - ------------------------------------------------------------------------------------------------------- Total other operating income 7,159 5,931 5,411 - ------------------------------------------------------------------------------------------------------- Other Operating Expense - ------------------------------------------------------------------------------------------------------- Salaries and employee benefits 10,982 10,040 9,770 - ------------------------------------------------------------------------------------------------------- Equipment expense 2,041 1,954 1,934 - ------------------------------------------------------------------------------------------------------- Occupancy expense, net 1,734 1,306 1,256 - ------------------------------------------------------------------------------------------------------- Professional services 721 826 913 - ------------------------------------------------------------------------------------------------------- Bank card processing expense 584 822 711 - ------------------------------------------------------------------------------------------------------- Pennsylvania shares tax 452 502 479 - ------------------------------------------------------------------------------------------------------- Deposit insurance expense 65 2 539 - ------------------------------------------------------------------------------------------------------- Other expense 4,001 3,360 2,787 - ------------------------------------------------------------------------------------------------------- Total other operating expense 20,580 18,812 18,389 - ------------------------------------------------------------------------------------------------------- Income before income taxes 13,712 12,599 11,185 - ------------------------------------------------------------------------------------------------------- Income taxes 4,442 3,879 3,528 - ------------------------------------------------------------------------------------------------------- Net income $ 9,270 $ 8,720 $ 7,657 - ------------------------------------------------------------------------------------------------------- Per common share: - ------------------------------------------------------------------------------------------------------- Net income: - ------------------------------------------------------------------------------------------------------- Basic 2.34 2.15 1.88 - ------------------------------------------------------------------------------------------------------- Diluted 2.31 2.15 1.88 - ------------------------------------------------------------------------------------------------------- Cash dividends paid 1.00 .84 .705 =======================================================================================================
See accompanying notes to consolidated financial statements. 3 Consolidated Statements of Stockholders' Equity
(Years Ended December 31, 1997, 1996 and 1995) (Dollars in thousands, except per share data) ================================================================================================================================== Net Unrealized Gain (Loss) on Common Capital Retained Treasury Investment Securities Available Stock Surplus Earnings Stock for Sale, Net of Taxes Total ================================================================================================================================== Balance, January 1, 1995 $ 15,231 $ 27,006 $ 11,316 $ 0 ($1,451) $ 52,102 - ---------------------------------------------------------------------------------------------------------------------------------- Net Income 0 0 7,657 0 0 7,657 - ---------------------------------------------------------------------------------------------------------------------------------- Cash dividends ($.705 per share) 0 0 (2,866) 0 0 (2,866) - ---------------------------------------------------------------------------------------------------------------------------------- Stock issued under dividend 0 199 reinvestment plan 38 161 0 0 - ---------------------------------------------------------------------------------------------------------------------------------- Stock split (4 for 3) 5,089 (5,089) 0 0 0 0 - ---------------------------------------------------------------------------------------------------------------------------------- Change in net unrealized gain (loss) on investment securities available for sale, net of tax effect of $909 0 0 0 0 1,787 1,787 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 $ 20,358 $ 22,078 $ 16,107 $ 0 $ 336 $ 58,879 - ---------------------------------------------------------------------------------------------------------------------------------- Net income 0 0 8,720 0 0 8,720 - ---------------------------------------------------------------------------------------------------------------------------------- Cash dividends ($.84 per share) 0 0 (3,409) 0 0 (3,409) - ---------------------------------------------------------------------------------------------------------------------------------- Treasury stock repurchase, 93,700 shares 0 0 0 ($ 2,123) (2,123) - ---------------------------------------------------------------------------------------------------------------------------------- Change in net unrealized gain (loss) on investment securities available for sale, net of tax effect of $91 0 0 0 0 172 172 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $ 20,358 $ 22,078 $ 21,418 ($ 2,123) $ 508 $ 62,239 - ---------------------------------------------------------------------------------------------------------------------------------- Net income 0 0 9,270 0 0 9,270 - ---------------------------------------------------------------------------------------------------------------------------------- Cash dividends ($1.00 per share) 0 0 (3,961) 0 0 (3,961) - ---------------------------------------------------------------------------------------------------------------------------------- Acquisition of 26,400 shares of treasury stock 0 0 0 (703) 0 (703) - ---------------------------------------------------------------------------------------------------------------------------------- Disposition of 14,666 shares of treasury stock 0 5 0 345 0 350 - ---------------------------------------------------------------------------------------------------------------------------------- Change in net unrealized gain (loss) on investment securities available for sale, net of tax effect of $519 0 0 0 0 939 939 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 $ 20,358 $ 22,083 $ 26,727 ($ 2,481) $ 1,447 $ 68,134 ==================================================================================================================================
See accompanying notes to consolidated financial statements. 4 Consolidated Statements of Cash Flows
(Years Ended December 31, 1997, 1996 and 1995) (Dollars in thousands) ==================================================================================================================================== Cash Flows from Operating Activities 1997 1996 1995 ==================================================================================================================================== Net Income $ 9,270 $ 8,720 $ 7,657 - ------------------------------------------------------------------------------------------------------------------------------------ Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: - ------------------------------------------------------------------------------------------------------------------------------------ Provision for loan losses 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ Depreciation and amortization 1,532 1,414 1,463 - ------------------------------------------------------------------------------------------------------------------------------------ Originations of residential mortgage loans sold (35,211) (40,710) (10,456) - ------------------------------------------------------------------------------------------------------------------------------------ Proceeds from sale of residential mortgage loans 36,889 38,582 10,510 - ------------------------------------------------------------------------------------------------------------------------------------ Deferred income taxes (630) 405 23 - ------------------------------------------------------------------------------------------------------------------------------------ Decrease (increase) in accrued interest receivable (122) 167 (659) - ------------------------------------------------------------------------------------------------------------------------------------ (Decrease) increase in accrued interest payable 701 (100) 2,216 - ------------------------------------------------------------------------------------------------------------------------------------ Net gain on sale of residential mortgage loans (932) (940) (209) - ------------------------------------------------------------------------------------------------------------------------------------ Net gain on sale of credit card loans (618) 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ Net realized gains on investment securities available for sale (513) (79) (126) - ------------------------------------------------------------------------------------------------------------------------------------ Net realized gain on sale of other real estate owned (112) (60) (410) - ------------------------------------------------------------------------------------------------------------------------------------ Other, net 200 (621) 1,166 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 8,776 8,906 11,121 - ------------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Investing Activities: - ------------------------------------------------------------------------------------------------------------------------------------ Net decrease (increase) in interest bearings deposits with banks (19) 65 (96) - ------------------------------------------------------------------------------------------------------------------------------------ Net decrease in federal funds sold 0 0 1,300 - ------------------------------------------------------------------------------------------------------------------------------------ Maturities of investment securities held to maturity 38,250 31,667 65,006 - ------------------------------------------------------------------------------------------------------------------------------------ Maturities of investment securities available for sale 22,632 29,088 10,179 - ------------------------------------------------------------------------------------------------------------------------------------ Sales of investment securities available for sale 3,038 196 609 - ------------------------------------------------------------------------------------------------------------------------------------ Funds invested in investment securities held to maturity (22,656) (36,329) (79,394) - ------------------------------------------------------------------------------------------------------------------------------------ Funds invested in investment securities available for sale (21,571) (25,978) (18,143) - ------------------------------------------------------------------------------------------------------------------------------------ Net increase in loans made to customers (51,520) (34,871) (7,759) - ------------------------------------------------------------------------------------------------------------------------------------ Proceeds from sale of credit card loans 3,051 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ Net expenditures for premises and equipment (1,368) (1,613) (1,306) - ------------------------------------------------------------------------------------------------------------------------------------ Proceeds from sale of other real estate owned 773 412 1,481 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used by investing activities (27,712) (39,491) (28,069) - ------------------------------------------------------------------------------------------------------------------------------------ Cash Flows From Financing Activities: - ------------------------------------------------------------------------------------------------------------------------------------ Net increase customer deposits 29,432 38,916 19,177 - ------------------------------------------------------------------------------------------------------------------------------------ Net (decrease) in short-term borrowings (333) (3,838) (3,447) - ------------------------------------------------------------------------------------------------------------------------------------ Net (decrease) increase in other borrowings (4,088) (7,571) 4,083 - ------------------------------------------------------------------------------------------------------------------------------------ Cash dividends paid (3,961) (3,409) (2,866) - ------------------------------------------------------------------------------------------------------------------------------------ Acquisition of treasury stock (703) (2,123) 0 - ------------------------------------------------------------------------------------------------------------------------------------ Disposition of treasury stock 350 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ Proceeds from issuance of common stock 0 0 199 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 20,697 29,651 17,146 - ------------------------------------------------------------------------------------------------------------------------------------ Net (Decrease) Increase in Cash and Due From Banks 1,761 (934) 198 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and Due From Banks at Beginning of Period 22,832 23,766 23,568 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and Due From Banks at End of Period $ 24,593 $ 22,832 $ 23,766 - ------------------------------------------------------------------------------------------------------------------------------------ Supplemental Disclosures: - ------------------------------------------------------------------------------------------------------------------------------------ Interest paid (excluding interest credited) $ 11,249 $ 10,658 $ 10,310 - ------------------------------------------------------------------------------------------------------------------------------------ Income taxes paid 5,350 3,090 3,653 - ------------------------------------------------------------------------------------------------------------------------------------ Non-cash investing and financing activities: - ------------------------------------------------------------------------------------------------------------------------------------ Transfers from loans to other real estate owned 81 134 163 - ------------------------------------------------------------------------------------------------------------------------------------ Loan charge-offs 700 895 583 ====================================================================================================================================
See accompanying notes to consolidated financial statements. 5 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies The accounting and reporting policies of Keystone Heritage Group, Inc. (the Company) and its subsidiaries conform to generally accepted accounting principles and reporting practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. The material estimate that is particularly susceptible to significant change in the near-term relates to the determination of the allowance for loan losses. Business Keystone Heritage Group, Inc. is a bank holding company headquartered in Lebanon, Pennsylvania which engages in a general commercial and retail banking, mortgage banking and trust business through its banking subsidiary, Lebanon Valley National Bank (the Bank). Keystone Heritage Life Insurance Company is a non-bank subsidiary that reinsures credit life and accident and health policies written on consumer loans generated by the Bank. Principles of Consolidation The consolidated financial statements of the Company and subsidiaries include the accounts of the Company and its wholly-owned subsidiaries, Lebanon Valley National Bank and Keystone Heritage Life Insurance Company. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. For purposes of comparability, certain prior year amounts have been reclassified with no impact on net income. Loans Loans are generally carried at the principal amount outstanding, net of undisbursed commitments and net of deferred loan fees. Interest income on loans is accrued based on methods which approximate a constant yield when related to the principal amounts outstanding. The accrual of interest on loans is discontinued when they are past due 90 days as to either principal or interest, or when, in management's opinion, the collectibility of principal or interest is doubtful, except for certain consumer loans for which the period is 120 days. Management may maintain the accrual status for a past-due loan in the event that the loan is well secured and in the process of collection. When the accrual of interest is discontinued, unpaid interest recognized during the current year is reversed by a charge against interest income, and unpaid interest from the prior year is reversed by a charge against the allowance for loan losses. Interest payments received on non-accrual loans are recorded as reductions of principal if management determines that the ultimate collectibility of principal or interest is doubtful. Loans are generally returned to accrual status when the collectibility of both principal and interest on a timely basis is reasonably assured, all delinquent principal and interest is brought current and the loan has been performing as contractually agreed upon for at least six months. Net loan fees and costs associated with originating loans are deferred and amortized using the effective interest method to interest income over the contractual life of the related loan. The amortization of deferred fees and costs is discontinued on non-accrual loans. Generally, all significant non-accrual loans are deemed to be impaired. Management considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. In evaluating whether a loan is impaired, management considers not only the amount that the Company expects to collect but also the timing of the collection. Generally if payments are consistently made, but on a delayed basis of not more than 90 days, a loan is not deemed to be impaired. When a loan is considered to be impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or at the loan's market price or fair value of the collateral if the loan is collateral dependent. The majority of loans deemed to be impaired by management are collateral dependent. Loans are evaluated individually for impairment. The Company excludes smaller balance, homogeneous loans (primarily consumer and residential mortgage loans) from the evaluation of impairment. Impairment losses are included in the allowance for loan losses. Impaired loans are charged-off when management believes that the ultimate collectibility of principal and interest of a loan is not likely. Interest income on impaired loans is generally recorded as payments are collected. 6 Notes to Consolidated Financial Statements, cont. - -------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies, cont. Loans held for sale Loans held for sale consist of mortgages and credit card loans which the Company intends to sell. The mortgage loans and credit card loans are separately carried at the lower of aggregate cost or estimated market values with unrealized losses, if any, recognized through a provision included in other income. Gains and losses on the sale of mortgage loans held for sale are determined using the specific identification method. Residential mortgage loans are committed to be sold without recourse at the date of origination to a third-party with servicing released by the Company. These loans committed for sale are funded by the Company for a short period of time until settlement with the third-party. The Company sold its credit card portfolio, without recourse, to a third-party during the second quarter of 1997 and therefore these loans have been classified as held for sale at December 31, 1996. Investment Securities The Company classifies its debt and marketable equity securities into one of two categories; available for sale or held to maturity. Investment securities available for sale are securities held for the purpose of maintaining a liquid asset base and may be sold. Investment securities held to maturity are those securities for which the Company has the ability and intent to hold the security until maturity. Investment securities available for sale are recorded at fair value. Investment securities held to maturity are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses, net of the related tax effect, on investment securities available for sale are excluded from earnings and are reported as a separate component of stockholders' equity until realized. A decline in the fair value of investment securities available for sale or investment securities held to maturity below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related investment security held to maturity as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses from the sale of available for sale securities are included in earnings and are determined using the specific identification method. Other securities include stock of the Federal Reserve Bank of Philadelphia and stock of the Federal Home Loan Bank of Pittsburgh and are stated at cost. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to other operating expense as incurred. Gains or losses on dispositions are reflected in current results of operations. Allowance for Loan Losses The allowance for loan losses is a reserve for estimated known and inherent losses in the loan portfolio. Losses occur primarily from the loan portfolio, but may also be derived from commitments to extend credit and standby letters of credit. Loan losses and recoveries on previously charged-off loans are charged or credited directly to the allowance for loan losses. Management performs a quarterly assessment of the loan portfolio to determine the appropriate level of the allowance. The factors considered in this evaluation include, but are not necessarily limited to, estimated loan losses identified through review of loans by the Company's personnel; analysis of historical loss experience; deterioration in loan concentrations or pledged collateral; trends in portfolio volume and composition; trends in delinquencies and non-accruals and changes in lending policies and general economic conditions. While management uses available information to determine the appropriate level of allowance for loan losses, future changes in the allowance may become necessary due to changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. These agencies may recommend the Bank change the level of the allowance based on their judgements of information available to them at the time of their examination. 7 Notes to Consolidated Financial Statements, cont. - -------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies, cont. Other Real Estate Owned Other real estate owned is valued at the lower of cost or fair value less the cost to sell. These assets are written down to fair value at the date of transfer to other real estate owned by a charge to the allowance for loan losses. Subsequent to transfer, any further declines in fair value are recorded through a valuation allowance. These properties are reviewed on a quarterly basis and additional provisions are charged to other operating expense as appropriate. Fair values are derived from independent appraisals at the time of foreclosure. Subsequent appraisals are obtained as market conditions are deemed by management to have significantly changed. Gains on the sale or disposition of other real estate owned are generally credited to other operating income and losses on the sale or disposition are charged to other operating expense or against the valuation allowance. Costs of maintaining foreclosed properties are expensed as incurred. Employee Benefits Retirement plan costs for the Company's defined benefit plan are accounted for in accordance with the requirements of Statement of Financial Accounting Standards No. 87, "Employees' Accounting for Pensions". The projected unit credit method is utilized for measuring net periodic pension cost over the employee's service life. The Company funds the plan according to an actuarial formula to provide for both current and future benefit payments, to the extent that contributions are deductible under existing federal tax regulations. The Company does not provide any other significant post-retirement or post-employment benefits. Income Taxes Income taxes are accounted for utilizing the asset and liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company files a consolidated federal income tax return. Trust Assets and Income Property held in a fiduciary or agency capacity for customers of the Company's trust department is not included in the consolidated balance sheets since such items are not assets of the Company or its subsidiaries. Trust income is recognized on a cash basis which is not materially different than if it were reported on an accrual basis. Interest Rate Contracts The Bank has entered into interest rate swap contracts as part of its asset-liability management activities. These contracts are entered into to manage interest rate risk exposure. Interest rate swap contracts generally involve the exchange of fixed and floating-rate interest payment obligations without the exchange of the underlying principal amounts. Entering into interest rate swap contracts involves not only the risk of dealing with counterparties and their ability to meet the terms of the contracts but also the interest rate risk associated with unmatched positions. Notional principal amounts often are used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. The interest income or interest expense differential from interest rate swap contracts is recognized on the accrual basis as a component of interest income or interest expense over the life of the contract. Gains or losses from early termination of interest rate swap contracts are deferred and amortized over the remaining term of the underlying assets or liabilities. 8 Notes to Consolidated Financial Statements, cont. - -------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies, cont. New Accounting Standards In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share". SFAS 128, which supersedes APB Opinion No. 15 (APB 15), "Earnings Per Share", specifies the computation, presentation, and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock. It replaces the presentation of primary EPS with a presentation of basic EPS and fully diluted EPS with diluted EPS, Basic EPS, unlike primary EPS, excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similarly to fully diluted EPS under APB 15. The Company adopted SFAS 128 as of December 31, 1997. All prior period per share data has been restated to reflect the adoption of SFAS 128. 9 2. Merger On August 15, 1997, the Company entered into a merger agreement with Fulton Financial Corporation ("Fulton Financial"). Fulton Financial is a $4.2 billion bank holding company which operates 117 banking offices in Pennsylvania, Maryland, Delaware and New Jersey through ten affiliate banks. Under the terms of the merger agreement, each of the outstanding shares of the Company's common stock will be exchanged for 1.83 shares of Fulton Financial common stock. The transaction is expected to be completed in the first quarter of 1998 and will be accounted for as a pooling of interests. As a result of the acquisition, the Company will be merged into Fulton Financial and Lebanon Valley National Bank, the sole banking subsidiary of the Company, will be combined with Farmers Trust Bank, one of Fulton Financial's existing affiliate banks, to become Lebanon Valley Farmers Bank. Concurrently with the merger, deposits, loans and branches located in Lancaster and Dauphin counties will be transferred to Fulton Bank, another of Fulton Financial's existing affiliates. 3. Acquisitions On March 1, 1996, the Bank acquired the business operations of Central Mortgage Company, a Lancaster, Pennsylvania mortgage origination company. As consideration for this acquisition, the Company will pay the seller an amount equal to one-tenth of one percent (0.1%) of all mortgages closed and located in Lancaster County during the next five years, up to a maximum of $50,000 a year. This transaction was accounted for using purchase accounting. However, no intangible assets were acquired as a result of this transaction. 4. Cash and Due from Banks Cash and due from banks consists of cash and cash items, balances due from correspondent banks and balances maintained with the Federal Reserve Bank. The Company is required to maintain average reserve balances with the Federal Reserve Bank. The average amount of those required reserve balances was $8,697,000 and $7,449,000 at December 31, 1997 and 1996, respectively, which amounts were primarily covered by the Bank's vault cash. 10 5. Investment Securities A summary of the amortized cost and fair values of investment securities available for sale and investment securities held to maturity at December 31, 1997 and 1996 is as follows:
==================================================================================================================================== December 31, 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Investment Securities Available for Gross Gross Sale: Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value ==================================================================================================================================== U.S. Treasury and government agencies $ 52,921 $ 221 $ 30 $ 53,112 - ------------------------------------------------------------------------------------------------------------------------------------ Mortgage-backed securities 927 26 0 953 - ------------------------------------------------------------------------------------------------------------------------------------ Equity securities 2,142 2,012 2 4,152 - ------------------------------------------------------------------------------------------------------------------------------------ Other investment securities 2,578 0 0 2,578 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 58,568 $ 2,259 $ 32 $ 60,795 ==================================================================================================================================== ==================================================================================================================================== December 31, 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Investment Securities Held to Gross Gross Maturity: Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value ==================================================================================================================================== U.S. Treasury and government agencies $ 22,538 $ 211 $ 113 $ 22,636 - ------------------------------------------------------------------------------------------------------------------------------------ States and political subdivisions 19,342 109 17 19,434 - ------------------------------------------------------------------------------------------------------------------------------------ Mortgage-backed securities 34,330 288 61 34,557 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 76,210 $ 608 $ 191 $ 76,627 ====================================================================================================================================
11
==================================================================================================================================== December 31, 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Investment Securities Available for Gross Gross Sale: Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value ==================================================================================================================================== U.S. Treasury and government agencies $ 56,153 $ 40 $ 209 $ 55,984 - ------------------------------------------------------------------------------------------------------------------------------------ Mortgage-backed securities 1,389 41 8 1,422 - ------------------------------------------------------------------------------------------------------------------------------------ Equity securities 1,821 909 4 2,726 - ------------------------------------------------------------------------------------------------------------------------------------ Other securities 2,464 0 0 2,464 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 61,827 $ 990 $ 221 $ 62,596 ==================================================================================================================================== ==================================================================================================================================== December 31, 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Investment Securities Held to Gross Gross Maturity: Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value ==================================================================================================================================== U.S. Treasury and government agencies $ 25,724 $ 298 $ 120 $ 25,902 - ------------------------------------------------------------------------------------------------------------------------------------ States and political subdivisions 17,179 89 11 17,257 - ------------------------------------------------------------------------------------------------------------------------------------ Mortgage-backed securities 48,749 387 214 48,922 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 91,652 $ 774 $ 345 $ 92,081 ====================================================================================================================================
Investment securities having a book value and a fair value of $54,797,000 and $54,898,000 respectively, at December 31, 1997 were pledged as required by law to secure public and trust deposits, repurchase agreements, and other borrowings. A summary of proceeds from the sales of investment securities available for sale, gross realized gains, and gross realized losses for each of the years in the three-year period ended December 31, 1997 are as follows: 1997 1996 1995 ------------------------------------------ Proceeds from sales $3,038,000 $ 196,000 $ 609,000 Gross realized gains 513,000 79,000 134,000 Gross realized losses 0 0 8,000 12 The amortized cost and fair value of investment securities available for sale and investment securities held to maturity at December 31, 1997, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations. ================================================================================ December 31, 1997: Investment Securities Available for Sale: Amortized Fair Value (Dollars in thousands) Cost ================================================================================ Due in one year or less $ 19,544 $ 19,524 - -------------------------------------------------------------------------------- Due after one year through five years 33,182 33,383 - -------------------------------------------------------------------------------- Due after five years through ten years 195 205 - -------------------------------------------------------------------------------- Mortgage-backed securities 927 953 - -------------------------------------------------------------------------------- Equity securities 2,142 4,152 - -------------------------------------------------------------------------------- Other securities 2,578 2,578 - -------------------------------------------------------------------------------- Total $ 58,568 $ 60,795 ================================================================================ ================================================================================ Investment Securities Held to Maturity: Amortized (Dollars in thousands) Cost Fair Value ================================================================================ Due in one year or less $ 14,375 $ 14,415 - -------------------------------------------------------------------------------- Due after one year through five years 25,674 25,818 - -------------------------------------------------------------------------------- Due after five years through ten years 128 130 - -------------------------------------------------------------------------------- Due after ten years 1,703 1,707 - -------------------------------------------------------------------------------- Mortgage-backed securities 34,330 34,557 - -------------------------------------------------------------------------------- Total $ 76,210 $ 76,627 ================================================================================ 6. Loans The carrying amounts of loans at December 31, 1997 and 1996 are as follows: ================================================================================ (Dollars in thousands) 1997 1996 ================================================================================ Commercial $215,006 $194,950 - -------------------------------------------------------------------------------- Agriculture 127,452 106,513 - -------------------------------------------------------------------------------- Commercial real estate - construction 6,818 5,126 - -------------------------------------------------------------------------------- Real estate - residential mortgage 33,559 29,596 - -------------------------------------------------------------------------------- Consumer (net of unearned income of $1,538 and $1,812 for 1997 and 1996, respectively) 94,529 87,003 - -------------------------------------------------------------------------------- Unamortized net loan fees (491) (654) - -------------------------------------------------------------------------------- Total, net $476,873 $422,534 ================================================================================ 13 Included within this loan portfolio are loans on which the Company has ceased the accrual of interest. Such loans amounted to $4,849,000 and $973,000 at December 31, 1997 and 1996, respectively. If interest income had been recognized during 1997, 1996 and 1995 on non-accrual loans in accordance with their original terms, interest income would have been affected as follows: ================================================================================ (Dollars in thousands) 1997 1996 1995 ================================================================================ - -------------------------------------------------------------------------------- Interest income which would have been recognized in accordance with original terms $ 79 $ 66 $ 65 - -------------------------------------------------------------------------------- Interest income recorded during the period 57 45 45 - -------------------------------------------------------------------------------- Net effect upon interest income ($ 22) ($ 21) ($ 20) ================================================================================ The Company has determined that loans with a carrying value of $4,850,000 and $973,000 were deemed to be impaired under SFAS 114 at December 31, 1997 and 1996, respectively. These loans are fully collateralized and the specific allowance for credit losses on these loans is not material. The average balance of loans classified as impaired amounted to $848,000 and $895,000 for the years ended December 31, 1997 and 1996, respectively. Interest income of approximately $57,000, $45,000 and $45,000 was recognized during each of the years ended December 31, 1997, 1996 and 1995, respectively, on loans classified as impaired loans. Loans to officers and directors of the Company and its subsidiaries, and corporations in which such officers or directors are beneficially interested as stockholders, officers or directors, aggregated approximately $3,302,000 and $3,556,000 at December 31, 1997 and 1996, respectively. These loans were made on substantially the same basis, including interest rates and collateral, as those prevailing for comparable transactions with other borrowers at the same time. During 1997, approximately $100,000 of new loans were made, and repayments approximated $354,000. At December 31, 1997 and 1996, none of these loans were classified as non-accrual, past due, restructured, or potential problem loans. 7. Allowance for Loan Losses Changes in the allowance for loan losses for the years ended December 31, 1997, 1996 and 1995 are summarized as follows: ================================================================================ (Dollars in thousands) 1997 1996 1995 ================================================================================ Balance, beginning of year $ 7,736 $ 8,025 $ 8,140 - -------------------------------------------------------------------------------- Provision charged to operations 0 0 0 - -------------------------------------------------------------------------------- Loans charged-off (700) (895) (583) - -------------------------------------------------------------------------------- Recoveries on loans charged-off 1,436 606 468 - -------------------------------------------------------------------------------- Balance, end of year $ 8,472 $ 7,736 $ 8,025 ================================================================================ 14 8. Premises and Equipment Premises and equipment at December 31, 1997 and 1996 are summarized below: ================================================================================ (Dollars in thousands) Estimated 1997 1996 Useful Lives ================================================================================ Land - $ 1,555 $ 1,495 - -------------------------------------------------------------------------------- Premises 20 years 8,653 8,503 - -------------------------------------------------------------------------------- Furniture and equipment 2-7 years 9,431 8,787 - -------------------------------------------------------------------------------- Leasehold improvements 20 years 1,129 916 - -------------------------------------------------------------------------------- Subtotal 20,768 19,701 - -------------------------------------------------------------------------------- Less: Accumulated depreciation and amortization (12,800) (11,569) - -------------------------------------------------------------------------------- Total, net $ 7,968 $ 8,132 ================================================================================ Depreciation and amortization amounted to $1,532,000, $1,414,000 and $1,463,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 9. Time Deposits Time deposits in excess of $100,000 amounted to $25,352,000 and $23,930,000 at December 31, 1997 and 1996, respectively. Interest expense of $1,597,000, $1,055,000 and $1,112,000 was recognized on these deposits in 1997, 1996, and 1995, respectively. At December 31, 1997, the scheduled maturity of time deposits was as follows: (Dollars in thousands) 1998 $ 194,572 1999 44,920 2000 18,093 2001 13,559 2002 9,294 2003 and there after 5,926 ------- Total time deposits $ 286,364 ======= 15 10. Short-term Borrowings At December 31, 1997 and 1996, short-term borrowings consisted of the following:
==================================================================================================================================== 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ December Average Interest December Average Interest (Dollars in thousands) 31 Outstanding Expense 31 Outstanding Expense ==================================================================================================================================== Federal funds purchased $ 2,400 $ 618 $ 36 $ 0 $ 604 $ 35 - ------------------------------------------------------------------------------------------------------------------------------------ Securities sold under agreement to repurchase 9,745 11,654 501 12,478 11,128 451 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 12,145 $ 12,272 $ 537 $ 12,478 $ 11,732 $ 486 ====================================================================================================================================
16 Federal funds purchased represent the Company's overnight borrowing transactions. The weighted average interest rate on federal funds borrowing was 5.83 percent for 1997 and 5.76 percent for 1996. Securities sold under agreement to repurchase range in maturity from one to 90 days. The weighted average interest rate was 4.30 percent during 1997 and 4.05 percent during 1996. The highest month-end outstanding balance was $19,081,000 for 1997 and $15,433,000 for 1996. The weighted average rate at December 31, 1997 was 4.45 percent and for December 31, 1996 and 1995 was 4.04 percent, respectively. The securities that serve as collateral for the securities sold under agreement to repurchase which had a book value of $22,240,000 and $20,131,000 at December 31, 1997 and 1996, respectively, are under the Company's control. Unused federal funds lines of credit available to the Company for short- term financing at December 31, 1997 totalled $118,000,000. 11. Other Borrowings At December 31, 1997 and 1996, there were $2,018,000 and $6,075,000, respectively, of advances outstanding from the Federal Home Loan Bank of Pittsburgh (FHLB) with original maturities between one to five years. The FHLB advances had a weighted average interest rate of 6.30 percent and 6.10 percent at December 31, 1997 and 1996, respectively, and a range of interest rates from 6.19 percent to 6.48 percent. All FHLB advances are secured by the FHLB capital stock owned by the Company and by certain investment securities having a fair value of $2,032,000 and $6,147,000 at December 31, 1997 and 1996, respectively. Obligations under capital leases were $332,000 and $363,000 at December 31, 1997 and 1996, respectively, and carried an imputed interest rate of 7.67 percent for December 31, 1997 and 1996. Scheduled lease payments include payment of imputed interest of $26,000, $24,000 and $23,000 for 1998, 1999 and 2000, respectively. The costs of leasing a branch location and the equipment purchased as a result of the mortgage banking acquisition totalling $389,000, net of accumulated amortization of $100,000, at December 31, 1997, were recorded as assets under the capital lease. In addition, computer hardware and software systems which are fully depreciated amounting to $2,509,000 at December 31, 1997, were also recorded as assets under the capital lease. The following is a summary of the maturities of FHLB advances and the scheduled amortization of capital lease obligations as of December 31, 1997: ================================================================================ FHLB ADVANCES ----------------------------------- WEIGHTED CAPITAL LEASE (Dollars in thousands) AMOUNT AVERAGE RATE OBLIGATIONS ================================================================================ 1998 $ 0 0.00% $ 33 - -------------------------------------------------------------------------------- 1999 2,018 6.30 34 2000 0 0.00 36 2001 0 0.00 4 2002 0 0.00 0 2003-2006 0 0.00 225 - -------------------------------------------------------------------------------- Total $ 2,018 6.30% $ 332 ================================================================================ 17 12. Federal Income Taxes Federal income taxes included in the accompanying statements of income for the years ended December 31, 1997, 1996 and 1995 are as follows: ================================================================================ (Dollars in thousands) 1997 1996 1995 ================================================================================ Current $ 5,072 $ 3,474 $ 3,505 - -------------------------------------------------------------------------------- Deferred (630) 405 23 - -------------------------------------------------------------------------------- Total $ 4,442 $ 3,879 $ 3,528 ================================================================================ The following is a reconciliation between the applicable income tax expense and the amount of income taxes which would have been provided at the Federal statutory rate of 35 percent for the years ended December 31, 1997, 1996 and 1995. ================================================================================ (Dollars in thousands) 1997 1996 1995 ================================================================================ Federal tax expense at statutory rates $ 4,799 $ 4,410 $ 3,915 - -------------------------------------------------------------------------------- Increase (Reduction) in taxes resulting from: - -------------------------------------------------------------------------------- Non-taxable investment security income (256) (162) (139) - -------------------------------------------------------------------------------- Non-taxable loan income (190) (193) (189) - -------------------------------------------------------------------------------- Low income housing tax credit (94) (64) 0 - -------------------------------------------------------------------------------- Other, net 183 (112) (59) - -------------------------------------------------------------------------------- Total $ 4,442 $ 3,879 $ 3,528 ================================================================================ The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and December 31, 1996 are presented below: 18 ================================================================================ (Dollars in thousands) December 31, 1997 December 31, 1996 ================================================================================ Deferred tax assets: - -------------------------------------------------------------------------------- Allowance for loan losses $ 2,880 $ 2,630 - -------------------------------------------------------------------------------- Deferred compensation 356 359 - -------------------------------------------------------------------------------- Unamortized net loan fees 167 241 - -------------------------------------------------------------------------------- Non-accrual loan interest 33 32 - -------------------------------------------------------------------------------- Gross unrealized loss on investment securities available for sale 0 77 - -------------------------------------------------------------------------------- Other 527 46 - -------------------------------------------------------------------------------- Total $ 3,963 $ 3,385 - -------------------------------------------------------------------------------- Deferred tax liabilities: - -------------------------------------------------------------------------------- Depreciation $ 80 $ 174 - -------------------------------------------------------------------------------- Gross unrealized gain on investment securities available for sale 779 337 - -------------------------------------------------------------------------------- Discount accretion 218 153 Prepaid pension expense 171 76 Other 0 41 - -------------------------------------------------------------------------------- Total $ 1,248 781 - -------------------------------------------------------------------------------- Deferred tax asset, net $ 2,715 $ 2,604 ================================================================================ The Company has determined that it is not required to establish a valuation reserve for the deferred tax asset since it is more likely than not that the deferred tax asset of $3,963,000 will be realized through carrybacks to taxable income in prior years, through future reversals of existing temporary differences, future taxable income and tax planning strategies. The Company reviews the tax criteria related to the recognition of deferred tax assets on a quarterly basis. 13. Stockholders' Equity On June 12, 1996 the Company announced its intentions to repurchase up to 5 percent or 203,584 shares of its outstanding common stock. These shares, when repurchased, become available for reissuance through the Company's Dividend Reinvestment or Stock Option Plans or for other general corporate purposes. During 1997 and 1996, the Company repurchased a total of 26,400 and 93,700 shares, respectively, at an average price of $26.62 per share for 1997 and $22.66 per share for 1996. The Company terminated its plans for further stock repurchases upon entering into the merger agreement with Fulton Financial Corporation (See Note 2). During 1997, the Company reissued 14,666 shares from Treasury stock for its Stock Option Plans. The Board of Directors of the Company effected a 4 for 3 stock split during January 1996. All prior period per share data has been restated to give effect for this stock split. 19 14. Stock Option Plan At December 31, 1997 the Company has two stock-based compensation plans, both of which are fixed option plans which are described below. The Company applies APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's two stock-based compensation plans been determined on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1997 1996 1995 Net income As reported $ 9,270,000 $ 8,720,000 $ 7,657,000 Pro forma 9,119,000 8,613,000 7,646,000 Net income per As Reported $ 2.34 $ 2.15 $ 1.88 common share - basic Pro forma 2.30 2.12 1.88 Net income per As Reported $ 2.31 $ 2.15 $ 1.88 common share-diluted Pro forma 2.28 2.12 1.88
Under the 1994 Stock Option Plan, the Company may grant options or stock appreciation rights to officers and key employees of the Company and its subsidiaries for up to 200,000 shares of common stock. Under the 1996 Independent Directors Stock Option Plan, the Company may grant options or stock appreciation rights to non-employee directors of the Company and its subsidiaries for up to 60,000 shares of common stock. Under both plans, the exercise price of each option equals the fair market value of the Company's common stock on the date of grant and an option's maximum term is 10 years. Options vest immediately and are exercisable six months from the date of grant. The fair value of each option grant is estimated on the date of the grant using the Black- Scholes option-pricing model with the following weighted average assumptions used for grants in 1997, 1996 and 1995, respectively: dividend yield of 3.8 percent for each year; expected volatility of 30 percent, 28 percent and 24 percent; risk-free interest rates of 6.60 percent, 5.56 percent and 6.60 percent; and expected lives of 7 years for 1997, 1996 and 1995. A summary of the Company's two fixed stock option plans as of December 31, 1997, 1996 and 1995 and changes during the years ending on those dates is presented below:
Fixed Stock Options: 1997 1996 1995 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------- ------------- ------------- Outstanding at beginning of year 67,130 $21.67 37,330 $21.61 18,665 $19.88 Granted 31,200 25.63 29,800 21.75 18,665 23.34 Exercised 14,666 23.82 0 0.00 0 0.00 Forfeited 0 0.00 0 0.00 0 0.00 Outstanding at end of year 83,664 $22.77 67,130 $21.67 37,330 $21.61 Options exercisable year-end 83,664 67,130 18,665 Weighted-average fair value of options granted during the year $ 7.44 $ 5.50 $ 6.08
20 The following table summarizes information about fixed stock options outstanding at December 31, 1997:
==================================================================================================================================== Options Options Outstanding Exercisable - ------------------------------------------------------------------------------------------------------------------------------------ Range of Number Weighted- Weighted- Number Weighted- exercise prices outstanding average average exercisable average at 12/31/97 remaining exercise at 12/31/97 exercise contractual price price life - ------------------------------------------------------------------------------------------------------------------------------------ $19.88-$26.63 83,664 8 years $22.77 83,664 $22.77 ====================================================================================================================================
At December 31, 1997, there were 125,670 shares available for grant under the 1994 Officer and Key Employee Stock Option Plan and there were 36,000 shares available for grant under the 1996 Independent Director Stock Option Plan. 21 15. Employee Benefit Plans Pension Plan The Company has a non-contributory pension plan covering substantially all employees. Pension expense of $295,000, $328,000 and $287,000 was recognized for 1997, 1996 and 1995, respectively. The following presents the plan's funded status (using a measurement date of October 1) and amounts recognized on the Company's balance sheets:
=========================================================================================================================== October 1, (Dollars in thousands) 1997 1996 1995 =========================================================================================================================== Actuarial present value of accumulated plan benefits: - --------------------------------------------------------------------------------------------------------------------------- Vested $ 5,631 $ 4,659 $ 4,071 - --------------------------------------------------------------------------------------------------------------------------- Nonvested 135 119 117 - --------------------------------------------------------------------------------------------------------------------------- Accumulated plan benefits $ 5,766 $ 4,778 $ 4,188 - --------------------------------------------------------------------------------------------------------------------------- Effects of projected future compensation levels $ 2,626 $ 2,232 $ 2,065 - --------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation $ 8,392 $ 7,010 $ 6,253 - --------------------------------------------------------------------------------------------------------------------------- Plan assets at fair value 8,505 6,725 5,740 - --------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets $ 113 ($ 285) ($ 513) - --------------------------------------------------------------------------------------------------------------------------- Amount contributed 574 571 0 - --------------------------------------------------------------------------------------------------------------------------- Unrecognized net transition asset (198) (248) (298) - --------------------------------------------------------------------------------------------------------------------------- Unrecognized prior service cost 13 15 16 - --------------------------------------------------------------------------------------------------------------------------- Unrecognized net gain due to past experience from different assumptions made 0 170 204 - --------------------------------------------------------------------------------------------------------------------------- Prepaid (accrued) pension expense $ 502 $ 223 ($ 591) =========================================================================================================================== Years Ended December 31, ------------------------------------------------------------- The net pension expense included the following: 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Service cost - benefits earned during the year $ 418 $ 422 $ 350 - --------------------------------------------------------------------------------------------------------------------------- Interest cost on the projected benefit obligation 494 432 380 - --------------------------------------------------------------------------------------------------------------------------- Net amortization and deferral 761 56 (446) - --------------------------------------------------------------------------------------------------------------------------- Return on plan assets (1,378) (582) (889) - --------------------------------------------------------------------------------------------------------------------------- Net pension expense $ 295 $ 328 $ 287 ===========================================================================================================================
The discount rate used in determining the projected benefit obligation was 7.0 percent for 1997, 7.5 percent for 1996 and 7.0 percent for 1995. The expected long-term return on plan assets and the projected increase in salary levels were 8.0 percent and 5.0 percent, respectively, for 1997, 1996 and 1995. Plan assets are primarily invested in money market funds, equity common trust funds, and U.S. Treasury and agency securities. The Company also sponsors a defined contribution plan where each eligible participant's contribution is 50 percent matched by the Company up to a maximum of the first 3 percent of the participant's compensation and 25 percent matched by the Company for the next 3 percent of the participant's compensation. For the years ended December 31, 1997, 1996 and 1995, the expense to the Company to provide these matching contributions totalled $103,000, $100,000 and $83,000, respectively. 22 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, Fulton Financial Corporation has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. FULTON FINANCIAL CORPORATION By: /s/ Rufus A. Fulton, Jr. ------------------------------------- Rufus A. Fulton, Jr. President and Chief Executive Officer Date: May 21, 1998 -----END PRIVACY-ENHANCED MESSAGE-----