-----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, OAPgYcsQ4XewxdxnUunL6MxG7tdAvKge3DkN60XENzRWSeq4yw2CNtrCzYtLTIBG MBVmUwQTkGZlotZMkD970w== 0000950109-98-004241.txt : 19980814 0000950109-98-004241.hdr.sgml : 19980814 ACCESSION NUMBER: 0000950109-98-004241 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-10587 FILM NUMBER: 98686310 BUSINESS ADDRESS: STREET 1: ONE PENN SQ STREET 2: PO BOX 4887 CITY: LANCASTER STATE: PA ZIP: 17604 BUSINESS PHONE: 7172912411 MAIL ADDRESS: STREET 1: ONE PENN SQ STREET 2: PO BOX 4887 CITY: LANCASTER STATE: PA ZIP: 17604 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20459 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 , or --------------------- [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ---------------- Commission File No. 0-10587 ------- FULTON FINANCIAL CORPORATION -------------------------------------------------------------- (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2195389 -------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Penn Square, P.O. Box 4887 Lancaster, Pennsylvania 17604 ------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (717) 291-2411 --------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $2.50 Par Value-59,953,701 shares outstanding as of July 31, 1998. - ------------------------------------------------------------------------------- FULTON FINANCIAL CORPORATION AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 INDEX ----- Description Page ----------- ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): (a) Consolidated Balance Sheets - June 30, 1998 and December 31, 1997..................................3 (b) Consolidated Statements of Income - Three and six months ended June 30, 1998 and 1997...................4 (c) Consolidated Statements of Shareholders' Equity - Six months ended June 30, 1998 and 1997.............................5 (d) Consolidated Statements of Cash Flows - Six months ended June 30, 1998 and 1997.............................6 (e) Notes to Consolidated Financial Statements - June 30, 1998...........7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K...............................17 SIGNATURES..............................................................18 2 FULTON FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) - -------------------------------------------------------------------------------- (Dollars in thousands, except per-share data)
June 30 December 31 1998 1997 ---------------------------------- ASSETS - ------------------------------------------------------------------------------------------------------------------------- Cash and due from banks .............................................................. $ 223,009 $ 197,006 Interest-bearing deposits with other banks ........................................... 2,063 1,242 Mortgage loans held for sale ......................................................... 1,560 1,946 Investment securities: Held to maturity (Fair value: $251,102 in 1998 and $334,145 in 1997) ............ 250,951 333,351 Available for sale .............................................................. 894,564 658,243 Loans ................................................................................ 3,767,362 3,796,706 Less: Allowance for loan losses ................................................ (56,555) (55,593) Unearned income ....................................................... (9,930) (9,968) ------------- ------------- Net Loans ................................................... 3,700,877 3,731,145 ------------- ------------- Premises and equipment ............................................................... 70,987 69,615 Accrued interest receivable .......................................................... 32,147 30,539 Other assets ......................................................................... 77,681 88,302 ------------- ------------- Total Assets ................................................ $ 5,253,839 $ 5,111,389 ============= ============= LIABILITIES - ------------------------------------------------------------------------------------------------------------------------- Deposits: Noninterest-bearing ............................................................. $ 668,293 $ 631,784 Interest-bearing ................................................................ 3,589,149 3,546,234 ------------- ------------- Total Deposits .............................................. 4,257,442 4,178,018 ------------- ------------- Short-term borrowings: Securities sold under agreements to repurchase................................... 177,024 170,035 Federal funds purchased.......................................................... 17,421 73,211 Demand notes of U.S. Treasury ................................................... 5,621 5,661 ------------- ------------- Total Short-Term Borrowings ................................. 200,066 248,907 ------------- ------------- Accrued interest payable ............................................................. 33,535 31,491 Other liabilities .................................................................... 66,352 59,500 Long-term debt ....................................................................... 128,779 50,045 ------------- ------------- Total Liabilities ........................................... 4,686,174 4,567,961 ------------- ------------- SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------- Common stock ($2.50 par) Shares: Authorized 200,000,000 Issued 59,956,385 (59,907,649 in 1997) Outstanding 59,956,385 (59,841,488 in 1997)............................ 149,891 119,816 Capital surplus ...................................................................... 284,104 315,322 Retained earnings .................................................................... 105,842 81,890 Accumulated other comprehensive income................................................ 27,828 27,699 Treasury stock, at cost (66,161 shares in 1997)....................................... - (1,299) ------------- ------------- Total Shareholders' Equity .................................. 567,665 543,428 ------------- ------------- Total Liabilities and Shareholders' Equity................... $ 5,253,839 $ 5,111,389 ============= ============= - -------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements 3 FULTON FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - -------------------------------------------------------------------------------- (Dollars in thousands, except per-share data)
Three Months Ended June 30 Six Months Ended June 30 --------------------------- --------------------------- 1998 1997 1998 1997 --------------------------- --------------------------- INTEREST INCOME - ---------------------------------------------------------------------------------------------------------------------- Loans, including fees ..................................... $ 80,780 $ 77,313 $ 161,303 $ 151,647 Investment securities: Taxable .............................................. 13,353 12,274 26,131 23,944 Tax-exempt ........................................... 843 859 1,558 1,834 Dividends ............................................ 828 653 1,655 1,289 Federal funds sold ........................................ 759 712 965 803 Interest-bearing deposits with other banks ................ 21 54 74 104 --------- ---------- --------- ---------- Total Interest Income ........... 96,584 91,865 191,686 179,621 INTEREST EXPENSE - --------------------------------------------------------------------------------------------------------------------- Deposits .................................................. 37,900 35,630 75,425 69,709 Short-term borrowings ..................................... 1,960 2,656 4,296 4,924 Long-term debt ............................................ 1,901 994 3,121 1,959 --------- ---------- --------- ---------- Total Interest Expense ........... 41,761 39,280 82,842 76,592 --------- ---------- --------- ---------- Net Interest Income .............. 54,823 52,585 108,844 103,029 PROVISION FOR LOAN LOSSES ................................. 1,501 1,641 3,002 3,459 --------- ---------- --------- ---------- Net Interest Income After Provision for Loan Losses . 53,322 50,944 105,842 99,570 --------- ---------- --------- ---------- OTHER INCOME - --------------------------------------------------------------------------------------------------------------------- Trust department .......................................... 3,129 2,626 6,096 5,282 Service charges on deposit accounts ....................... 4,792 4,299 9,215 8,397 Other service charges and fees ............................ 2,909 3,153 5,672 5,647 Gain on sale of mortgage loans ............................ 870 496 1,675 939 Investment securities gains ............................... 4,613 622 7,995 2,776 --------- ---------- --------- ---------- Total Other Income ............... 16,313 11,196 30,653 23,041 OTHER EXPENSES - --------------------------------------------------------------------------------------------------------------------- Salaries and employee benefits ............................ 19,670 18,772 39,567 37,986 Net occupancy expense ..................................... 3,096 2,941 6,127 5,979 Equipment expense ......................................... 2,267 2,278 4,626 4,507 FDIC assessment expense ................................... 178 189 359 355 Special services .......................................... 2,515 1,768 4,572 3,604 Other ..................................................... 11,104 7,992 20,433 16,262 --------- ---------- --------- ---------- Total Other Expenses ............. 38,830 33,940 75,684 68,693 --------- ---------- --------- ---------- Income Before Income Taxes ....... 30,805 28,200 60,811 53,918 INCOME TAXES............................................... 9,886 9,066 19,292 16,746 --------- ---------- --------- ---------- Net Income ....................... $ 20,919 $ 19,134 $ 41,519 $ 37,172 ========= ========== ========= ========== - --------------------------------------------------------------------------------------------------------------------- PER-SHARE DATA: Net income (basic)......................................... $ 0.35 $ 0.32 $ 0.69 $ 0.62 Net income (diluted)....................................... $ 0.35 $ 0.32 $ 0.69 $ 0.62 Cash dividends ............................................ $ 0.150 $ 0.132 $ 0.293 $ 0.255 - ---------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements 4 FULTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Accumulated Other Comprehen- Common Capital Retained sive Treasury (Dollars in thousands, except per-share data) Stock Surplus Earnings Income Stock Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1997................................... $119,816 $ 315,322 $ 81,890 $27,699 $(1,299) $543,428 Comprehensive income: Net income................................................ 41,519 41,519 Other - unrealized gain on securities (net of taxes)...... 129 129 ---------- Total comprehensive income........................... 41,648 ---------- Stock split payable in the form of a stock dividend - 25% (11,985,361 shares)................. 29,963 (30,088) (125) Stock issued (159,271 shares, including 110,536 shares of treasury stock)......................... 112 (1,130) 2,411 1,393 Acquisition of treasury stock (44,375 shares).................. (1,112) (1,112) Cash dividends - $0.293 per share.............................. (17,567) (17,567) -------------------------------------------------------------------- Balance at June 30, 1998....................................... $149,891 $ 284,104 $105,842 $27,828 $ - $567,665 ==================================================================== Balance at December 31, 1996................................... $110,380 $ 240,095 $121,578 $ 9,846 $ (103) $481,796 Comprehensive income: Net income................................................ 37,172 37,172 Other - unrealized gain on securities (net of taxes)...... 4,193 4,193 ---------- Total comprehensive income........................... 41,365 ---------- Stock dividends issued - 10% (4,494,568 shares)................ 8,989 73,962 (83,046) (95) Stock issued (161,526 shares).................................. 299 116 415 Cash dividends - $0.255 per share.............................. (15,241) (15,241) -------------------------------------------------------------------- Balance at June 30, 1997....................................... $119,668 $ 314,173 $ 60,463 $14,039 $ (103) $508,240 ==================================================================== - ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements FULTON FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - -------------------------------------------------------------------------------- (In thousands)
Six Months Ended June 30 -------------------------- 1998 1997 -------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income........................................................................$ 41,519 $ 37,172 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ................................................... 3,002 3,459 Depreciation and amortization of premises and equipment ..................... 4,476 4,156 Net amortization of investment security premiums ............................ 100 31 Investment security gains ................................................... (7,995) (2,776) Net decrease in mortgage loans held for sale................................. 386 5,506 Amortization of intangible assets ........................................... 794 779 Decrease in accrued interest receivable ..................................... (1,608) 989 Decrease in other assets .................................................... 9,773 (3,817) Increase in accrued interest payable ........................................ 2,044 2,940 Increase in other liabilities................................................ 4,770 8,088 --------- ---------- Total adjustments...................................................... 15,742 19,355 --------- ---------- Net cash provided by operating activities .............................. 57,261 56,527 --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale ............................. 16,747 59,523 Proceeds from maturities of securities held to maturity .......................... 86,740 108,813 Proceeds from maturities of securities available for sale ........................ 103,942 31,825 Purchase of securities held to maturity .......................................... (4,341) (17,967) Purchase of securities available for sale ........................................ (348,931) (205,896) (Increase) decrease in short-term investments .................................... (821) 803 Net decrease (increase) in loans ................................................. 27,266 (144,739) Purchase of premises and equipment................................................ (5,848) (5,207) --------- ---------- Net cash used in investing activities .................................. (125,246) (172,845) --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand and savings deposits ...................................... 39,962 20,372 Net increase in time deposits .................................................... 39,462 156,216 Increase in long-term debt........................................................ 78,734 6,326 Decrease in short-term borrowings ................................................ (48,841) (21,344) Dividends paid ................................................................... (15,485) (14,137) Net proceeds from issuance of common stock ....................................... 1,268 320 Acquisition of treasury stock .................................................... (1,112) - --------- ---------- Net cash provided by financing activities............................... 93,988 147,753 --------- ---------- Net Increase in Cash and Due From Banks .......................................... 26,003 31,435 Cash and Due From Banks at Beginning of Period ................................... 197,006 203,523 --------- ---------- Cash and Due From Banks at End of Period .........................................$ 223,009 $ 234,958 ========= ========== Supplemental Disclosures of Cash Flow Information Cash paid during the period for: Interest ....................................................................$ 80,798 $ 73,115 Income taxes ................................................................$ 15,256 $ 13,051 - -----------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements FULTON FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE A - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. NOTE B - 5-for-4 Stock Split The Corporation paid a 5-for-4 stock split in the form of a 25% stock dividend on May 27, 1998. All share and per-share information has been restated to reflect the effect of this stock split. NOTE C - Net Income Per Share The Corporation adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (Statement 128), on December 31, 1997. Statement 128 requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures. The Corporation's basic net income per share is calculated as net income divided by the weighted average number of shares outstanding. For diluted net income per share, net income is divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation's common stock equivalents consist solely of outstanding stock options. A reconciliation of the weighted average shares outstanding used to calculate basic net income per share and diluted net income per share follows (in thousands):
Three months ended Six months ended June 30 June 30 --------------------------- --------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Weighted average shares outstanding (basic).............. 59,933 59,779 59,905 59,745 Impact of common stock equivalents....................... 530 464 516 430 ------------- ----------- ----------- ---------- Weighted average shares outstanding (diluted)............ 60,463 60,243 60,421 60,175 ============= =========== =========== ===========
NOTE D - Mergers and Acquisitions Keystone Heritage Group, Inc. - On March 27, 1998, the Corporation completed its acquisition of Keystone Heritage Group, Inc. (Keystone Heritage), a $650 million bank holding company located in Lebanon, Pennsylvania. As provided under the terms of the merger agreement, each of the approximately 4.0 million shares of Keystone Heritage's common stock was exchanged for 2.288 shares of the Corporation's common stock. In addition, each of the 70,000 options to acquire Keystone Heritage stock was converted to options to acquire the Corporation's stock. The Corporation issued 9.1 million shares of its common stock in connection with the merger, which was accounted for as a pooling of interests. As a result of the acquisition, Keystone Heritage was merged with and into the Corporation. Its sole banking subsidiary, Lebanon Valley National Bank (Lebanon Valley), was merged with Farmers Trust Bank, one of 7 the Corporation's existing affiliate banks, to become Lebanon Valley Farmers Bank. Lebanon Valley's deposits, loans and branches located in Lancaster and Dauphin Counties were transferred to Fulton Bank as a result of the merger. The following table sets forth selected unaudited financial data for the Corporation and Keystone Heritage for the period January 1, 1998 through March 27, 1998: Fulton Keystone Financial Heritage Corporation Group, Inc. ----------- ---------- Net interest income........................ $ 47,466 $ 6,555 Other income............................... 13,032 1,308 ----------- ---------- Total income............................... $ 60,498 $ 7,863 =========== ========== Net income................................. $ 19,066 $ 1,534 =========== ========== The effect of the merger on the Corporation's previously reported revenues, net income and net income per share for the three months ended June 30, 1997 follows:
Fulton Keystone Financial Heritage Corporation Group, Inc. Restated ----------- ----------- ---------- Net interest income........................ $ 45,655 $ 6,930 $ 52,585 Other income............................... 9,121 2,075 11,196 ---------- ---------- ---------- Total income............................... $ 54,776 $ 9,005 $ 63,781 ========== ========== ========== Net income................................. $ 16,026 $ 3,108 $ 19,134 ========== ========== ========== Net income per share (basic)............... $ 0.32 $ 0.78 $ 0.32 ========== ========== ========== Net income per share (diluted)............. $ 0.31 $ 0.78 $ 0.32 ========== ========== ==========
The effect of the merger on the Corporation's previously reported revenues, net income and net income per share for the six months ended June 30, 1997 follows:
Fulton Keystone Financial Heritage Corporation Group, Inc. Restated ----------- ------------ ----------- Net interest income........................ $ 89,477 $ 13,552 $ 103,029 Other income............................... 19,429 3,612 23,041 ---------- ---------- ----------- Total income............................... $ 108,906 $ 17,164 $ 126,070 ========== ========== =========== Net income................................. $ 31,726 $ 5,446 $ 37,172 ========== ========== =========== Net income per share (basic)............... $ 0.63 $ 1.37 $ 0.62 ========== ========== =========== Net income per share (diluted)............. $ 0.62 $ 1.36 $ 0.62 ========== ========== ===========
8 Ambassador Bank of the Commonwealth. - On January 26, 1998, the Corporation entered into a merger agreement to acquire Ambassador Bank of the Commonwealth (Ambassador) of Allentown, Pennsylvania. Ambassador is a $275 million bank, which operates eight community banking offices in Lehigh and Northampton counties. Under the terms of the merger agreement, each of the 1.9 million shares of Ambassador's common stock will be exchanged for 1.4 shares of the Corporation's common stock. In addition, the 417,000 options and warrants to acquire Ambassador stock will be exchanged for approximately 409,000 shares of the Corporation's common stock. The acquisition has been approved by Ambassador shareholders and is subject to approval by bank regulatory authorities. The transaction is expected to be completed in the third quarter of 1998 and will be accounted for as a pooling of interests. As a result of the acquisition, Ambassador will be merged with and into Lafayette Bank, one of the Corporation's existing affiliate banks. NOTE E - Reporting Comprehensive Income Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (Statement 130), was issued in July, 1997. Statement 130 established standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The objective of Statement 130 is to report a measure of all changes in equity that result from economic events of the period other than transactions with owners. Comprehensive income is the total of net income and all other nonowner changes in equity. Statement 130 was effective for fiscal years beginning after December 15, 1997 and was adopted by the Corporation in the first quarter of 1998. NOTE F - New Accounting Standards Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (Statement 125), was issued in 1996 and was effective for 1997. SFAS No. 127 (Statement 127) was also issued in 1996 and amended Statement 125 by deferring for one year the effective date for certain provisions of Statement 125. The Corporation adopted the applicable provisions of Statement 125 on January 1, 1997 and the remaining provisions on January 1, 1998. There was no material financial statement impact. Statement of Financial Accounting Standards No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits" (Statement 132), was issued in February, 1998. Statement 132 revises the required disclosures by employers with respect to pensions and other postretirement plans which were previously addressed by Statements 87, 88 and 106. Statement 132 does not change the measurement or recognition of expense of such plans, but requires additional disclosures about changes in benefit obligations and fair values of plan assets. Statement 132 is effective for years beginning after December 31, 1997. The Corporation will adopt the new disclosure requirements in its financial statements and footnotes for the year ending December 31, 1998. Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and for Hedging Activities" (Statement 133), was issued in July, 1998. Statement 133 replaces existing accounting practices with a single, integrated accounting framework for derivatives and hedging activities. Under Statement 133, every derivative is recorded in the balance sheet as either an asset or liability measured at its fair value and changes in fair value are recognized currently in earnings unless specific hedge accounting criteria are met. Statement 133 is effective as of the beginning of fiscal years beginning after June 15, 1999. The Corporation does not anticipate that adoption of Statement 133 will have a material impact on its financial statements. 9 FULTON FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- This discussion concerns Fulton Financial Corporation (the Corporation), a bank holding company incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly-owned subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and other financial information presented in this report. The Corporation has made, and may continue to make, certain forward-looking statements with respect to its management of net interest income and margin and its progress in addressing Year 2000 issues. The Corporation cautions that these forward-looking statements are subject to various assumptions, risks and uncertainties. Because of the possibility of change in these assumptions, risks and uncertainties, actual results could differ materially from forward-looking statements. In addition to the factors identified herein, the following could cause actual results to differ materially from such forward looking statements: pricing pressures on loan and deposit products, actions of bank and nonbank competitors, changes in local and national economic conditions, changes in regulatory requirements and regulatory oversight of the Corporation, actions of the Federal Reserve Board, the Corporation's success in merger and acquisition integration and the progress of the Corporation in its efforts to ensure Year 2000 compliance. 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 ACQUISITIONS - ----------------------- Keystone Heritage Group, Inc. - On March 27, 1998, the Corporation completed its acquisition of Keystone Heritage Group, Inc. (Keystone Heritage), a $650 million bank holding company located in Lebanon, Pennsylvania. As provided under the terms of the merger agreement, each of the approximately 4.0 million shares of Keystone Heritage's common stock was exchanged for 2.288 shares of the Corporation's common stock. In addition, each of the 70,000 options to acquire Keystone Heritage stock was converted to options to purchase the Corporation's stock. The Corporation issued 9.1 million shares of its common stock in connection with the merger, which was accounted for as a pooling of interests. As a result of the acquisition, Keystone Heritage was merged with and into the Corporation. Its sole banking subsidiary, Lebanon Valley National Bank (Lebanon Valley), was merged with Farmers Trust Bank, one of the Corporation's existing affiliate banks, to become Lebanon Valley Farmers Bank. Lebanon Valley's deposits, loans and branches located in Lancaster and Dauphin Counties were transferred to Fulton Bank as a result of the merger. Ambassador Bank of the Commonwealth. - On January 26, 1998, the Corporation entered into a merger agreement to acquire Ambassador Bank of the Commonwealth (Ambassador) of Allentown, Pennsylvania. Ambassador is a $275 million bank, which operates eight community banking offices in Lehigh and Northampton counties. Under the terms of the merger agreement, each of the 1.9 million shares of Ambassador's common stock will be exchanged for 1.4 shares of the Corporation's common stock. In addition, the 417,000 options and warrants to acquire Ambassador stock will be exchanged for approximately 409,000 shares of the Corporation's common stock. The acquisition has been approved by Ambassador shareholders and is 10 subject to approval by bank regulatory authorities. The transaction is expected to be completed in the third quarter of 1998 and will be accounted for as a pooling of interests. As a result of the acquisition, Ambassador will be merged with and into Lafayette Bank, one of the Corporation's existing affiliate banks. RESULTS OF OPERATIONS - --------------------- Quarter ended June 30, 1998 versus Quarter ended June 30, 1997 - ---------------------------------------------------------------- Fulton Financial Corporation's net income for the second quarter of 1998 increased $1.8 million, or 9.3%, in comparison to net income for the second quarter of 1997. Second quarter net income of $20.9 million, or $0.35 per share (basic and diluted), represented a return on average assets (ROA) of 1.61% and a return on average equity (ROE) of 14.89%. This compares to 1997 net income of $19.1 million, or $0.32 per share (1.59% ROA and 15.44% ROE). Excluding the impact of unrealized gains on investment securities, return on average equity was 15.70% in 1998 and 15.69% in 1997. The increase in net income was a result of the moderate growth in net interest income and significantly higher other income, primarily due to investment securities gains. Increases in income were offset by higher non-interest expenses. Net Interest Income - ------------------- Net interest income increased $2.2 million, or 4.3%, for the quarter. Overall, this increase was a result of growth in the Corporation's balance sheet. The following tables summarize the components of this increase as well as the changes in average interest-earning assets and interest-bearing liabilities and the average interest rates thereon. All dollar amounts are in thousands.
Change ---------------------- 1998 1997 Dollar Percent -------- -------- -------- -------- Interest income .................. $ 96,584 $ 91,865 $ 4,719 5.1 % Interest expense.................. 41,761 39,280 2,481 6.3 -------- -------- -------- -------- Net interest income............... $ 54,823 $ 52,585 $ 2,238 4.3 % ======== ======== ======== ======== 1998 1997 % Change ----------- ------------ ----------- Average interest-earning assets....................... $ 4,831,164 $ 4,508,294 7.2 % Yield on earning assets............................... 8.02 % 8.17 % (1.8 %) Average interest-bearing liabilities.................. $ 3,889,664 $ 3,660,814 6.3 % Cost of interest-bearing liabilities.................. 4.31 % 4.30 % 0.2 % Net interest margin (fully taxable equivalent)........ 4.64 % 4.76 % (2.5 %)
The 7.2% increase in average earning assets accounted for an interest income increase of approximately $6.4 million. This was offset by a $1.7 million reduction due to the 15 basis point decline in yield. The Corporation's loan portfolio grew by approximately $206 million or 5.8%, mainly in commercial loans and mortgages. These increases have been offset by reductions in residential mortgages due to refinances and sales of new loans in the secondary market. Also contributing to the increase in average earning assets was the growth of the Corporation's investment portfolio, which increased 10.2%. The 15 basis point decrease in the overall yield was a result of a change in the earning assets mix to include a larger percentage 11 of investment securities (which generally have lower yields than loans), as well as a six basis point decrease in the yield on the loan portfolio as a result of competitive pressures. The 6.3% increase in average interest-bearing liabilities resulted in a $2.4 million increase in interest expense. An additional $100,000 increase was a result of the minimal increase in the overall cost of interest-bearing liabilities. Interest-bearing deposits increased $187 million or 5.5%, accounting for much of the increase. In addition, the Corporation's long-term borrowings increased $66 million or 102% as $90 million was borrowed at favorable fixed rates. Since loan growth was funded mainly through deposit increases, these borrowings have been used to purchase additional investment securities. Decreases in rates on deposit products have generally lagged the declines experienced in the loan portfolio. This is a result of several factors, including local competition. More significant is that much of the growth in the Corporation's deposits has been in higher-cost certificates of deposit ($151 million increase). Although CD's cost more, the increase has resulted in new customer relationships. This is evidenced by the $55 million or 9.4% increase that the Corporation has realized in non-interest bearing deposits. The factors noted above have resulted in a decrease in the Corporation's net interest margin from 4.76% in 1997 to 4.64% in 1998. Despite the decrease, this margin would have placed the Corporation in the top half of its self-defined peer group of 25 bank holding companies, based on the most recent available information. Provision and Allowance for Loan Losses - --------------------------------------- The following table summarizes loans outstanding (including unearned income) as of the dates shown:
June 30 December 31 1998 1997 ------------ ------------ (in thousands) Commercial, financial and agricultural............. $ 535,506 $ 518,034 Real estate - construction......................... 126,971 143,593 Real estate - mortgage............................. 2,364,349 2,407,915 Consumer .......................................... 686,067 671,171 Leasing and other.................................. 54,469 55,993 ------------ ------------ Totals.......................................... $ 3,767,362 $ 3,796,706 ============ ============
12 The following table summarizes the activity in the Corporation's allowance for loan losses:
Three Months Ended June 30 ---------------------------- 1998 1997 ----------- ----------- (in thousands) Loans outstanding at end of period................................ $ 3,757,432 $ 3,593,199 =========== =========== Daily average balance of loans and leases......................... $ 3,773,379 $ 3,567,373 =========== =========== Balance of allowance for loan losses at beginning of period....................................... $ 56,054 $ 53,843 Loans charged-off: Commercial, financial and agricultural........................ 340 817 Real estate - mortgage........................................ 299 564 Consumer...................................................... 1,178 981 Leasing and other............................................. 7 24 ----------- ----------- Total loans charged-off....................................... 1,824 2,386 ----------- ----------- Recoveries of loans previously charged-off: Commercial, financial and agricultural........................ 269 1,301 Real estate - mortgage........................................ 267 134 Consumer...................................................... 288 311 Leasing and other............................................. - - ----------- ----------- Total recoveries.............................................. 824 1,746 ----------- ----------- Net loans charged-off............................................. 1,000 640 Provision for loan losses......................................... 1,501 1,641 ----------- ----------- Balance at end of period.......................................... $ 56,555 $ 54,844 =========== =========== Net charge-offs to average loans (annualized)..................... 0.11% 0.07% =========== =========== Allowance for loan losses to loans outstanding.................... 1.51% 1.53% =========== ===========
The provision for loan losses for the quarter ended June 30, 1998 was $1.5 million, a $140,000 or 8.5% decrease from $1.6 million for the same period of 1997. As shown in the preceding table, net charge-offs as a percentage of average loans outstanding was 0.11% for the second quarter of 1998 as compared to 0.07% in the second quarter of 1997. The increase was due mainly to lower recoveries on commercial loans. Although the charge-off percentage was higher for 1998, the ratio is still consistent with that experienced by the Corporation over the past several years. The allowance for loan losses as a percentage of gross loans (net of unearned income) decreased slightly to 1.51% at June 30, 1998 from 1.53% at June 30, 1997. The following table summarizes the Corporation's non-performing assets as of the periods shown: June 30 Dec. 31 (Dollars in thousands) 1998 1997 ----------- ------------ Nonaccrual loans................................ $ 20,007 $ 20,074 Loans 90 days past due and accruing............. 8,304 9,963 Other real estate owned......................... 1,136 1,292 ----------- ------------ Total non-performing assets..................... $ 29,447 $ 31,329 =========== ============ Non-performing assets/Total assets.............. 0.56 % 0.61 % Non-performing assets/Gross loans............... 0.75 % 0.79 % 13 Since December 31, 1997, the Corporation's total nonperforming assets decreased $1.9 million or 6.0%. Management considers various factors in assessing the adequacy of the allowance for loan losses and determining the provision for the period. Among these are the mix and risk characteristics of loan types in the portfolio, charge-off history, risk classification of significant credits, adequacy of collateral, the amount of the allowance that is not specifically allocated to individual loans, and the balance of the allowance relative to total and nonperforming loans. In management's opinion, based on its consideration of these factors, the allowance for loan losses of $56.6 million at June 30, 1998 is adequate. Other Income - ------------ Other income for the quarter ended June 30, 1998 was $16.3 million. This was an increase of $5.1 million or 45.7% over the comparable period in 1997. Of this increase, $4.0 million was a result of higher investment security gains. Management monitors the Corporation's available for sale securities and makes periodic purchase and sale decisions based on current and expected market conditions. In the second quarter of 1998, certain investments in stocks of other financial institutions were sold due to management's assessment of the valuation of these investments. Excluding investment security gains, other income increased $1.1 million or 10.6%. Trust department income ($503,000, or 19.2%, increase) and service charges on deposit accounts ($493,000, or 11.5%, increase) accounted for a significant portion of this growth as a result of the continued emphasis of investment management and trust services and an increase in fee-based deposits. Gains on sales of mortgage loans increased $374,000 or 75.4% as relatively low interest rates caused an increase in refinance volume. Other service charges and fees were down $244,000 or 7.7% in comparison to 1997. Excluding the impact of $618,000 in one-time gains on sales of credit card portfolios and processing by Keystone Heritage Group, Inc. in the second quarter of 1997, other service charges and fees increased $374,000 or 14.8%. This increase was mainly a result of ATM convenience fees initiated in the third quarter of 1997. Other Expenses - -------------- Total other expenses for the second quarter of 1998 increased $4.9 million, or 14.4%, to $38.8 million from $33.9 million in the comparable period of 1997. Salaries and employee benefits increased $898,000 or 4.8% in comparison to the second quarter of 1997. This moderate increase was a result of normal merit increases and an increase in the average number of full-time equivalent employees (FTE's) from 2,199 in 1997 to 2,227 in 1998 (a 1.3% increase). Although the number of FTE's increased from 1997 as a result of the growth of the Corporation, the amount has actually decreased slightly from 2,230 in the first quarter. Net occupancy expense increased $155,000 or 5.3% due to the growth of the branch network. Equipment expense and FDIC assessment expense were relatively flat. Special services expense, which represents the cost of data processing, increased $747,000 or 42.3%. Of this increase, $200,000 was specific one-time charges related to the conversion of Lebanon Valley to the Corporation's data processing systems. Prior to the conversion, Lebanon Valley's data processing was an in-house function. As a result of the conversion to the Corporation's outsourced data processing servicer, additional normal processing fees are now being incurred, which have totaled close to $200,000. Additional increases in expense are attributable to the Corporation's conversion to a new mortgage processing system and growth. 14 Other expenses increased $3.1 million or 38.9% in 1998 to $11.1 million, as compared to $8.0 million for the same period in 1997. This increase was mainly due to certain non-recurring items in 1998, including: $408,000 in merger-related expenses; $496,000 in contributions to low income housing projects and certain charitable organizations; and $200,000 in one-time charges on Fulton Bank for supplies related to the Lebanon Valley conversion and certain loss write-offs. In addition, in 1997, Keystone Heritage Group, Inc. recovered $460,000 in legal fees from a prior period. Excluding the impact of these non-recurring items, other expenses increased $1.5 million or 18.3%. Of this remaining increase, approximately $350,000 was a result of an increase in the cost of the Corporation's corporate-owned life insurance plan. The remaining increase was due to growth. Income Taxes - ------------ Income tax expense for the quarter was $9.9 million as compared to $9.1 million for the comparable period in 1997, an $820,000 or 9.0% increase. The effective tax rate was 32.1% for both 1998 and 1997. Six months ended June 30, 1998 versus six months ended June 30, 1997 - ---------------------------------------------------------------------- Fulton Financial Corporation's net income for the first six months of 1998 increased $4.3 million, or 11.7%, in comparison to net income for the first half of 1997. First half net income of $41.5 million, or $0.69 per share (basic and diluted), represented a return on average assets (ROA) of 1.63% and a return on average equity (ROE) of 15.12%. This compares to 1997 net income of $37.2 million, or $0.62 per share (1.57% ROA and 15.22% ROE). Net Interest Income - ------------------- Net interest income increased $3.6 million, or 7.1%, for the first six months of 1998. Overall, this increase was a result of growth in the Corporation's balance sheet. The following tables summarize the components of this increase as well as the changes in average interest-earning assets and interest-bearing liabilities and the average interest rates thereon. All dollar amounts are in thousands.
Change --------------------------- 1998 1997 Dollar Percent --------- --------- -------- ------- Interest income .................. $ 191,686 $ 179,621 $ 12,065 6.7 % Interest expense.................. 82,842 76,592 6,250 8.2 --------- --------- -------- ------- Net interest income............... $ 108,844 $ 103,029 $ 5,815 5.6 % ========= ========= ======== ======= 1998 1997 % Change ---------- ----------- ---------- Average interest-earning assets....................... $ 4,782,603 $ 4,460,005 7.2 % Yield on earning assets............................... 8.08 % 8.12 % (0.5 %) Average interest-bearing liabilities.................. $ 3,863,965 $ 3,632,800 6.4 % Cost of interest-bearing liabilities.................. 4.29 % 4.25 % 0.9 % Net interest margin (fully taxable equivalent)........ 4.66 % 4.73 % (1.5 %)
The 6.7% increase in interest income was due primarily to the $323 million, or 7.2%, increase in average interest-earning assets, offset by a small increase in yield. Average loans increased $246 million, or 7.0%, accounting for the majority of the increase. Much of the increase in loans was in commercial mortgages, offset by a decrease in residential mortgages due to refinance activity. Investment securities increased $73 million, or 8.1%, as a result of increases in funding exceeding net loan demand. The average yield on 15 earning assets decreased four basis points, reflecting the change in the earning asset mix to a larger percentage of investment securities, which generally carry a lower yield. The 8.2% increase in interest expense was a result of a $231 million, or 6.4%, increase in average interest-bearing liabilities as well as a four basis point increase in the average cost. Average interest-bearing deposits increased $208 million or 6.2%. Most of this increase was in certificates of deposit with original maturities of three years or less. In addition to deposit growth, the Corporation's average long-term borrowings increased $43.9 million. See "Liquidity and Interest Rate Risk" below for additional discussion of the Corporation's asset/liability management function. Provision and Allowance for Loan Losses - --------------------------------------- The following table summarizes the activity in the Corporation's allowance for loan losses:
Six Months Ended June 30 ---------------------------- 1998 1997 ----------- ----------- (in thousands) Loans outstanding at end of period................................ $ 3,757,432 $ 3,593,199 =========== =========== Daily average balance of loans and leases......................... $ 3,776,392 $ 3,530,127 =========== =========== Balance of allowance for loan losses at beginning of period....................................... $ 55,593 $ 52,528 Loans charged-off: Commercial, financial and agricultural........................ 739 1,265 Real estate - mortgage........................................ 501 688 Consumer...................................................... 2,156 1,817 Leasing and other............................................. 27 25 ----------- ----------- Total loans charged-off....................................... 3,423 3,795 ----------- ----------- Recoveries of loans previously charged-off: Commercial, financial and agricultural........................ 435 1,688 Real estate - mortgage........................................ 328 257 Consumer...................................................... 619 706 Leasing and other............................................. 1 1 ----------- ----------- Total recoveries.............................................. 1,383 2,652 ----------- ----------- Net loans charged-off............................................. 2,040 1,143 Provision for loan losses......................................... 3,002 3,459 ----------- ----------- Balance at end of period.......................................... $ 56,555 $ 54,844 =========== =========== Net charge-offs to average loans (annualized)..................... 0.11% 0.06% =========== =========== Allowance for loan losses to loans outstanding.................... 1.51% 1.53% =========== ===========
The provision for loan losses for the six months ended June 30, 1998 was $3.0 million, a $457,000 or 13.2% decrease from $3.5 million for the same period of 1997. As shown in the preceding table, net charge-offs as a percentage of average loans outstanding was 0.11% for the second quarter of 1998 as compared to 0.06% in the second quarter of 1997. The increase was due mainly to lower recoveries on commercial loans. Although the charge-off percentage was higher for 1998, the ratio is still consistent with that experienced by the Corporation over the past several years. 16 Other Income - ------------ Other income for the six months ended June 30, 1998 was $30.7 million. This was an increase of $7.6 million or 33.0% over the comparable period in 1997. Of this increase, $5.2 million was a result of higher investment security gains due to the sale of bank stock investments that, in management's opinion, were fully valued. Excluding investment security gains, other income increased $2.4 million or 11.8%. Trust department income ($814,000, or 15.4%, increase) and service charges on deposit accounts ($818,000, or 9.7%, increase) accounted for much of this growth. Gains on sales of mortgage loans increased $736,000 or 78.4% as relatively low interest rates caused an increase in refinance volume. Other service charges and fees increased $643,000, or 12.8%, (excluding non-recurring gains in 1997), mainly as a result of ATM convenience fees. Other Expenses - -------------- Total other expenses for the first six months of 1998 increased $7.0 million, or 10.2%, to $75.7 million from $68.9 million in the comparable period of 1997. Salaries and employee benefits increased $1.6 million or 4.2% in comparison to 1997. Adjusting 1997 for $600,000 in non-recurring expenses for post-employment benefits results in a $2.2 million or 5.8% increase in salaries and benefits in 1998. Additional staff expenses were incurred to facilitate the conversion and transition of Lebanon Valley. Average full-time equivalent (FTE) employees increased from 2,188 in 1997 to 2,228 in 1998, resulting in approximately $680,000 of additional expense. The number of FTE's has been declining since January as Lebanon Valley employees have been absorbed into the Corporation. The remaining increase in salaries and benefits, $1.5 million or 4.0%, is consistent with the Corporation's merit increase goals. Net occupancy expense, equipment expense and FDIC assessment expense increased less than 3.0% each, mainly as a result of growth. Special services expense increased $968,000 or 26.9%. Of this increase, $200,000 was specific one-time charges related to the conversion of Lebanon Valley to the Corporation's data processing systems. Prior to the conversion, Lebanon Valley's data processing was an in-house function. As a result of the conversion to the Corporation's outsourced data processing servicer, additional normal processing fees are now being incurred, which have totaled close to $200,000. Additional increases in expense are attributable to the Corporation's conversion to a new mortgage processing system and growth. Other expenses increased $4.2 million or 25.6% in 1998 to $20.4 million as compared to $16.3 million for the same period in 1997. Most of this increase is a result of non-recurring items. In 1998, these included: $1.3 million in merger-related expenses; $496,000 in contributions to low income housing projects and certain charitable organizations; $200,000 in one-time charges on Fulton Bank for supplies related to the Lebanon Valley conversion and certain loss write-offs; and a $150,000 loss on the sale of a consumer loan portfolio. In 1997, non-recurring items included: a Keystone Heritage Group, Inc. recovery of $460,000 in legal fees from a prior period; and $620,000 in legal expense accruals. Excluding the impact of these non-recurring items, other expenses increased $2.1 million or 13.3%. Of this remaining increase, approximately $650,000 was a result of an increase in the cost of the Corporation's corporate-owned life insurance plan. The remaining increase was due to growth. Income Taxes - ------------ Income tax expense for the first six months of 1998 was $19.3 million as compared to $16.7 million for the comparable period in 1997, a $2.5 million or 15.2% increase. The effective tax rate for 1998 was 31.7% as compared to 31.1% for 1997. 17 FINANCIAL CONDITION - ------------------- At June 30, 1998, the Corporation had total assets of $5.3 billion, reflecting an increase of $142 million, or 2.8%, over December 31, 1997. Investment securities accounted for an increase of $154 million, offset by a net decline in the loan portfolio of $29 million. The loan portfolio decrease was a result of increased competition and a net runoff of residential mortgage loans due to refinance activity. The net decrease in loans and a $79 million increase in deposits provided excess funds to the Corporation during the first quarter of 1998. In addition, in March, 1998, the Corporation borrowed $90 million in long-term fixed-rate advances from the Federal Home Loan Bank. This borrowing was done to take advantage of the relatively low interest rate environment and to adjust the interest rate sensitivity of the Corporation's liabilities. With the net decrease in loans, these borrowed funds were used to eliminate the Corporation's federal funds purchased balance, which was $73.2 million at December 31, 1997. Remaining funds were used to purchase investment securities. Liquidity and 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. Secondly, movements in interest rates can create fluctuations in the Corporation's net income. 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. This committee's primary responsibility is to address the liquidity and net income risks noted above. The goals of the Corporation's asset/liability management function are to ensure adequate liquidity and to maintain an appropriate balance between the relative rate sensitivity of interest-earning assets and interest-bearing liabilities. 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. Adequate liquidity is provided by cash, short-term investments, securities available for sale and scheduled payments and maturities of loans receivable and securities held to maturity. Liquidity is also provided by deposits and short and long-term borrowings. In order to manage the risk that changes in interest rates could have a significant impact on net income, the Corporation, through its ALCO function, relies on certain analytical tools, including "static gap" analyses and net interest income forecasting. As required by banking regulators, the Corporation also employs certain interest sensitivity, income volatility and market value of equity analyses. Static gap illustrates the expected repricing periods for all rate-sensitive assets and liabilities and shows the difference (or gap) for each period. Despite the fact that static gap only addresses rate risk at a point in time and is not as sophisticated as certain modeling and forecasting methods, it remains a popular tool in the industry and for the Corporation. Interest rate sensitivity varies widely with different types of interest-earning assets and interest-bearing liabilities. At the short end of the asset spectrum are overnight Federal funds, on which rates change daily, and loans, whose rates float with the prime rate or a similar index. At the other end are long-term investment securities and fixed-rate loans. On the liability side, jumbo time deposits and short-term borrowings are much more interest rate sensitive than passbook savings and FHLB advances. 18 While the interest rate sensitivity gap (the difference between repricing opportunities for interest-earning assets and interest-bearing liabilities) must be managed over all time periods, the Corporation focuses on the 6-month period as the key interval affecting net interest income. This shorter period is monitored because a large percentage of the Corporation's interest-earning assets and interest-bearing liabilities are subject to repricing within this period. In addition, short-term interest rate swings can be more pronounced and provide a shorter time for reaction or strategy adjustment. The Corporation's policy provides for the six-month gap position to be maintained between 0.85 and 1.15. The Corporation was positioned within this range throughout the first six months of 1998. Capital Resources - ----------------- Shareholders' equity increased $24.2 million or 4.5% during the first six months of 1998. This increase was a result of net income for the quarter -- offset by the normal quarterly dividend to shareholders -- and an increase in the value of the Corporation's available for sale investment securities. Current capital guidelines measure the adequacy of a bank holding company's capital by taking into consideration the differences in risk associated with holding various types of assets as well as exposure to off-balance sheet commitments. The guidelines call for a minimum risk-based Tier I capital percentage of 4.0% and a minimum risk-based total capital of 8.0%. Tier I capital includes common shareholders' equity less goodwill and non-qualified intangible assets. Total capital includes all Tier I capital components plus the allowance for loan losses. The Corporation is also subject to a "leverage capital" requirement, which compares capital (using the definition of Tier I capital) to total balance sheet assets and is intended to supplement the risk based capital ratios in measuring capital adequacy. The minimum acceptable leverage capital ratio is 3% for institutions which are highly-rated in terms of safety and soundness and which are not experiencing or anticipating any significant growth. Other institutions are expected to maintain capital levels at least one or two percent above the minimum. As of June 30, 1998, the Corporation and each of its subsidiaries met the minimum capital requirements. In addition, the Corporation and each of its subsidiaries' capital ratios exceeded the amounts required to be considered "well-capitalized" as defined in the regulations. The Corporation's total and Tier I risk-based capital ratios have generally placed the Corporation near the middle of its self-defined peer group over the past year. The Corporation's ratio of Tier 1 capital to average assets, however, has generally placed it in the top quartile in comparison to its peers. In March, 1997, the Board of Directors approved a Plan to repurchase up to 100,000 shares of the Corporation's common stock through March 31, 1998. On April 21, 1998, the Board of Directors approved a plan to repurchase up to 250,000 shares of the Corporation' s common stock through October 31, 1998. Treasury stock acquired under these plans is used for the Corporation's Employee Stock Purchase Plan, Incentive Stock Option Plan and other benefit plans. The Corporation purchased 77,500 shares under the plan which expired on March 31, 1998. Through June 30, 1998, no shares had been repurchased under the new plan. YEAR 2000 - --------- The Corporation's business, operations and financial condition may be affected by the "Year 2000 Problem" where certain computer and other electronic information processing systems may not be able to recognize dates after 1999. A financial institution's ability to process financial data such as deposits, loans 19 and trust accounts through its various data processing systems is the most obvious area of exposure to the Year 2000 Problem. In addition, a financial institution's ability to collect payments on loans could be impacted if borrowers are unable to make payments as a result of Year 2000 deficiencies. Furthermore, financial institutions could be affected by the Year 2000 readiness of business customers, vendors and correspondents, customer perception of the problem, and regulatory influences, among other things. Specific guidelines are in place for the Corporation to substantially complete the work tasks for each of these steps. Awareness and assessment have been completed; renovation and validation are in process and system changes and testing will be substantially completed by December 31, 1998, and March 31, 1999, respectively. All mission critical systems, internal and external, should be complete and implementation should be substantially complete by June 30, 1999. The Corporation has formed committees to identify, evaluate and manage the risks related to the Year 2000 Problem, including the preparation of a comprehensive plan adopted by the Board of Directors of the Corporation which establishes a five step process - awareness, assessment, renovation, validation and implementation - to address the Year 2000 Problem. Since most major data processing functions of the Corporation are performed by third-party service providers, the Corporation does not anticipate that it will incur any material costs to address the Year 2000 Problem. The Corporation expects, at this time, that the Year 2000 Problem should have no material adverse effect on the products and services it offers or on competitive conditions; however, testing with mission critical third-party service providers will validate the readiness of these providers for this change. Similarly, the Corporation believes that the Year 2000 Problem should have no material adverse effect on the Corporation's business, operations or financial condition, but until it has completed its survey of its major business loan customers and other actions designed to evaluate the risks associated with the Year 2000 Problem, it cannot rule out the possibility that the Year 2000 Problem might have such an effect. Federal bank regulators have initiated a series of examinations of all financial institutions to assess their progress in addressing the Year 2000 Problem and have indicated that institutions which have not adequately addressed the issue will be subject to various sanctions, including denial of, or delay in acting on, regulatory applications. The Corporation believes that it has made sufficient progress on the Year 2000 Problem to minimize the risk of regulatory sanctions. 20 PART II -- OTHER INFORMATION ---------------------------- Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits -- The following is a list of the exhibits required by Item 601 of Regulation S-K and filed as part of this report: (1) Articles of incorporation as amended on April 13, 1990 and Bylaws of Fulton Financial Corporation as amended on April 17, 1990 - Incorporated by reference from Exhibits 19(a) and 19(b) of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1990. (2) Instruments defining the right of securities holders, including indentures: (a) Rights Agreement dated June 20, 1989 between Fulton Financial Corporation and Fulton Bank - Incorporated by reference to Exhibit 1 of the Fulton Financial Corporation Current Report on Form 8-K dated June 21, 1989. (3) Material Contracts - Executive Compensation Agreements and Plans: (a) Severance Agreements entered into as of April 17, 1984 and as of May 17, 1988 between Fulton Financial Corporation and the following executive officers: Robert D. Garner, Rufus A. Fulton, Jr., James K. Sperry and R. Scott Smith, Jr. - Incorporated by reference from Exhibit 28(a) of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1990. (b) Incentive Stock Option Plan adopted September 19, 1995 - Incorporated by reference from Exhibit A of Fulton Financial Corporation's 1996 Proxy Statement. (c) Severance Agreement entered into as of November 19, 1992 between Fulton Financial Corporation and Charles J. Nugent, Executive Vice President and Chief Financial Officer, incorporated by reference from Exhibit 10(c) to the Fulton Financial Corporation Annual Report on Form 10-K for the year ended December 31, 1992. (4) Financial Data Schedule - June 30, 1998 (5) Financial Data Schedule - June 30, 1997 (restated). (b) Reports on Form 8-K: (1) Form 8-K dated January 30, 1998 reporting execution of a Merger Agreement between Fulton Financial Corporation and Ambassador Bank of the Commonwealth. (2) Form 8-K dated March 31, 1998 (as amended by Form 8-K/A dated May 21, 1998) reporting consummation of the merger of Fulton Financial Corporation and Keystone Heritage Group, Inc. (3) Form 8-K dated May 18, 1998 reporting 30 day Income Statement for post-merger combined operations of Fulton Financial Corporation and Keystone Heritage Group, Inc. 21 FULTON FINANCIAL CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FULTON FINANCIAL CORPORATION Date: August 10, 1998 /s/ Rufus A. Fulton, Jr. -------------------- ---------------------------- Rufus A. Fulton, Jr. President and Chief Executive Officer Date: August 10, 1998 /s/ Beth Ann L. Chivinski --------------------- ------------------------------ Beth Ann L. Chivinski Senior Vice President-Controller (Chief Accounting Officer) 22 EXHIBIT INDEX Exhibits Required Pursuant to Item 601 of Regulation S-K ----------------------------- 3. Articles of Incorporation as amended on April 30, 1990, and Bylaws of Fulton Financial Corporation as amended on April 17, 1990 - Incorporated by reference from Exhibits 19(a) and 19(b) of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1990. 4. Instruments defining the rights of security holders, including indentures. (a) Rights Agreement dated June 20, 1989 between Fulton Financial Corporation and Fulton Bank- Incorporated by reference to Exhibit 1 of the Fulton Financial Corporation Current Report on Form 8-K dated June 21, 1989. 10. Material Contracts (a) Severance Agreements entered into as of April 17, 1984 and as of May 17, 1988 between Fulton Financial Corporation and the following executive officers: Robert D. Garner, Rufus A. Fulton, Jr., James K. Sperry and R. Scott Smith, Jr. - Incorporated by reference from Exhibit 28(a) of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1990. (b) Incentive Stock Option Plan adopted September 19, 1995 - Incorporated by reference from Exhibit A of Fulton Financial Corporation's 1996 Proxy Statement. (c) Severance Agreement entered into as of November 19, 1992 between Fulton Financial Corporation and Charles J. Nugent, Executive Vice President and Chief Financial Officer, filed as Exhibit 10(c) to the Fulton Financial Corporation Annual Report on Form 10-K for the year ended December 31, 1992. 27. Financial data schedule - June 30, 1998. 27.1 Financial data schedule - June 30, 1997 (restated). 23 EX-27.1 2 FINANCIAL DATA SCHEDULE ARTICLE 9
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FULTON FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND THE RELATED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND OTHER FINANCIAL DATA INCLUDED WITHIN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIL CONDITION AND RESULTS OF OPERATIONS AS OF AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 234,958 1,455 0 0 537,253 428,123 427,379 3,593,196 54,843 4,927,776 4,071,375 200,173 83,664 64,324 0 0 119,668 388,572 4,927,776 151,647 27,067 907 179,621 69,709 76,592 103,029 3,459 2,776 68,693 53,918 37,172 0 0 37,172 0.62 0.62 4.73 17,635 11,063 0 0 52,528 3,795 2,652 54,844 54,844 0 0
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