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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number: 33-85626
FULTON BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Commonwealth of Pennsylvania 25-1598464
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Lincoln Way East
McConnellsburg, Pennsylvania 17233
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (717) 485-3144
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 shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Class Outstanding at March 22, 1999
(Common stock, .625 par value) 495,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended
December 31, 1998 are incorporated by reference into Parts I
and II. Portions of the Proxy Statement for 1999 Annual
Meeting of Security Holders are incorporated by reference in
Part III of this Form 10-K.
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Item 1. Business.
Description of the Company
Fulton Bancshares Corporation (the "Company"), a
Pennsylvania business corporation, is a bank holding company
registered with and supervised by the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board").
The Company was incorporated on March 29, 1989 under the
business corporation law of the Commonwealth of Pennsylvania
for the purpose of becoming a bank holding company. Since
commencing operations, the Company's business has consisted
primarily of managing and supervising the Fulton County
National Bank and Trust Company (the "Bank"), and its
principal source of income has been dividends paid by the
Bank. The Company has two wholly-owned subsidiaries - the
Bank, and Fulton County Community Development Corporation
("FCCDC"), which was formed on June 7, 1996 to support
efforts of the local downtown business revitalization project
by making low interest loans to eligible small businesses for
the purpose of facade improvement. FCCDC had minimal
activity in 1998, and has no employees.
The principal executive office of the Company is
located at 100 Lincoln Way East, McConnellsburg, Fulton
County, Pennsylvania 17233. The telephone number of the
Company is (717) 485-3144.
The Company has no employees.
- -2-
Supervision and Regulation - The Company
The Company is subject to the provisions of the
Bank Holding Company Act of 1956, as amended (the "Bank
Holding Company Act"), and to supervision by the Federal
Reserve Board. The Bank Holding Company Act requires the
Company to secure the prior approval of the Federal Reserve
Board before it owns or controls, directly or indirectly,
more than five percent (5%) of the voting shares or
substantially all of the assets of any institution, including
another bank. The Bank Holding Company Act prohibits
acquisition by the Company of more than five percent (5%) of
the voting shares of, or interest in, all or substantially
all of the assets of any bank located outside of Pennsylvania
unless such acquisition is specifically authorized by the
laws of the state in which such bank is located.
A bank holding company is prohibited from engaging
in or acquiring direct or indirect control of more than five
percent (5%) of the voting shares of any company engaged in
nonbanking activities unless the Federal Reserve Board, by
order or regulation, has found such activities to be so
closely related to banking or managing or controlling banks
as to be a proper incident thereto.
- -3-
The Company is required to file an annual report
with the Federal Reserve Board and any additional information
that the Federal Reserve Board may require pursuant to the
Bank Holding Company Act. The Federal Reserve Board may also
make examinations of the Company and any or all of its
subsidiaries.
Federal law prohibits acquisitions of control of a
bank holding company without prior notice to certain federal
bank regulators. Control is defined for this purpose as the
power, directly or indirectly, to direct the Management or
policies of the bank or bank holding company or to vote 25%
or more of any class of voting securities of the bank holding
company. A person or group holding revocable proxies to vote
25% or more of the stock of a bank or its holding company
would presumably be deemed to control the institution for
purposes of this federal law.
Subsidiary banks of a bank holding company are
subject to certain restrictions imposed by the Federal
Reserve Act on any extensions of credit to the bank holding
company or any of its subsidiaries, on investments in the
stock or other securities of the bank holding company and on
taking of such stock or securities as collateral for loans to
any borrower.
- -4-
Permitted Activities
The Federal Reserve Board permits bank holding
companies to engage in activities so closely related to
banking or managing or controlling banks as to be a proper
incident thereto. The Company does not at this time engage
in any of the permissible activities described below, nor
does the Company have any current plans to engage in these
activities in the foreseeable future.
While the types of permissible activities are
subject to a variety of limitations and to change by the
Federal Reserve Board, the principal activities that
presently may be conducted by a bank holding company and may
in the future be engaged by the Company are: (1) making,
acquiring or servicing loans and other extensions of credit
for its own account or for the account of others, such as
would be made by consumer finance, credit card, mortgage,
commercial finance and factoring companies; (2) operating as
an industrial bank or similar entity in the manner authorized
by state law so long as the institution does not both accept
demand deposits and make commercial loans; (3) operating as a
trust company in the manner authorized by federal or state
law so long as the institution does not make certain types of
loans or investments or accept deposits, except as may be
permitted by the Federal Reserve Board; (4) acting as an
investment or financial advisor to investment companies and
- -5-
other persons; (5) leasing personal and real property or
acting as agent, broker or advisor in leasing property; (6)
making equity and debt investments in corporations or
projects designed primarily to promote community welfare; (7)
providing to others financially oriented data processing or
bookkeeping services; (8) acting as an insurance agent or
broker in relation to insurance for itself and its
subsidiaries or for insurance directly related to extensions
of credit; (9) acting as underwriter for credit life
insurance and credit accident and health insurance: (10)
providing courier services of a limited character; (11)
providing management consulting advice to nonaffiliated banks
and nonbank depository institutions; (12) selling money
orders, travelers' checks and United States savings bonds;
(13) performing appraisals of real estate; (14) acting as
intermediary for the financing of commercial or industrial
income-producing real estate by arranging for the transfer of
the title, control and risk of such a real estate project to
one or more investors; (15) providing securities brokerage
services, related securities credit activities and incidental
activities such as offering custodial services, individual
retirement accounts and cash management services, if the
securities brokerage services are restricted to buying and
selling securities solely as agent for the account of
- -6-
customers and do not include securities underwriting or
dealing or investment advice or research services; (16)
underwriting and dealing in obligations of the United States,
general obligations of states and their political
subdivisions such as bankers' acceptances and certificates of
deposit; (17) providing general information, advisory
services and statistical forecasting with respect to foreign
exchange markets; (18) acting as a futures commission
merchant in the execution and clearance on major commodity
exchanges of futures contracts and options on futures
contracts for bullion, foreign exchange, government
securities, certificates of deposit and other money market
instruments; (19) performing personal property appraisals
that require expertise regarding all types of personal and
business property, including intangible property such as
corporate securities; (20) providing commodity trading and
futures commission merchant advice; (21) providing consumer
financial counseling to individuals on consumer-oriented
financial management matters, including debt consolidation,
mortgage applications, bankruptcy, budget management, real
estate tax shelters, tax planning, retirement and estate
planning, insurance and general investment management, so
long as this activity does not include the sale of specific
products or investments; (22) providing tax planning and
- -7-
preparation advice to corporations and individuals; (23)
providing check guaranty services to subscribing merchants;
(24) operating a collection agency and credit bureau; and
(25) acquiring and operating thrift institutions, including
savings and loan associations, building and loan associations
and FDIC-insured savings banks.
Certain Provisions of Pennsylvania Banking Law
Under the Pennsylvania Banking Code of 1965, as
amended, (the "Code"), the Company has been permitted since
March 4, 1990 to control an unlimited number of banks.
However, the Company would be subject to the requirements of
the Bank Holding Company Act as discussed in the "Supervision
and Regulation - The Company" section above.
Also since March 4, 1990, the Code authorizes
reciprocal interstate banking without any geographic
limitation. Reciprocity between states exists when a foreign
state's law authorizes Pennsylvania bank holding companies to
acquire banks or bank holding companies located in that state
on terms and conditions substantially no more restrictive
than those applicable to such an acquisition by a bank
holding company located in that state. For a further
discussion of interstate banking and branching, see the
section entitled "Legislation and Regulatory Changes" below.
- -8-
Legislation and Regulatory Changes
From time to time, legislation is enacted which
has the effect of increasing the cost of doing business,
limiting or expanding permissible activities or affecting the
competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding
companies and other financial institutions are frequently
made in Congress, and before various bank regulatory
agencies. No prediction can be made as to the likelihood of
any major changes or the impact such changes might have on
the Company and its subsidiary, the Bank. Certain changes of
potential significance to the Company which have been enacted
recently are discussed below.
The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking and Branch
Act") permits interstate banking to occur. Bank holding
companies, pursuant to an amendment to the Bank Holding
Company Act, can acquire a bank located in any state, as long
as the acquisition does not result in the bank holding
company controlling more than 10% of the deposits in the
United States, or 30% of the deposits in the target bank's
state. The legislation permits states to waive the
concentration limits and require that the target institution
- -9-
be in existence for up to five years before it can be
acquired by an out-of-state bank or bank holding company.
Interstate branching and merging of existing banks is
permitted after September 29, 1997 if the bank is adequately
capitalized and demonstrates good management.
The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") was enacted in August of
1989. This law was enacted primarily to improve the
supervision of savings associations by strengthening capital,
accounting and other supervisory standards. In addition,
FIRREA reorganized the FDIC by creating two deposit insurance
funds to be administered by the FDIC: The Savings
Association Insurance Fund and the Bank Insurance Fund.
Customers' deposits held by the Bank are insured under the
Bank Insurance Fund. FIRREA also regulates real estate
appraisal standards and the supervisory/enforcement powers
and penalty provisions in connection with the regulation of
the Bank.
- -10-
Effects of Inflation
Inflation has some impact on the Company's, the
Bank's, and FCCDC's operating costs. Unlike many industrial
companies, however, substantially all of the Bank's and
FCCDC's assets and liabilities are monetary in nature. As a
result, interest rates have a more significant impact on the
Company's, the Bank's, and FCCDC's performance than the
general level of inflation. Over short periods of time,
interest rates may not necessarily move in the same direction
or in the same magnitude as prices of goods and services.
Monetary Policy
The earnings of the Company, the Bank, and FCCDC
are affected by domestic economic conditions and the monetary
and fiscal policies of the United States Government and its
agencies. An important function of the Federal Reserve
System is to regulate the money supply and interest rates.
Among the instruments used to implement those objectives are
open market operations in United States government securities
and changes in reserve requirements against member bank
deposits. These instruments are used in varying combinations
to influence overall growth and distribution of bank loans,
investments and deposits, and their use may also affect rates
charged on loans or paid for deposits.
- -11-
The Bank is a member of the Federal Reserve System
and, therefore, the policies and regulations of the Federal
Reserve Board have a significant effect on its deposits,
loans and investment growth, as well as the rate of interest
earned and paid, and are expected to affect the Bank's
operations in the future. The effect of such policies and
regulations upon the future business and earnings of the
Company, the Bank, and FCCDC cannot be predicted.
Environmental Regulation
There are several federal and state statutes which
regulate the obligations and liabilities of financial
institutions pertaining to environmental issues. In addition
to the potential for attachment of liability resulting from
its own actions, a bank may be held liable under certain
circumstances for the actions of its borrowers, or third
parties, when such actions result in environmental problems
on properties that collateralize loans held by the Bank.
Further, the liability has the potential to far exceed the
original amount of the loan issued by the Bank. Currently,
the Company, the Bank, and FCCDC are not party to any pending
legal proceeding pursuant to any environmental statute, nor
is the Company, the Bank, or FCCDC aware of any circumstances
which may give rise to liability under any such statute.
- -12-
Description of the Bank
The Bank was organized on February 24, 1887 as a
Pennsylvania state-chartered banking institution. It
converted to a national banking association on September 5,
1933, and is presently under the supervision of the Office of
the Comptroller of the Currency (the "Comptroller"). The
Bank is a member of the Federal Reserve System. Customers'
deposits held by the Bank are insured by the FDIC to the
maximum extent permitted by law. The Bank's legal
headquarters are located at 100 Lincoln Way East,
McConnellsburg, Fulton County, Pennsylvania 17233.
The Bank engages in a full service commercial and
consumer banking business, including the acceptance of time
and demand deposits and the making of secured and unsecured
commercial and consumer loans, and offering trust services.
The Bank's primary service area is located in Fulton County,
Pennsylvania. Specifically, the main office of the Bank is
located in McConnellsburg, the county seat. Within the
defined service area of the Bank's main office, the banking
business is highly competitive. In addition to local
community banks, the Bank competes with regionally-based
commercial banks, all of which have greater assets, capital
and lending limits. The Bank also competes with savings
banks, savings and loan associations, money market funds,
insurance companies, stock brokerage firms, regulated small
- -13-
loan companies, credit unions and with the issuers of
commercial paper and other securities.
In order to compete effectively in this market and
to obtain business from individuals, small and medium-sized
businesses and professionals, the Bank offers specialized
services such as extended hours of operation and personal and
business checking accounts at competitive rates in addition
to traditional commercial and consumer banking and trust
services. The Bank accepts time, demand and savings
deposits, including passbook accounts, statement savings
accounts, NOW accounts, money market accounts, certificates
of deposit and club accounts. The Bank makes secured and
unsecured commercial, consumer, mortgage and construction
loans. Consumer loans include revolving credit lines. The
following support services are offered by the Bank to make
financial management more efficient and convenient for its
customers: bank by mail, direct deposit, drive-in banking,
Federal Tax Depository, automatic teller machine,
MasterCard/Visa applications and cash advances, night deposit
services, notary public services, payroll deduction plan,
bond coupon collections, foreign money exchange, safe deposit
boxes, signature guarantees, travelers checks, money orders,
cashiers checks, treasury securities, U.S. Savings Bonds,
individual retirement accounts, and utility and municipal
payments. The Bank also offers discount brokerage services,
mutual funds, and other alternative investment products to
- -14-
provide its customers a full range of investment services.
The Bank expects to experience a modest increase in growth.
Lending Activities
It is the Bank's general policy to grant all of
its loans in its primary trade area. This trade area
includes all of Fulton County, Southern Huntington County and
the Hancock, Maryland area. The Bank's lending objectives
are as follows: (1) to establish a diversified loan
portfolio composed of a predetermined mix of mortgage loans,
commercial loans, consumer loans and all other loan types;
(2) to provide a satisfactory rate of return to its
shareholders by properly pricing loans to include the cost of
funds, administrative costs, bad debts, local economic
conditions, competition, customer relationships, the term of
the loan, credit risk, and collateral quality; and, (3) to
provide protection for its depositors by maintaining a
predetermined level of loans to deposits to ensure liquidity.
The Bank recognizes that the lending of money is a community
responsibility which involves a degree of credit risk and is
willing to undertake such risks by utilizing standard banking
procedures and making prudent judgments when extending
credit.
The Bank makes loans to both individual consumers
and commercial entities. The types of loans offered include:
(1) loans for businesses and individuals on a short term or
- -15-
seasonal basis; (2) mortgage and construction loans, (3)
loans to individuals for consumer purchases such as
appliances, furniture, vacations, etc.: (4) loans secured by
marketable stock and bonds providing adequate margins for
market fluctuations; (5) short term working capital loans
secured by the assignment of accounts receivable and
inventory; (6) automobile loans, (7) second liens on
commercial and residential real estate, (8) home equity lines
of credit, and (9) PHEAA student loans. Loans of these types
will be considered desirable by the Bank provided such loans
meet the test of sound credit.
The Bank has adopted the following loan-to-value
ratios, in accordance with standards adopted by its bank
supervisory agencies:
Loan Category
Loan-to-Value Limit
Raw land 65%
Land development 75%
Construction:
Commercial, multifamily, and other
nonresidential 80%
1 to 4-family residential 85%
Improved property 85%
Owner-occupied 1 to 4 family and
home equity 90%
The Bank does not assume undue risk on any loan within the
loan portfolio, and takes appropriate steps to secure all
loans as necessary.
- -16-
Concentration
The Bank is neither dependent upon deposits nor
exposed to loan concentrations to a single customer or to a
single industry, the loss of any one or more of which would
have a material adverse effect on the financial condition of
the Bank.
Employees
As of December 31, 1998, the Bank has forty-three
(43) full-time equivalent employees.
Supervision and Regulation - The Bank
The operations of the Bank are subject to federal
and state statutes applicable to banks chartered under the
banking laws of the United States, to members of the Federal
Reserve System and to banks whose deposits are insured by the
FDIC. The operations of the Bank are also subject to
regulations of the Comptroller, the Federal Reserve Board and
the FDIC. The primary supervisory authority of the Bank is
the Comptroller, which regulates and examines the Bank. The
Comptroller has authority to prevent national banks from
engaging in unsafe or unsound practices in conducting their
businesses.
Federal and state banking laws and regulations
govern, among other things, the scope of a bank's business,
the investments a bank may make, the reserves against
deposits a bank must maintain, loans a bank makes and
- -17-
collateral it takes, the maximum interest rates a bank may
pay on deposits, the activities of a bank with respect to
mergers and consolidations and the establishment of branches.
Under Pennsylvania law, the Bank may establish or acquire
branch offices, subject to certain limitations, in any county
of the state. National bank branches, however may be
established within the permitted area only after approval by
the Comptroller.
As a subsidiary bank of a bank holding company,
the Bank is subject to certain restrictions imposed by the
Federal Reserve Act on any extensions of credit to the bank
holding company or its subsidiaries, or investments in the
stock or other securities as collateral for loans. The
Federal Reserve Act and Federal Reserve Board regulations
also place certain limitations and reporting requirements on
extensions of credit by the Bank to principal shareholders of
its parent holding company, among others, and to related
interests of such principal shareholders. In addition, such
legislation and regulations may affect the terms upon which
any person becoming a principal shareholder of a holding
company may obtain credit from banks with which the
subsidiary Bank maintains a correspondent relationship.
FDIC
Under the Federal Deposit Insurance Act, the
Comptroller possesses the power to prohibit institutions
- -18-
regulated by it (such as the Bank) from engaging in any
activity that would be an unsafe and unsound banking practice
or would otherwise be in violation of the law. Moreover, the
Financial Institutions Regulatory and Interest Rate Control
Act of 1978 ("FIRA") generally expanded the circumstances
under which officers or directors of a bank may be removed by
the institution's federal supervisory agency, restricts
lending by a bank to its executive officers, directors,
principal shareholders or related interests thereof and
restricts management personnel of a bank from serving as
directors or in other management positions with certain
depository institutions whose assets exceed a specified
amount or which have an office within a specified geographic
area, and restricts management personnel from borrowing from
another institution that has a correspondent relationship
with their bank. Additionally, FIRA requires that no person
may acquire control of a bank unless the appropriate federal
supervisory agency has been given sixty (60) days prior
written notice and within that time has not disapproved the
acquisition or otherwise extended the period for disapproval.
Control for purposes of FIRA, means the power, directly or
indirectly, to direct the management or policies or to vote
twenty-five percent (25%) or more of any class of outstanding
stock of a financial institution or its respective holding
- -19-
company. A person or group holding revocable proxies to vote
twenty-five percent (25%) or more of the outstanding common
stock of a financial institution or holding company such as
the Company, would presumably be deemed to control the
institution for purposes of FIRA.
Garn-St Germain
The Garn-St Germain Depository Institutions Act of
1982 ("1982 Act") removed certain restrictions on a bank's
lending powers and liberalized its depository capabilities.
The 1982 Act also amended FIRA (see above) by changing the
statutory limits on lending by a bank to its executive
officers, directors, principal shareholders or related
interests thereof and by relaxing certain reporting
requirements. The 1982 Act, however, also tightened FIRA
provisions respecting management interlocks and correspondent
bank relationships involving a bank's management personnel.
CRA
Under the Community Reinvestment Act of 1977, as
amended ("CRA"), the Comptroller is required to assess the
record of all financial institutions regulated by it to
determine if these institutions are meeting the credit needs
of the community (including low and moderate income
neighborhoods) which they serve and to take this record into
account in its evaluation of any application made by any of
such institutions for, among other things, approval of a
- -20-
branch or other deposit facility, office relocation, a merger
or an acquisition of bank shares. The Financial Institutions
Reform, Recovery and Enforcement Act of 1989 amended the CRA
to require, among other things, that the Comptroller make
publicly available the evaluation of a bank's record of
meeting the credit needs of its entire community, including
low and moderate income neighborhoods. This evaluation will
include a descriptive rating and a statement describing the
basis for the rating, which is publicly disclosed.
BSA
Under the Bank Secrecy Act ("BSA"), banks and
other financial institutions are required to report to the
Internal Revenue Service currency transactions of more than $
10,000 or multiple transactions of which the Bank is aware in
any one day that aggregate in excess of $ 10,000. Civil and
criminal penalties are provided under the BSA for failure to
file a required report, for failure to supply information
required by the BSA or for filing a false or fraudulent
report.
CEBA
An omnibus federal banking bill, known as the
Competitive Equality Banking Act ("CEBA"), was signed into
law in August of 1987. Included in the legislation were
measures: (1) imposing certain restrictions on transactions
- -21-
between banks and their affiliates; (2) expanding the powers
available to Federal bank regulators in assisting failed and
failing banks; (3) limiting the amount of time banks may hold
certain deposits prior to making such funds available for
withdrawal and any interest thereon; and (4) requiring that
any adjustable rate mortgage loan secured by a lien on a one-
to-four family dwelling include a limitation on the maximum
rate at which interest may accrue on the principal balance
during the term of such loan.
FDICIA
Capital Categories
In December of 1991 the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") became law.
Under FDICIA, institutions must be classified, based on their
risk-based capital ratios into one of five defined
categories, as illustrated below:
Total Tier 1 Tier 1 Under a
Risk-Based Risk-Based Leverage Capital Order
Ratio Ratio Ratio or Directive
CAPITAL CATEGORY
Well capitalized > 10.0 > 6.0 > 5.0 No
Adequately
capitalized > 8.0 > 4.0 > 4.0*
Undercapitalized < 8.0 < 4.0 < 4.0*
Significantly
undercapitalized< 6.0 < 3.0 < 3.0
Critically
undercapitalized < 2.0
* 3.0 for those banks having the highest available
regulatory rating.
Based on the above criteria, the Bank is classified
as "well capitalized".
- -22-
Prompt Corrective Action
In the event an institution's capital deteriorates
to the undercapitalized category or below, FDICIA prescribes
an increasing amount of regulatory intervention, including:
(1) the institution of a capital restoration plan and a
guarantee of the plan by a parent institution; and (2) the
placement of a hold on increases in assets, number of
branches or lines of business. If capital has reached the
significantly or critically undercapitalized levels, further
material restrictions can be imposed, including restrictions
on interest payable on accounts, dismissal of management and
(in critically undercapitalized situations) appointment of a
receiver. For well capitalized institutions, FDICIA provides
authority for regulatory intervention where the institution
is deemed to be engaging in unsafe or unsound practices or
receives a less than satisfactory examination report rating
for asset quality, management, earnings or liquidity. All
but well capitalized institutions are prohibited from
accepting brokered deposits without prior regulatory
approval.
Operational Controls
Under FDICIA, financial institutions are subject
to increased regulatory scrutiny and must comply with certain
operational, managerial and compensation standards to be
developed by Federal Reserve Board regulations.
- -23-
FDICIA also requires the regulators to issue new rules
establishing certain minimum standards to which an
institution must adhere including standards requiring a
minimum ratio of classified assets to capital, minimum
earnings necessary to absorb losses and minimum ratio of
market value to book value for publicly held institutions.
Additional regulations are required to be developed relating
to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth and
excessive compensation, fees and benefits.
Examinations and Audits
Annual full-scope, on site examinations are
required for all FDIC-insured institutions except
institutions with assets under $ 250 million which are well
capitalized, well managed and not subject to a recent change
in control, in which case, the examination period is every
eighteen (18) months. Banks with total assets of $ 150
million or more are required to submit to their supervising
federal and state banking agencies a publicly available
annual audit report and are subject to additional accounting
and reporting regulations.
Truth-In-Savings
A separate subtitle within FDICIA, called the
"Bank Enterprise Act of 1991", requires "truth-in-savings" on
consumer deposit accounts so that consumers can make
meaningful comparisons between the competing claims of banks
- -24-
with regard to deposit accounts and products. Under this
provision, the Bank is required to provide information to
depositors concerning the terms of their deposit accounts,
and in particular, to disclose the annual percentage yield.
There are some operational costs of complying with the Truth-
In-Savings law.
Management believes that full implementation of
the FDICIA has had no material impact on liquidity, capital
resources or reported results of operation.
Item 2. Properties
The main administrative office of the Bank which
also includes a branch, is located in McConnellsburg,
Pennsylvania. The Bank currently has four branch offices one
of which is located at Penn's Village on Route 16 at the east
end of McConnellsburg, Pennsylvania. This branch office
opened on May 11, 1981. In addition, the Bank installed an
ATM at the Penn's Village Shopping Center in March, 1989.
The Bank also serves the communities surrounding the
Pennsylvania/Maryland border through its branch office
located in Warfordsburg, Pennsylvania. This branch opened
for business on April 4, 1983. On the same day, a third
branch office was opened in Hustontown, Pennsylvania, which
services Northern Fulton County. Finally, to service the
Southern end of Huntington County, the Bank acquired a branch
in Shade Gap, Pennsylvania, on September 26, 1988. On
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January 7, 1997 ATM's were opened at the Warfordsburg and
Hustontown branches. In June, 1998 the Bank opened an ATM at
the Shade Gap branch and added an ATM to its main office
drive-up facility. The main office, Warfordsburg, Hustontown
and Shade Gap branches are owned by the Bank. The Penn's
Village branch is rented.
On February 2, 1999, the Bank entered into an
agreement for the construction of a new branch building in
Orbisonia, Pennsylvania. The total estimated cost of the
construction is $ 225,840. The Bank plans to close its Shade
Gap branch (except for the ATM facility) when the new
Orbisonia branch opens.
Item 3. Legal Proceedings.
Fulton Bancshares Corporation is an occasional
party to legal actions arising in the ordinary course of its
business. In the opinion of the Company's management, Fulton
Bancshares Corporation has adequate legal defenses and/or
insurance coverage respecting any and each of these actions
and does not believe that they will materially affect the
Company's operations or financial position.
Item 4. Submission of Matters to Vote of Security Holders.
None
Item 5. Market for Registrant's Common Stock and Related
Security Holder Matters.
The corporation's common stock is traded on a
limited basis in the local over-the-counter market. As of
December 31, 1998, the approximate number of shareholders of
record was 490.
Market Cash Market Cash
Price Dividend Price Dividend
1998 1997
First Quarter $ 45.00 $ .165 $ 35.00 $ .16
Second Quarter 50.00 .165 35.00 .16
Third Quarter 50.00 .19 40.00 .185
Fourth Quarter 55.00 .20 45.00 .195
- -26-
Item 6. Selected Financial Data.
1998 1997 1996 1995 1994
Income (000 omitted)
Interest income $ 8,192 $ 7,898 $ 7,513 $ 7,298 $ 6,417
Interest expense 4,151 4,036 3,725 3,732 3,269
Provision for
loan losses 185 20 65 62 48
Net interest
income after
provision for
loan losses 3,856 3,842 3,723 3,504 3,100
Securities gains
(losses) 4 3 ( 2) 5 2
Other operating
income 718 470 391 276 242
Other operating
expenses 2,745 2,626 2,425 2,304 2,236
Income before
income taxes 1,833 1,689 1,687 1,481 1,108
Applicable income
tax 406 384 455 422 319
Net income $ 1,427 $ 1,305 $ 1,232 $ 1,059 $ 789
Per share amounts are based on following weighted averages:
1998 - 495,000 1996 - 495,000 1994 - 440,000
1997 - 495,000 1995 - 480,476
Income before
income taxes $ 3.70 $ 3.41 $ 3.41 $ 3.08 $ 2.52
Applicable income
taxes .82 .77 .92 .88 .73
Net income 2.88 2.64 2.49 2.20 1.79
Cash dividend paid .72 .70 .66 .55 .48
Book value 25.21 23.04 20.50 19.08 14.12
- -27-
Item 6. Selected Financial Data (Continued).
1998 1997 1996 1995 1994
Income (000 omitted)
Year-End Balance Sheet Figures (000 omitted)
Total assets $ 119,649 $ 105,770 $ 102,355 $ 96,449 $ 90,890
Net loans 80,214 70,416 63,791 59,871 60,321
Total investment
securities 29,183 25,922 28,474 29,365 24,060
Deposits-non-
interest
bearing 11,553 8,159 10,000 7,959 7,266
Deposits-interest
bearing 87,788 82,062 81,632 78,399 76,728
Total deposits 99,341 90,221 91,632 86,358 83,994
Liabilities for
borrowed money 7,100 3,470 0 0 220
Total stock-
holders'
equity 12,479 11,407 10,149 9,445 6,214
Ratios
Average equity/
average assets 10.51 10.29 9.80 9.29 7.23
Return on
average equity 12.23 11.98 12.57 12.13 12.08
Return on
average assets 1.29 1.23 1.23 1.13 .87
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Management's discussion and analysis of financial
condition and results of operations included on pages 26
through 32 of the annual report to shareholders is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data,
some of which is required under Guide 3 (statistical
disclosures by bank holding companies) are shown on pages 2
through 25 of the annual shareholders report for the year
ended December 31, 1998 and are incorporated herein by
reference. Additional schedules required in addition to
those included in the annual shareholders report are
submitted herewith.
- -28-
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
For additional information concerning liquidity, refer to statistical
disclosures applicable to the investment and loan portfolio.
Closely related to the management of liquidity is the management of rate
sensitivity which focuses on maintaining stability in the net interest margin.
As
illustrated in the table below the tax equivalent net interest margin ranged
from 4.0% to
4.1% of average earning assets during the past 3 years. An asset/liability
committee
monitors and coordinates the overall asset/liability strategy.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Rates and Interest Differential Tax Equivalent Yields
Years Ended December 31
ASSETS 1998 1997 1996
Average Average Average
(000 omitted) Balance Interest Rate Balance Interest Rate Balance
Interest Rate
Investment securities:
Taxable interest
income $ 20,510 $ 1,185 5.8 $ 23,627 $ 1,532 6.5% $ 26,647 $
1,651 6.2%
Nontaxable interest
income 5,793 286 4.9 5,090 254 5.0 3,040
153 5.0
Total investment
securities 26,303 1,471 5.6 28,717 1,786 6.2 29,687
1,804 6.1
Loans (net of unearned
discounts) 75,610 6,702 8.8 68,171 6,098 8.9 62,530
5,68
6 9.1
Other short-term
investments 343 19 5.5 255 14 5.5 430
23
5.3
Total interest
earning assets 102,256 $ 8,192 8.0% 97,143 $ 7,898 8.1%
9
2,647 $ 7,513 8.1%
Allowance for loan
losses ( 578) ( 475) ( 392)
Cash and due from banks 2,560 2,847 2,638
Bank premises and
equipment 2,557 2,371 2,083
Other assets 4,207 3,978 3,211
Total assets $ 111,002 $ 105,864 $ 100,187
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand
deposits $ 16,779 $ 455 2.7% $ 15,528 $ 412 2.6% $ 15,758
$
413 2.6%
Savings deposits 13,616 357 2.6 13,816 368 2.7 14,578 400 2.7
Time deposits 54,621 3,102 5.7 53,738 3,136 5.8 49,582 2,847
5.7
Short-term borrowings 4,426 237 5.4 2,114 120 5.7
1,196
65 5.4
Total interest
bearing
liabilities 89,442 $ 4,151 4.6 85,196 $ 4,036 4.7% 81,114
$
3,725 4.6%
Demand deposits 9,146 8,848 8,562
Other liabilities 749 927 645
Total liabilities 99,337 94,971 90,321
Stockholders'
equity 11,665 10,893 9,866
Total liabilities &
stockholders'
equity $ 111,002 $ 105,864 $ 100,187
Net interest income/net
yield on average
earning assets $ 4,041 4.0% $ 3,862 4.0% $ 3,788 4.1%
For purposes of calculating loan yields, the average loan volume
includes
nonaccrual loans. For purposes of calculating yields on nontaxable interest
income, the
taxable equivalent adjustment is made to equate nontaxable interest on the
same basis as
taxable interest. The marginal tax rate was 34% for 1998, 1997 and 1996.
- -29-
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
CHANGES IN NET INTEREST INCOME TAX EQUIVALENT YIELDS
1998 Versus 1997 1997 Versus 1996
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
Total Total
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
(000 omitted)
Interest Income
Loans (net of
unearned
discounts) $ 662 ($ 58) $ 604 $ 502 ($ 80) $ 422
Taxable
investment
securities ( 202) ( 145) ( 347) ( 196) 67 ( 129)
Nontaxable
investment
securities 35 ( 3) 32 103 ( 2) 101
Other short-term
investments 5 0 5 ( 10) 1 ( 9)
Total interest
Income 500 ( 206) 294 399 ( 14) 385
Interest Expense
Interest bearing
demand 33 10 43 ( 6) 6 0
Savings
deposits ( 5) ( 6) ( 11) ( 20) ( 12) ( 32)
Time deposits 51 ( 85) ( 34) 241 48 289
Short-term
borrowings 132 ( 15) 117 52 2 54
Total interest
expense 211 ( 96) 115 267 44 311
Net interest
income $ 179 $ 74
Changes which are attributed in part to volume and in part
to rate
are allocated in proportion to their relationships to the amounts of changes.
- -30-
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
The following table shows the maturities of investment
securities at book value as of December 31, 1998, and weighted average
yields of such securities. Yields are shown on a tax equivalent basis,
assuming a 34% federal income tax rate.
After 1 year After 5 years
Within but within but within After
1 year 5 years 10 years 10 years Total
(000 omitted)
Bonds:
U. S. Treasury
Book value $ 0 $ 0 $ 0 $ 0 $ 0
Yield 0% 0% 0% 0% 0%
U. S. Government agencies
Book value 500 8,254 0 0 8,754
Yield 3.82% 4.53% 0% 0% 4.48%
State and municipal
Book value 0 1,688 3,865 378 5,931
Yield 0% 7.76% 7.41% 7.11% 7.45%
Mortgage-Backed
Book value 0 0 0 8,679 8,679
Yield 0% 0% 0% 4.58% 4.58%
Total book value $ 500 $ 9,942 $ 3,865 $ 9,057 $ 23,364
Yield 3.82% 5.08% 7.41% 4.69% 5.27%
Other Debt Securities:
FHLMC/FNMA non-
cumulative preferred
stock
Book value $ 4,984
Yield 7.61%
Equity Securities:
Total Equity Securities $ 709
Yield 4.79%
Total Investment Securities $ 29,057
Yield 5.66%
- -31-
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
LOAN PORTFOLIO
The following table presents the loan portfolio at the end of
each of the last five years:
1998 1997 1996 1995 1994
(000 omitted)
Commercial, financial and
agricultural $ 11,401 $ 7,180 $ 7,648 $ 11,135 $ 11,641
Real estate - Construction 0 0 0 386 159
Real estate - Mortgage 58,915 53,624 47,519 37,822 37,196
Installment and other
personal loans (net of
unearned discount) 10,478 10,099 9,068 10,872 11,682
Total loans $ 80,794 $ 70,903 $ 64,235 $ 60,215 $ 60,678
Presented below are the approximate maturities of the loan
portfolio (excluding real estate mortgages and installments) at
December 31, 1998:
Under One One to Over Five
Year Five Years Years Total
(000 omitted)
Commercial, financial and
agricultural $ 7,410 $ 2,052 $ 1,939 $ 11,401
Real estate - Construction 0 0 0 0
Total $ 7,410 $ 2,052 $ 1,939 $ 11,401
The following table presents the approximate amount of fixed
rate loans and variable rate loans due as of December 31, 1998:
Fixed Rate Variable
Loans Rate Loans
(000 omitted)
Due within one year $ 5,147 $ 11,946
Due after one but within five years 13,516 6,890
Due after five years 21,074 22,221
Total $ 39,737 $ 41,057
- -32-
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31
1998 1997 1996 1995 1994
(000 omitted)
Average total loans
outstanding (net of
unearned income) $ 75,610 $ 68,171 $ 62,530 $ 61,011 $ 61,062
Allowance for loan losses,
beginning of period $ 487 $ 444 $ 345 $ 358 $ 400
Additions to provision
for loan losses charged
to operations 185 20 65 62 48
Loans charged off during
the year
Commercial 67 6 0 35 68
Installment 47 40 9 48 31
Total charge-off's 114 46 9 83 99
Recoveries of loans
previously charged off:
Commercial 16 49 33 1 6
Installment 6 20 10 7 3
Total recoveries 22 69 43 8 9
Net loans charged off 92 ( 23) ( 34) 75 90
Allowance for loan losses, $ 580 $ 487 $ 444 $ 345 $ 358
Ratio of net loans
charged off to average
loans outstanding .12% ( .03)% ( .05)% .12% .15%
The provision is based on an evaluation of the adequacy of the
allowance for possible loan losses. The evaluation includes, but is not
limited to, review of net loan losses for the year, the present and
prospective financial condition of the borrowers and evaluation of current
and projected economic conditions.
- -33-
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
LOANS
The following table sets forth the outstanding balances of
those loans on a nonaccrual status and those on accrual status which
are contractually past due as to principal or interest payments for
30 days or more at December 31.
1998 1997 1996 1995 1994
(000 omitted)
Nonaccrual loans $ 0 $ 413 $ 310 $ 310 $ 80
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $ 0
30 through 89 days
past due 1,458 1,466 1,716 2,533 3,876
90 days or more
past due 442 431 1,041 253 85
Total accrual
loans $ 1,900 $ 1,897 $ 2,757 $ 2,786 $ 3,961
See Note 5 of the notes to consolidated financial
statements for details of income recognized and foregone revenue on
nonaccrual loans for the past three years.
Management has not identified any significant problem
loans in the accrual loan categories shown above.
- -34-
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
The following is an allocation by loan categories of the allowance
for loan losses at December 31 for the last five years. In retrospect the
specific allocation in any particular category may prove excessive or
inadequate and consequently may be reallocated in the future to reflect the
then current conditions. Accordingly, the entire allowance is available to
absorb losses in any category:
Years Ended December 31
1998 1997 1996
Percentage Percentage Percentage
Allowance of Loans to Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
(000 omitted)
Commercial,
financial and
agri-
cultural $ 82 14.11% $ 49 10.13% $ 53 11.91%
Real estate -
Constr-
uction 0 0.00 0 0.00 0 0.00
Real estate -
Mortgage 423 72.92 368 75.63 328 73.98
Instal-
lment 75 12.97 70 14.24 63 14.11
Total $ 580 100.00% $ 487 100.00% $ 444 100.00%
Years Ended December 31
1995 1994
Percentage Percentage
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
(000 omitted)
Commercial,
financial and
agricultural $ 123 35.68% $ 136 37.92%
Real estate -
Construction 2 0.64 1 .27
Real estate -
Mortgage 157 45.62 152 42.55
Installment 63 18.06 69 19.26
Total $ 345 100.00% $ 358 100.00%
- -35-
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
DEPOSITS
The average amounts of deposits are summarized below:
Years Ended December 31
1998 1997 1996
(000 omitted)
Demand deposits $ 9,146 $ 8,848 $ 8,562
Interest bearing demand deposits 16,779 15,528 15,758
Savings deposits 13,616 13,816 14,578
Time deposits 54,621 53,738 49,582
Total deposits $ 94,162 $ 91,930 $ 88,480
The following is a breakdown of maturities of time
deposits of $ 100,000 or more as of December 31, 1998:
Maturity (000 omitted)
Certificates of Deposit
Three months or less $ 2,970
Over three months through six months 3,409
Over six months through twelve months 2,527
Over twelve months 3,124
$ 12,030
RETURN ON EQUITY AND ASSETS (APPLYING DAILY AVERAGE BALANCES)
The following table presents a summary of significant
earnings and capital ratios:
1998 1997 1996
Assets $ 111,002 $ 105,864 $ 100,187
Net income $ 1,427 $ 1,305 $ 1,232
Equity $ 11,665 $ 10,893 $ 9,866
Cash dividends paid $ 356 $ 347 $ 327
Return on assets 1.29% 1.23% 1.23%
Return on equity 12.23% 11.98% 12.49%
Dividend payout ratio 24.9% 26.6% 26.5%
Equity to asset ratio 10.51% 10.29% 9.85%
- -36-
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December 31
1998 1997 1996 1995 1994
(000 omitted)
Interest income $ 8,192 $ 7,898 $ 7,513 $ 7,298 $ 6,417
Interest expense 4,151 4,036 3,725 3,732 3,269
Net interest income 4,041 3,862 3,788 3,566 3,148
Provision for loan losses 185 20 65 62 48
Net interest income after
provision for loan
losses 3,856 3,842 3,723 3,504 3,100
Other income:
Trust 97 63 43 42 41
Service charges - Deposits 140 146 130 99 102
Other service charges,
collection and exchange,
charges, commission fees 123 93 102 69 80
Other operating income 362 171 114 71 21
Total other income 722 473 389 281 244
Income before operating
expense 4,578 4,315 4,112 3,785 3,344
Operating expenses:
Salaries and employees
benefits 1,242 1,178 1,129 1,072 957
Occupancy and equipment
expense 569 465 418 370 325
Other operating expenses 934 983 878 862 954
Total operating
expenses 2,745 2,626 2,425 2,304 2,236
Income before income taxes 1,833 1,689 1,687 1,481 1,108
Income tax 406 384 455 422 319
Net income applicable
to common stock $ 1,427 $ 1,305 $ 1,232 $ 1,059 $ 789
Per share data:
Earnings per common share $ 2.88 $ 2.64 $ 2.49
$
2.20 $ 1.79
Cash dividend - Common .72 .70 .66 $ .55 * $ .48
Weighted average number
of common shares 495,000 495,000 495,000 480,476 440,000
* Based on 495,000 shares outstanding
- -37-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES
($ 000 omitted) 1998 1997 1996 1995 1994
LOANS
Lines of credit $ 3,332 $ 3,290 $ 3,492 $ 3,556 $ 3,606
Tax free 1,281 2,201 2,458 3,027 1,930
Commercial 14,203 13,966 12,702 10,356 10,533
Mortgage 40,916 35,415 32,833 33,430 34,458
Consumer 15,878 13,299 11,045 10,642 10,535
Total loans 75,610 68,171 62,530 61,011 61,062
INVESTMENT SECURITIES
U.S. Government 0 0 254 404 564
U.S. Government agencies 5,863 6,931 6,984 5,361 4,743
State & municipal 5,793 5,090 3,040 1,586 906
Mortgage-backed securities 9,324 13,861 18,730 19,777 17,744
FNMA & FHLMC preferred
stock 4,746 2,443 124 0 0
Other 577 392 679 468 407
Total investment
securities 26,303 28,717 29,687 27,596 24,364
OTHER SHORT-TERM INVESTMENTS
Federal funds sold 343 255 430 661 536
TOTAL EARNING ASSETS 102,256 97,143 92,647 89,268 85,962
TOTAL ASSETS $ 111,002 $ 105,864 $ 99,844 $ 93,959 $ 90,315
Percent increase (decrease) 4.9% 6.0% 6.3% 4.0% (1.1)%
DEPOSITS
Interest-bearing
demand $ 16,979 $ 15,528 $ 15,758 $ 14,871 $ 14,876
Savings 13,616 13,816 14,578 14,663 16,641
Time 54,621 53,738 49,582 47,502 43,919
Total interest-
bearing deposits 85,016 83,082 79,918 77,036
75,436
OTHER BORROWINGS
Federal funds purchased 622 276 908 524 408
Liabilities for borrowed
money 3,804 1,838 288 185 200
TOTAL INTEREST-BEARING
LIABILITIES 89,442 85,196 81,114 77,745 76,044
- -38-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES (CONTINUED)
1998 1997 1996 1995 1994
AVERAGE RATES EARNED
% % % % %
Loans
Commercial 9.23 9.11 9.31 9.95 8.90
Mortgage 8.61 8.67 8.64 8.99 7.94
Consumer 8.77 8.89 9.58 10.09 10.14
Tax free 5.82 5.62 5.91 6.05 6.73
Lines of credit 8.81 9.19 9.13 9.84 8.63
Total 8.72 8.73 9.09 9.22 8.45
Investment Securities
U.S. Government 0.00 0.00 6.40 6.40 6.11
U.S. Government agencies 5.95 6.17 6.09 5.86 5.35
State & municipal 4.93 5.00 5.02 5.08 5.34
Mortgage-backed securities 5.50 6.46 6.50 5.94 4.87
Other 5.99 7.27 6.32 6.54 6.17
Total 5.57 6.22 6.08 5.89 5.03
Other Short-Term Investments
Federal funds sold 5.49 5.51 5.30 5.85 4.02
Total earning assets 7.90 8.13 8.11 8.15 7.44
AVERAGE RATES PAID
Time & savings deposits 4.60 4.71 4.59 4.77 4.29
Federal funds purchased 5.57 5.61 5.61 6.09 3.93
Liabilities for borrowed money 5.32 5.68 5.55 6.36 3.74
Total interest-bearing
liabilities 4.64 4.74 4.59 4.78 4.29
- -39-
Item 9. Disagreements on Accounting and Financial Disclosures.
Not applicable.
- -40-
PART III
The information required by Items 10, 12 and 13 is
incorporated by reference from Fulton Bancshares
Corporation's definitive proxy statement for the 1999 Annual
Meeting of shareholders filed pursuant to Regulation 14A.
- -41-
Item 11. Executive Compensation
Shown below is information concerning the annual
compensation for services in all capacities to the Company,
the Bank, and FCCDC for the fiscal years ended December 31,
1998, 1997 and 1996 of the Chief Executive Officer. There
were no other officers of the Company, the Bank, or FCCDC
whose total annual salary and bonus during that time frame
exceeded $ 100,000.
Summary Compensation Table
Annual Compensation Long-Term Compensation
Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted
Name and Annual Stock Options/ LTIP All Other
Principal Salary Bonus Compensation Award(s) SARs Payouts Compensation
Position Year ($) ($) ($) ($) (#) ($) ($)
Clyde H.
Bookheimer
President &
CEO 1998 $ 112,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 47,566
1997 101,825 0 0 0 0 0 59,889
1996 83,200 0 0 0 0 0 60,987
Footnotes:
(1) All other compensation includes the following:
Fringe Benefits Deferred
(Personal Use of Bank Retirement Supplemental Executive Directors
Directors Owned Vehicle) Plan Retirement Plan Fees
1998 $ 0 $ 908 $ 7,906 $ 38,752 $ 0
1997 0 1,140 6,081 52,668 0
1996 6,000 1,351 9,027 42,609 2,000
The supplemental executive retirement plan was funded by single premium
life insurance policies on the CEO, with the Bank named as beneficiary.
Actual payments to the CEO amounting to $ 73,000 annually will not begin
until 2005. At December 31, 1998, the cash surrender value of the policies
was $ 754,799.
- -42-
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.
(a) Certain documents filed as part of Form 10-K
Financial Statement Schedules and Exhibits
(1) Financial statements. See Item 8 of this
report for the index to financial
statements.
(2) Financial statement schedules. Not
applicable.
(3) Exhibits.
Exhibit Numbers
(2) Plan of acquisition, reorganization,
arrangement, liquidation or succession.
Not applicable.
(3) (a) Articles of incorporation. Incorporated
by reference to Exhibit 3A to the
Registrant's Registration Statement on
Form SB-2, Registration No. 33-85626.
(b) By-laws. Incorporated by reference to
Exhibit 3B to the Registrant's
Registration Statement on Form SB-2,
Registration No. 33-85626.
(4) Instruments defining the rights of
security holders including indentures.
The rights of the holders of Registrant's
common stock are contained in:
- -43-
(i) Articles of Incorporation of Fulton
Bancshares Corporation, filed as Exhibit
3A to Registrant's Registration
Statement on Form SB-2 (Registration No.
33-85626).
(ii)By-laws of Fulton Bancshares
Corporation, filed as Exhibit 3B to the
Registrant's Registration Statement on
Form SB-2 (Registration No. 33-85626).
(9) Voting trust agreement. Not applicable.
(10) Material contracts. None.
(11) Statement re: computation of per share
earnings. Not applicable.
(12) Statements re: computation of ratios. Not
applicable.
(13) Annual report to security holders, Form 10-Q
or quarterly report to security holders. Not
applicable.
(16) Letter re: change in certifying accountant.
not applicable.
(18) Letter re: change in accounting principles.
Not applicable.
(21) Subsidiaries of the registrant. Filed
herewith as Exhibit 21.
(22) Published report regarding matters submitted
to vote of security holders. Not applicable.
- -44-
(23) Consents of experts and counsel. Filed
herewith.
(24) Power of attorney. Not applicable.
(27) Financial data schedule. Filed herewith.
(28) Information from reports furnished to state
insurance regulatory authorities. Not
applicable.
(99) Additional exhibits. Not applicable.
(b) Reports on Form 8-K. None.
- -45-
SIGNATURES
In accordance with the requirements of Section 13 or 15(d)
of the Securities Act of 1934, this report was signed by the
following persons on behalf of the Registrant in the capacities and
on the dates indicated.
Signature Title Date
/s/ Clyde H. Bookheimer Director, President & March , 1999
Clyde H. Bookheimer CEO (Principal Executive
Officer)
/s/ David L. Seiders Director March , 1999
David L. Seiders
/s/ Cecil B. Mellott Director March , 1999
Cecil B. Mellott
/s/ Robert C. Snyder Director & March , 1999
Robert C. Snyder Chairman
/s/ Ellis L. Yingling Director & Vice March , 1999
Ellis L. Yingling Chairman
/s/ Clair R. Miller Director March ____, 1999
Clair R. Miller
- -46-
Exhibit Index
Exhibit No. Sequentially numbered
pages
13 Annual report to shareholders
21 Subsidiaries of the Registrant
23.1 Independent Auditor's Consent
27 Financial data schedule
- -47-
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets 2
Statements of income 3
Statements of changes in stockholders' equity 4
Statements of cash flows 5 and 6
Notes to consolidated financial statements 7 - 20
ACCOMPANYING FINANCIAL INFORMATION
Selected five year financial data 21
Changes in income and expense 22
Summary of quarterly financial data 23
Statements of average balances and average rates 24 and 25
Management's discussion and analysis of consolidated
financial condition
and results of operations 26 - 31
Stock market analysis and dividends 32
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Fulton Bancshares Corporation
McConnellsburg, Pennsylvania
We have audited the accompanying consolidated
balance sheets of the Fulton Bancshares Corporation and its
wholly-owned subsidiaries as of December 31, 1998 and 1997
and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three
years ended December 31, 1998. These consolidated financial
statements are the responsibility of the corporation's
management. Our responsibility is to express an opinion on
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 consolidated financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated 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 the Fulton Bancshares
Corporation and its wholly-owned subsidiaries as of
December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years
ended December 31, 1998 in conformity with generally accepted
accounting principles.
Chambersburg, Pennsylvania
February 10, 1999
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
1998 1997
Cash and due from banks $ 3,301,246 $ 2,744,534
Securities available for sale 28,605,661 25,344,944
Federal Reserve, Atlantic Central Bankers Bank and
Federal Home Loan Bank stocks 576,850 576,850
Loans, net of reserve for loan losses
1998 - $ 580,694; 1997 -
$ 487,250 80,214,351 70,415,725
Premises and equipment 2,667,135 2,406,729
Cash surrender value of life
insurance 3,165,957 3,020,255
Accrued interest receivable 733,269 669,988
Real estate owned other than premises 140,000 269,451
Other assets 244,380 322,014
Total assets $ 119,648,849 $ 105,770,490
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing $ 11,553,431 $ 8,158,764
Interest bearing 87,787,719 82,062,522
99,341,150 90,221,286
Federal funds purchased 2,100,000 0
Other borrowed funds 5,000,000 3,470,000
Accrued interest payable 392,241 379,773
Other liabilities 336,861 292,827
Total liabilities 107,170,252 94,363,886
Stockholders' Equity
Common stock: par value $ .625 per
share; 4,000,000 shares
authorized; 495,000 shares issued and outstanding at
December 31, 1998 and 1997 309,375 309,375
Additional paid-in capital 2,051,275 2,051,275
Retained earnings 10,035,342 8,964,410
Accumulated other comprehensive
income 82,605 81,544
Total stockholders'
equity 12,478,597 11,406,604
Total liabilities and
stockholders' equity $ 119,648,849 $ 105,770,490
The Notes to Consolidated Financial Statements are an
integral part of these statements.
- -2-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
Interest Income
Interest and fees on loans $ 6,702,101 $ 6,098,379 $ 5,676,179
Interest and dividends on investment securities:
U.S. Government securities 0 0 15,971
Other U. S. Government
agencies 349,045 427,721 415,389
Mortgage backed securities 512,814 896,014 1,185,034
Obligations of states and
political subdivisions 285,745 254,330 152,730
FNMA & FHLMC preferred
stock 281,664 168,904 8,012
Interest on federal funds
Sold 18,863 14,059 23,106
Other interest and
dividends 42,232 38,405 36,326
Total interest income 8,192,464 7,897,812 7,512,747
Interest Expense
Interest on deposits 3,914,252 3,915,899 3,659,385
Interest on federal funds
purchased 34,615 15,506 49,609
Interest on other borrowed
money 202,481 104,546 16,195
Total interest expense 4,151,348 4,035,951 3,725,189
Net interest income before provision
for loan losses 4,041,116 3,861,861 3,787,558
Provision for Loan Losses 185,000 20,000 65,000
Net interest income after provision
for loan losses 3,856,116 3,841,861 3,722,558
Other Income
Service charges on deposit
accounts 140,424 145,539 129,633
Other service charges and
fees 123,099 93,447 102,392
Earnings - Cash surrender value
of life insurance 175,184 153,602 112,733
Trust department income 96,743 62,626 43,132
Gain (loss) on sale of
investment securities 3,671 3,052 ( 2,044)
Gain (loss) on sale of other
real estate 177,906 2,228 ( 1,772)
Other income 5,046 12,111 4,505
Total other income 722,073 472,605 388,579
Other Expenses
Salaries, fees and employee
benefits 1,241,650 1,177,559 1,128,686
Net occupancy expense of bank premises and
furniture and equipment
expense 568,556 464,990 417,777
FDIC insurance premiums 10,948 11,467 1,493
Other expenses 923,905 971,807 876,909
Total other expenses 2,745,059 2,625,823 2,424,865
Income before income taxes 1,833,130 1,688,643 1,686,272
Applicable income taxes 405,798 384,051 454,631
Net income $ 1,427,332 $ 1,304,592 $ 1,231,641
Earnings per common share $ 2.88 $ 2.64 $ 2.49
The Notes to Consolidated Financial Statements are an integral
part of these statements.
- -3-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
Accumulated
Additional Other Total
Capital Paid-In Retained Comprehensive Stockholders'
Stock Capital Earnings Income Equity
Balance - December 31,
1995 $ 309,375 $ 2,051,275 $ 7,101,377 ($ 17,043) $ 9,444,984
Comprehensive income:
Net income 1,231,641 1,231,641
Change in unrealized (loss) on
investment securities available
for sale, net of tax of $ 103,764 ( 201,425) ( 201,425)
Total comprehensive income 1,030,216
Cash dividends
($ .66 per
share) ( 326,700) ( 326,700)
Balance - December 31,
1996 309,375 2,051,275 8,006,318 ( 218,468) 10,148,500
Comprehensive income:
Net income 1,304,592 1,304,592
Change in unrealized gain on
Investment securities available
for sale, net of tax of $ 154,552 300,012 300,012
Total comprehensive income 1,604,604
Cash dividends
($ .70 per
share) ( 346,500) ( 346,500)
Balance - December 31,
1997 309,375 2,051,275 8,964,410 81,544 11,406,604
Comprehensive income:
Net income 1,427,332 1,427,332
Change in unrealized gain on
investment securities available
for sale, net of tax of $ 546 1,061 1,061
Total comprehensive income 1,428,393
Cash dividends ($ .72
per share) ( 356,400) ( 356,400)
Balance - December 31,
1998 $ 309,375 $ 2,051,275 $10,035,342 $82,605 $ 12,478,597
The Notes to Consolidated Financial Statements are an integral
part of these statements.
- -4-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
Cash flows from operating activities:
Net income $ 1,427,332 $ 1,304,592 $ 1,231,641
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 284,866 228,463 169,381
Provision for loan losses 185,000 20,000 65,000
Deferred income taxes ( 50,535) ( 39,851) ( 32,037)
(Increase) in CSV -
Officers' life insurance ( 145,702) ( 129,967) ( 80,743)
(Gain) loss on disposal
of other real estate ( 177,906) ( 2,228) 1,772
(Gain) loss on sale of
investment securities ( 3,671) ( 3,052) 2,044
(Increase) decrease in
other assets 122,485 ( 65,915) ( 140,842)
(Increase) decrease in
interest receivable ( 63,281) ( 35,053) ( 28,601)
Increase (decrease) in
interest payable 12,468 6,824 3,435
Increase (decrease) in
other liabilities 49,173 89,376 ( 48,502)
Net cash provided by
operating activities 1,640,229 1,373,189 1,142,548
Cash flows from investing activities:
Sales of investment securities
available for sale 5,375,879 7,954,592 5,909,298
Maturities of investment securities
available for sale 5,208,580 2,843,455 3,607,407
Purchases of investment securities
available for sale ( 13,043,399) ( 7,783,675) ( 8,713,580)
Net decrease (increase)
in loans ( 9,983,626) ( 6,784,589) ( 3,985,389)
Purchases of property
and equipment ( 545,272) ( 486,609) ( 189,847)
Purchases of FRB and
FHLB stock ( 796,500) ( 4,300) ( 221,900)
Purchase of officers'
life insurance 0 ( 516,000) ( 1,741,000)
Proceeds from sales of
other real estate 307,357 218,874 16,728
Purchases of other
real estate 0 ( 8,980) ( 1,056)
Net cash (used) by
investing activities ( 13,476,981) ( 4,567,232) ( 5,319,339)
Cash flows from financing activities:
Net increase (decrease)
in deposits 9,119,864 ( 1,410,994) 5,273,733
Dividends paid ( 356,400) ( 346,500) ( 326,700)
Net increase in federal
funds purchased 2,100,000 0 0
Proceeds from long-term
borrowings 5,000,000 0 0
Net increase (decrease)
in line-of-credit ( 3,470,000) 3,470,000 0
Net cash provided by
financing activities 12,393,464 1,712,506 4,947,033
Net increase (decrease)
in cash and cash
equivalents 556,712 ( 1,481,537) 770,242
Cash and cash equivalents
at beginning of year 2,744,534 4,226,071 3,455,829
Cash and cash equivalents
at end of year $ 3,301,246 $ 2,744,534 $ 4,226,071
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -5-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1998, 1997 and 1996
1998
1997 1996
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 4,138,880 $ 4,029,127 $ 3,721,754
Income taxes 438,625 449,509 609,193
Supplemental schedule of noncash investing and
financing activities:
Unrealized holding gain
(loss), net of tax $ 1,061 $ 300,012 ($ 201,425)
Loans transferred to other real estate
owned $ 0 $ 140,000 $ 0
Other real estate owned
transferred to
property and
equipment $ 0 $ 0 $ 69,684
The Notes to Consolidated Financial Statements are an
integral part of these statements.
- -6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of Operations
Fulton Bancshares Corporation's primary activity consists
of owning and supervising its subsidiaries:
? Fulton County National Bank and Trust Company, which is
engaged in providing banking and bank related
services, principally in Fulton and Huntingdon Counties. Its
five branches are located in McConnellsburg (2),
Shade Gap, Warfordsburg and Hustontown.
? Fulton County Community Development Corporation,
which was formed on June 7, 1996 to support
efforts of the local downtown business revitalization project
by making low interest loans to eligible small
businesses for the purpose of facade improvement. Future
projects are expected to include small business
marketing, new business creation, small business
education, and housing for low-to-moderate income
individuals.
Principles of Consolidation
The consolidated financial statements include the accounts
of the corporation and its wholly-owned subsidiaries, the
Fulton County National Bank and Trust Company and the
Fulton County Community Development Corporation. All
significant intercompany transactions and accounts have
been eliminated.
See Note 13 for parent company financial statements.
Basis of Accounting
The Bank uses the accrual basis of accounting.
Use of estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates.
Material estimates that are particularly susceptible
to significant change relate to the determination of
the allowance for losses on loans and the valuation of
real estate acquired in connection with foreclosures
or in satisfaction of loans. In connection with the
determination of the allowances for losses on loans
and foreclosed real estate, management obtains
independent appraisals for significant properties.
While management uses available information to
recognize losses on loans and foreclosed real estate,
future additions to the allowances may be necessary based on
changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination
process, periodically review the corporation's allowances
for losses on loans and foreclosed real estate. Such
agencies may require the corporation to recognize additions
to the allowances based on their judgments about
information available to them at the time of their
examination. Because of these factors, management's
estimate of credit losses inherent in the loan portfolio and
the related allowance may change in the near term.
However, the amount of the change that is reasonably
possible cannot be estimated.
- -7-
Note 1. Significant Accounting Policies (Continued)
Investment Securities
Under SFAS 115, the Bank's investments in securities
are classified in three categories and accounted for
as follows.
? Trading Securities. Securities held principally
for resale in the near term are classified as
trading securities and recorded at their fair
values. Unrealized gains and losses on trading
securities are included in other income. The Bank
had no trading securities in 1998 or 1997.
? Securities to be Held to Maturity. Bonds and notes
for which the Bank has the
positive intent and ability to hold to maturity are
reported at cost, adjusted for amortization of
premiums and accretion of discounts, which are
recognized in interest income using the interest
method over the period to maturity.
? Securities Available for Sale. Securities
available for sale consist of bonds and notes not
classified as trading securities nor as securities
to be held to maturity, and FNMA and FHLMC
preferred stock. These are securities that
management intends to use as a part of its asset
and liability management strategy and may be sold
in response to changes in interest rates, resultant
prepayment risk and other related factors.
Unrealized holding gains and losses, net of tax, on
securities available for sale are reported as a net
amount in other comprehensive income. Gains and
losses on the sale of securities available for sale
are determined using the specific-identification
method. Fair values for investment securities are
based on quoted market prices.
The Bank has classified all of its investment
securities as "available for sale" at December 31,
1998 and 1997.
Loans and Reserve for Possible Loan Losses
The Bank grants agribusiness, commercial and
residential loans to customers primarily in Fulton
County, Pennsylvania and adjoining counties in
Pennsylvania and Maryland. Although the Bank has a
diversified loan portfolio, a significant portion of
its customers' ability to honor their contracts is
dependent upon the agribusiness economic sector
(approximately 16.4% of loan portfolio).
The Bank evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral
obtained, if deemed necessary upon the extension of
credit, is based on management's credit evaluation of
the customer. Collateral held varies but generally
includes equipment and real estate.
Loans are stated at the amount of unpaid principal,
reduced by a reserve for loan losses and increased or
decreased by net deferred loan origination fees and costs.
Interest on loans is calculated by using the simple
interest method on daily balances of the principal amount
outstanding. The reserve for loan losses is established
through a provision for loan losses charged to expense.
Loans are charged against the reserve for loan losses when
management believes that the collectibility of the
principal is unlikely. The reserve is an amount that
management believes will be adequate to absorb possible
losses on existing loans that may become uncollectible,
based on evaluations of the collectibility of loans and
prior loan loss experience. The evaluations take into
consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic
conditions that may affect the borrowers' ability to pay.
Accrual of interest is discontinued on a loan when
management believes, after considering economic and
business conditions and collection efforts, that the
borrowers' financial condition is such that collection of
interest is doubtful. Interest accrued but not collected
as of the date of placement on nonaccrual status is
reversed and charged against current income unless fully
collateralized.
- -8-
Note 1. Significant Accounting Policies (Continued)
Interest income generally is not recognized on
specific impaired loans unless the likelihood of
further loss is remote. Interest payments received on
such loans are applied as a reduction of loan
principal balance. Interest income on other impaired
loans is recognized only to the extent of interest
payments received.
Loan origination fees and certain direct loan
origination costs are deferred and the net amount
amortized as an adjustment of the related loan's
yield. These amounts are amortized over the
contractual life of the related loans.
Premises and Equipment
Premises and equipment are carried at cost less
accumulated depreciation. Depreciation is calculated
on both straight-line and accelerated methods over the
estimated useful lives of the various assets as
follows:
Years
Computer software 3 - 5
Premises 5 - 50
Equipment and vehicles 3 - 25
Repairs and maintenance are charged to operations as
incurred.
Assets Received in Foreclosure
Assets received in foreclosure are recorded at the
lower of the outstanding principal balance of the
related loans or the estimated fair value of
collateral held, less costs to sell. Any adjustment
required to write down the property to net realizable
value is charged to the allowance for loan losses.
Costs of holding and maintaining the property and
subsequent adjustments to the carrying amount of the
property are charged to expense when incurred.
Earnings per Share
Earnings per common share were computed based on:
495,000 shares of common stock outstanding in 1998,
1997 and 1996.
Federal income taxes
As a result of certain timing differences between
financial statement and federal income tax
reporting, including depreciation, loan losses,
deferred compensation, and loan costs, deferred income
taxes are provided in the financial statements.
Deferred tax assets and liabilities are included in
the financial statements at currently enacted income
tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be
realized or settled. As changes in tax laws or rates
are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes. See
Note 9 for further details.
Statements of Cash Flows
For purposes of the Statements of Cash Flows, cash and
cash equivalents include those amounts in the balance
sheet captions "cash and due from banks" and "federal
funds sold". As permitted by Statement of Financial
Accounting Standards No. 104, the corporation has
elected to present the net change in interest bearing
deposits with banks, deposits, and loans in the
Statements of Cash Flows.
- -9-
Note 1. Significant Accounting Policies (Continued)
Fair values of financial instruments
Statement of Financial Accounting Standards No. 107,
Disclosures About Fair Value of Financial Instruments,
requires disclosure of fair value information about
financial instruments, whether or not recognized in
the balance sheet. In cases where quoted market
prices are not available, fair values are based on
estimates using present value or other valuation
techniques. Those techniques are significantly
affected by the assumptions used, including the
discount rate and estimates of future cash flows. In
that regard, the derived fair value estimates cannot
be substantiated by comparison to independent markets
and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107
excludes certain financial instruments and all
nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying
value of the corporation.
The following methods and assumptions were used by the
corporation in estimating fair values of financial
instruments as disclosed herein:
Cash and Cash Equivalents. The carrying amounts of
cash and short-term instruments approximate
their fair value.
Securities to be Held to Maturity and Securities
Available for Sale. Fair values for
investment securities are based on quoted market
prices.
Loans Receivable. For variable-rate loans that
reprice frequently and have no significant
change in credit risk, fair values are based on
carrying values. Fair values for fixed rate loans
are estimated using discounted cash flow analyses, using
interest rates currently being offered for
loans with similar terms to borrowers of similar credit
quality. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying
collateral values, where applicable.
Deposit Liabilities. The fair values disclosed for
demand deposits are, by definition, equal to
the amount payable on demand at the reporting date (that is,
their carrying amounts). The carrying amounts of
variable-rate, fixed-term money market accounts and
certificates of deposit approximate their fair
values at the reporting date. Fair values for fixed-rate
certificates of deposits and IRA's are estimated
using a discounted cash flow calculation that
applies interest rates currently being offered to a
schedule of aggregated expected monthly maturities
on time deposits.
Short-Term Borrowings. The carrying amounts of
federal funds purchased and other short- term
borrowings maturing within 90 days approximate their fair
values. Fair values of other short-term
borrowings are estimated using discounted cash flow analyses
based on the Bank's current incremental borrowing rates
for similar types of borrowing arrangements.
Accrued Interest. The carrying amounts of accrued
interest approximate their fair values.
Off-Balance-Sheet Instruments. The Bank generally
does not charge commitment fees. Fees for standby
letters of credit and their off-balance-sheet instruments are
not significant.
Advertising
The Bank expenses advertising costs as incurred.
Advertising expenses for the years ended
December 31, 1998, 1997 and 1996 were $ 70,719, $
56,327 and $ 55,332, respectively.
- -10-
Note 1. Significant Accounting Policies (Continued)
Comprehensive income
In 1998 the Bank adopted Statement of Financial
Accounting Standards (SFAS) No. 130 - Reporting
Comprehensive Income. Under SFAS No. 130,
comprehensive income is defined as the change in
equity from transactions and other events from
nonowner sources. It includes all changes in equity
except those resulting from investments by
stockholders and distributions to stockholders.
Comprehensive income includes net income and certain
elements of "other comprehensive income" such as
foreign currency transactions; accounting for futures
contracts; employers accounting for pensions; and
accounting for certain investments in debt and equity
securities.
The Bank has elected to report its comprehensive
income in the statement of stockholders' equity. The
only element of "other comprehensive income" that the
Bank has is the unrealized gain or loss on available
for sale securities. The 1997 and 1996 financial
statements have been reclassified to reflect these
changes in reporting format.
The components of the change in net unrealized gains
(losses) on securities were as follows:
1998 1997 1996
Gross unrealized holding gains/(losses) arising during
the year $ 5,278 $ 457,616 ($ 307,233)
Reclassification adjustment for (gains)/losses realized
in net income ( 3,671) ( 3,052) 2,044
Net unrealized holding gains/(losses) before taxes 1,607 454,564
(
305,189)
Tax effect ( 546) ( 154,552) 103,764
Net change $ 1,061 $ 300,012 ($ 201,425)
Note 2. Investments
The amortized cost and fair value of investment securities
available for sale at December 31, 1998 were:
Gross
Gross
Amortized Unrealized Unrealized
Fair
Cost Gains
Losses Value
Obligations of U. S. Government
corporations and agencies $ 8,753,985 $ 20,969 $
5,574 $ 8,769,380
Obligations of states and
political subdivisions 5,930,727 168,100 33,465 6,065,362
Mortgage-backed securities 8,679,447 11,186 73,214 8,617,419
FNMA and FHLMC preferred stock 4,984,344 48,625 11,469
5,021,500
Other stocks 132,000 0
0 132,000
Totals $ 28,480,503 $ 248,880 $ 123,722 $ 28,605,661
The amortized cost and fair value of investment securities
available for sale at December 31, 1997 were:
Gross
Gross
Amortized Unrealized Unrealized
Fair
Cost Gains
Losses Value
Obligations of U. S. Government
corporations and agencies $ 6,154,332 $ 4,820 $
21,003 $ 6,138,149
Obligations of states and political
subdivisions 5,150,532 143,125 912 5,292,745
Mortgage-backed securities 9,728,684 23,658 26,136 9,726,206
FNMA and FHLMC preferred stock 4,187,844 0 0
4,187,844
Totals $ 25,221,392 $ 171,603 $ 48,051 $ 25,344,944
- -11-
Note 2. Investments (Continued)
The amortized cost and fair value of investment securities
available for sale at December 31, 1998, by expected
maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or
without call or prepayment penalties.
Amortized
Fair
Cost
Value
Due in one year or less $ 500,000 $ 499,845
Due after one year through five years 9,941,813 10,026,140
Due after five years through ten years 3,864,673 3,962,782
Due after ten years 378,225 345,975
Mortgage-backed securities 8,679,447 8,617,419
FNMA and FHLMC preferred stock 4,984,345 5,021,500
Other stocks 132,000 132,000
$ 28,480,503 $ 28,605,661
Proceeds from sales of securities available for sale
during 1998 were $ 5,375,879. Gross gains and losses
on those sales were $ 17,200 and $ 13,529,
respectively. Proceeds from maturities of investment
securities during 1998 were $ 5,208,580, resulting in
no gains or losses. Included in stockholders' equity
at December 31, 1998 is $ 82,605 of unrealized holding
gains on securities available for sale, net of $
42,554 in deferred taxes.
Proceeds from sales of securities available for sale
during 1997 were $ 7,954,592. Gross gains and losses
on those sales were $ 16,412 and $ 13,360,
respectively. Proceeds from maturities of investment
securities during 1997 were $ 2,843,455, resulting in
no gains or losses. Included in stockholders' equity
at December 31, 1997 is $ 81,544 of unrealized holding
gains on securities available for sale, net of $
42,008 in deferred taxes.
The Bank is required to maintain minimum investments
in certain stocks, which are recorded at cost since
they are not actively traded and therefore, have no
readily determinable market value. Consequently, the
Bank owns the following equity securities at December
31, 1998 and 1997:
Federal Home Loan Bank $ 496,000
Atlantic Central Bankers Bank 10,000
Federal Reserve Bank 70,850
$ 576,850
Securities with a cost basis of $ 8,750,000 (fair
value of $ 8,769,380) and $ 5,500,000 (fair value of
$ 5,537,709) at December 31, 1998 and 1997,
respectively, were pledged to secure public funds and
for other purposes as required or permitted by law.
Note 3. Reserve for Loan Losses
Activity in the reserve for loan losses is summarized
as follows:
1998
1997 1996
Balance at beginning of period $ 487,250 $ 443,659 $ 344,801
Recoveries 22,352 69,918 43,050
Current year provision charged to income 185,000 20,000
65,000
Total 694,602 533,577 452,851
Losses 113,908 46,327 9,192
Balance at end of period $ 580,694 $ 487,250 $ 443,659
- -12-
Note 4. Premises and Equipment
A summary of bank premises and equipment is as
follows:
Accumulated Depreciated
Description
Cost
Depreciation Cost
1998
Premises and improvements
(including land $ 279,586) $ 2,332,377 $ 476,662 $ 1,855,715
Equipment, furniture and fixtures 1,855,740 1,089,217 766,523
Vehicles 56,945 12,048 44,897
$ 4,245,062 $ 1,577,927 $ 2,667,135
1997
Premises and improvements
(including land $ 269,586) $ 2,140,074 $ 453,247 $ 1,686,827
Equipment, furniture and fixtures 1,556,497 873,505 682,992
Vehicles 52,848 15,938 36,910
$ 3,749,419 $ 1,342,690 $ 2,406,729
Depreciation expense amounted to $ 284,866 in 1998, $
228,463 in 1997, and $ 169,381 in 1996.
Note 5. Loans
Loans consist of the following at December 31 (in
thousands):
1998 1997
Real estate loans:
Secured by farmland $ 8,116 $ 5,367
Secured by 1-4 family residential 42,159 39,015
Secured by multifamily (5 or more) residential
properties 249 0
Secured by nonfarm nonresidential 8,391 7,934
Loans to finance agricultural production:
Loans to farmers 2,599 1,908
Commercial and industrial loans 7,459 5,059
Loans to individuals for household, family
and other personal expenditures 10,439 9,969
Obligations of states and political subdivisions in
the U. S. 1,343 1,521
All other loans 39 130
80,794 70,903
Less: reserve for loan losses ( 580) ( 487)
$ 80,214 $ 70,416
Loans 90 days or more past due (still accruing
interest) and those on nonaccrual status were as follows at December 31 (in
thousands):
90 Days or More
Nonaccrual
- - - - - - - Past Due - - - - - - - - -
- - - - - - Status - - - - - - - -
1998 1997 1996
1998 1997 1996
Real estate mortgages $ 405 $ 390 $ 1,038 $ 0 $ 361 $ 310
Installment loans 37 21 3 0 0 0
Time and demand loans 0 20 0 0
52 0
Total $ 442 $ 431 $ 1,041 $ 0 $ 413 $ 310
- -13-
Note 5. Loans (Continued)
The amounts of foregone interest and recognized
interest income on loans placed on nonaccrual status
were:
Foregone Interest
Interest Income
at December 31
Recognized
1998 $ 0 $ 0
1997 43,582 27,746
1996 37,278 21,030
A mortgage loan in the amount of $ 310,000 and listed
on nonaccrual status at both December 31, 1997 and
1996 was restructured in early 1998. As a result, $
37,393 in foregone interest at
December 31, 1997 was realized as interest income in
1998. This loan has an outstanding balance of $
286,000 at December 31, 1998 and is on a current
payment status.
Loan balances are stated net of deferred loan
origination (fees) costs. These net (fees) costs
amounted to the following at December 31:
1998 1997
Installment $ 12,613 $ 5,988
Time and demand 8,085 1,503
Mortgage ( 78,268) ( 106,566)
($ 57,570) ($ 99,075)
At December 31, 1998 and 1997, the total recorded
investment in impaired loans, all of which
had allowances determined in accordance with SFAS No.
114 and No. 118, amounted to approximately $ 0 and $
224,000, respectively. The average recorded
investment in impaired loans amounted to approximately
$ 23,000 and $ 198,000 for 1998 and 1997,
respectively. The allowance for loan losses related
to impaired loans amounted to approximately $ 0 and $
112,000 at
December 31, 1998 and 1997, respectively. Interest
income on impaired loans of $ 0 and $ 16,233 was
recognized for cash payments received in 1998 and
1997, respectively.
Note 6. Loans to Related Parties
The Bank has granted loans to the officers and
directors of the corporation and its subsidiary and to
their associates. Related party loans are made on
substantially the same terms, including interest rates
and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do
not involve more than normal risk of collectibility.
The aggregate dollar amount of these loans was $
1,019,727 and $ 826,228 at December 31, 1998 and 1997,
respectively. During 1998,
$ 995,310 of new loans were made and repayments
totaled $ 801,811. During 1997, $ 728,798 of new
loans were made and repayments totaled $ 541,836.
Outstanding loans to Bank employees totaled $ 808,569
and $ 915,738 at December 31, 1998 and 1997,
respectively.
Note 7. Financial Instruments With Off-Balance-Sheet
Risk/Commitments
The Bank is a party to financial instruments with off-
balance-sheet risk in the normal course of business to
meet the financial needs of its customers and to
reduce its own exposure to fluctuations in interest
rates. These financial instruments include
commitments to extend credit and standby letters of
credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in
excess of the amount recognized in the balance sheets.
The contract amounts of those instruments reflect the
extent of involvement the Bank has in particular
classes of financial instruments.
- -14-
Note 7. Financial Instruments With Off-Balance-Sheet
Risk/Commitments (Continued)
The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial
instrument for commitments to extend credit and
standby letters of credit and financial guarantees
written is represented by the contractual amounts of
those instruments. The Bank uses the same credit
policies in making commitments and conditional
obligations as it does for on-balance-sheet
instruments.
Contract or
Notional Amount
1998 1997
Financial instruments whose contract amounts
represent credit risk at December 31:
Commitments to extend credit $ 12,986,325 $ 8,699,691
Standby letters of credit and financial
guarantees written 229,500 517,461
Commitments to extend credit are agreements to lend to
a customer as long as there is no violation of any
condition established in the contract. Commitments
generally have fixed expiration dates or other
termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements.
Standby letters of credit and financial guarantees
written are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to
support public and private borrowing arrangements.
The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending
loans to customers. The Bank holds collateral
supporting those commitments when deemed necessary by
management.
During 1998 the Bank entered into an agreement and
made a good faith deposit of $ 10,000 to purchase land
for a new branch building. The total amount of the
contract is $ 150,000.
Note 8. Retirement Plan
The Bank maintains a 401-K profit-sharing plan
covering substantially all full-time employees. The
plan allows contributions of up to 15% by employees.
Additional contributions can be made at the discretion
of the board of directors. The Bank contributions
made to the plan were $ 52,735 for 1998,
$ 53,291 for 1997 and $ 60,000 for 1996.
Note 9. Federal Income Taxes
The components of federal income tax expense are
summarized as follows:
1998
1997 1996
Current year provision $ 455,085 $ 422,864 $ 487,363
Deferred income taxes (benefits) ( 50,535) (
39,851) ( 32,037)
Income tax effect of securities transactions
1,248 1,038 ( 695)
Applicable income taxes $ 405,798 $ 384,051 $ 454,631
Federal income taxes were computed after reducing
pretax accounting income for nontaxable interest and
dividend income in the amount of $ 550,702, $ 494,737
and $ 327,184 for 1998, 1997 and 1996, respectively.
- -15-
Note 9. Federal Income Taxes (Continued)
A reconciliation of the effective income tax rate to
the federal statutory rate is as follows:
1998 1997 1996
Applicable federal income tax rate 34.0% 34.0% 34.0%
Reductions resulting from:
Nontaxable investment income and other items,
net of nondeductible expenses (11.9) (11.3) ( 7.0)
Effective income tax rate 22.1% 22.7% 27.0%
Deferred tax liabilities have been provided for
taxable temporary differences related to accumulated
depreciation and deferred loan costs. Deferred tax
assets have been provided for deductible temporary
differences related to the allowance for loan losses
and unrealized losses on available for sale
securities. The net deferred tax assets (liabilities)
included in other assets (other liabilities) in the
accompanying consolidated balance sheets include the
following components:
1998
1997 1996
Total deferred tax assets $ 225,970 $ 159,363 $ 230,283
Total deferred tax liabilities ( 181,120) (
164,502) ( 120,721)
Net deferred tax asset (liability) $ 44,850 ($ 5,139)
$
109,562
The Bank has not recorded a valuation allowance for
the deferred tax assets as management believes that it
is more likely than not that they will be ultimately
realized.
Note 10. Leases
The Bank is party to real estate leases with base
monthly rental charges of $ 2,450. These charges are
to be adjusted on specified dates and by agreed upon
amounts or by the net change in the consumer price
index. The original leases expire on January 7, 2001
and December 31, 2003, respectively. Each lease
contains a provision for renewal under various terms
at the Bank's option. In addition, the Bank leases
certain equipment on a 54 month lease which expires in
2001. Total rental expense charged to operations for
the years ended December 31, 1998, 1997 and 1996 was $
59,435, $ 60,635 and $ 45,921, respectively.
Based on the current monthly rent, future minimum
rental payments for the next five years are as
follows:
1999 $ 56,870
2000 56,870
2001 46,423
2002 35,976
2003 35,976
Note 11. Other Assets
Other assets include the following at December 31:
1998
1997
Net deferred tax asset $ 44,850 $ 0
Prepaid expenses 160,074 190,042
Deposits on equipment 0 85,261
Others 39,456 46,711
$ 244,380 $ 322,014
- -16-
Note 12. Deposits
Included in interest-bearing deposits at December 31
are NOW and Money Market Account balances totaling $
18,049,411 and $ 14,349,172 for 1998 and 1997,
respectively.
Time deposits of $ 100,000 and over aggregated $
12,030,190 and $ 10,167,174 at December 31, 1998 and
1997, respectively. Interest expense on time deposits
of $ 100,000 and over was $ 617,000,
$ 571,000 and $ 521,000 for 1998, 1997 and 1996,
respectively.
The amount of time deposits maturing over the next 5
years is as follows:
1999 $ 36,572,732
2000 5,330,195
2001 4,629,758
2002 4,365,662
2003 5,401,551
$ 56,299,898
The Bank accepts deposits of the officers and
directors of the corporation and its subsidiaries on
the same terms, including interest rates, as those
prevailing at the time for comparable transactions
with unrelated persons. The aggregate dollar amount
of deposits of officers and directors totaled
$ 3,486,275 and $ 4,154,702 at December 31, 1998 and
1997, respectively.
Overdrafts of $ 39,524 and $ 130,171 at December 31,
1998 and 1997, respectively, were reclassified as loans for
financial reporting purposes.
Note 13. Fulton Bancshares Corporation (Parent Company
Only) Financial Information
The following are the condensed balance sheets, income
statements and statements of cash flows for the parent
company as of and for the periods ended December 31:
Balance Sheets
Assets
1998
1997
Cash $ 194 $ 4,674
Investment in the Fulton County National Bank
& Trust Company 12,307,525 11,358,925
Investment in Fulton County Community
Development Corporation 38,878 43,005
Securities available for sale 132,000 0
Total assets $ 12,478,597 $ 11,406,604
Stockholders' Equity
Common stock, par value $ .625 per share, 4,000,000
shares
authorized and 495,000 shares issued at December 31,
1998
and 1997 $ 309,375 $ 309,375
Additional paid-in capital 2,051,275 2,051,275
Retained earnings 10,035,342 8,964,410
Accumulated other comprehensive income 82,605
81,544
Total stockholders' equity 12,478,597 11,406,604
Total liabilities and stockholders' equity $ 12,478,597 $
11,406,604
- -17-
Note 13. Fulton Bancshares Corporation (Parent Company
Only) Financial Information (Continued)
1998
1997 1996
Statements of Income
Years Ended December 31
Cash dividends from wholly-owned subsidiary $
516,000 $ 361,000 $ 430,250
Investment income 370 0 0
Equity in undistributed income of subsidiaries 943,412 975,661 833,39
1
Printing, supplies, amortization and
other expenses ( 32,450) (
32,069) ( 32,000)
Net income $ 1,427,332 $ 1,304,592 $ 1,231,641
Statements of Cash Flows
Years Ended December 31
Cash flows from operating activities:
Net income $ 1,427,332 $ 1,304,592 $ 1,231,641
Adjustments to reconcile net income
to cash provided by operating activities:
Equity in undistributed income of
subsidiary ( 943,412) (
975,661) ( 833,391)
Net cash provided by operating activities 483,920 328,931
398,250
Cash flows from investing activities:
Investment in subsidiary 0
0 ( 50,000)
Purchases of investment securities available
for sale ( 132,000)
0 0
Net cash (used) by investing activities ( 132,000) 0
0
Cash flows from financing activities:
Dividends paid ( 356,400) (
346,500) ( 326,700) Net
(repayments from) advances
to subsidiary 0
0 693
Net cash provided (used) by financing activities (
356,400) ( 346,500) ( 326,007)
Net change in cash ( 4,480) (
17,569) 22,243
Beginning cash 4,674 22,243 0
Ending cash $ 194 $ 4,674 $ 22,243
Note 14. Compensating Balances
The corporation is required to maintain certain
compensating balances with its correspondent banks to
cover processing costs and service charges. Required
compensating balances were $ 125,000 at December 31,
1998 and 1997.
- -18-
Note 15. Regulatory Matters
Dividends paid by Fulton Bancshares Corporation are
generally provided from the Fulton County National
Bank and Trust Company's dividends to it. The Federal
Reserve Board, which regulates bank holding companies,
establishes guidelines which indicate that cash
dividends should be covered by current year earnings
and the debt to equity ratio of the holding company
must be below thirty percent.
Fulton County National Bank and Trust Company, as a
National Bank, is subject to the dividend restrictions
set forth by the Comptroller of the Currency.
Retained earnings available for the payment of
dividends without approval of the Comptroller amounted
to $ 2,964,040, $ 2,685,625, and
$ 2,235,877 at December 31, 1998, 1997 and 1996,
respectively.
The Bank is also required to maintain minimum amounts
of capital to total "risk weighted" assets, as defined
by the banking regulations. At December 31 the Bank's
actual ratios and required levels were as follows:
- - - - Actual - - - -
Required 1998 1997
Leverage (total capital/total assets) 4.0% 10.3% 10.7%
Tier 1 (Tier 1 core capital/risk weighted assets) 4.0% 15.8% 16.7%
Total capital (total capital plus allowance for
loan losses/
risk weighted assets) 8.0% 16.7% 17.4%
Note 16. Liabilities for Borrowed Money
At December 31, 1998 the Bank had an outstanding five
year loan with Federal Home Loan Bank of Pittsburgh of
$ 5,000,000. Interest is payable monthly at a fixed
rate of 4.54% with the principal maturing September
24, 2003.
The Bank has established credit at Federal Home Loan
Bank (FHLB) of Pittsburgh to improve liquidity. The
Bank may borrow up to approximately $ 40 million from
FHLB under the terms of certain commitment agreements,
less any borrowings outstanding. The rates and terms
of the commitments are flexible and are not fixed
until the funds are withdrawn, but funds may not be
borrowed for more than one year. Borrowings were $ 0
and $ 3,470,000 at December 31, 1998 and 1997,
respectively. The variable interest rate was 4.96% at
December 31, 1998. Collateral for the borrowings
consists of certain investments and mortgages
approximating $ 40 million at
December 31, 1998.
Note 17. Fair Value of Financial Instruments
The estimated fair values of the corporation's
financial instruments under Statement on Financial
Accounting Standards (SFAS) No. 107, Disclosure About
Fair Value of Financial Instruments were as follows at
December 31, 1998 and 1997:
Carrying Amount
Fair Value
(000
Omitted)
1998 1997
1998 1997
FINANCIAL ASSETS
Cash and due from banks $ 3,301 $ 2,745 $ 3,301 $ 2,745
Securities available for sale 28,606 25,345 28,606 25,345
Other bank stock 577 577 577 577
Loans receivable (net) 80,214 70,416 80,844 71,121
Accrued interest receivable 733 670 733 670
FINANCIAL LIABILITIES
Time certificates 56,300 54,296 56,978 54,386
Other deposits 43,041 35,925 43,041 35,925
Accrued interest payable 392 380 392 380
Other borrowed funds 5,000 3,470 4,987 3,470
Federal funds purchased 2,100 0 2,100 0
- -19-
Note 18. Deferred Compensation and Other Benefit Programs
The Bank has adopted several benefit programs, some of
which result in the deferral of payments for services
rendered:
(1) The Supplemental Executive Retirement Plan - This
Plan is funded by single premium life insurance
on the CEO and certain other Bank executives, with the Bank
as beneficiary. Actual payments to the
executives will not begin until their retirement.
(2) The Director Emeritus Program - This plan, funded
by life insurance, will allow the Bank to
reward its directors for longevity of service to the
Board. Directors who qualify would be eligible
at age 75 to receive $ 4,000 annually for up to 10 years
under this program.
(3) The Director Deferred Compensation Plan - This
plan, also funded by life insurance, will allow
directors to defer up to 100% of directors fees annually.
The amounts deferred will be paid out over a
period of up to 10 years beginning when the director reaches
the age of 75.
(4) The Officer Supplemental Life Insurance Plan
provides for officer life insurance coverage of
generally double their current salary level, and is
also funded by single premium life insurance.
As a result of these plans, the following items are
recognized in the financial statements:
1998
1997 1996
Asset
Cash surrender value of life insurance $ 3,165,957 $
3,020,255 N/A
Liabilities
Supplemental executive retirement plan 173,093 111,366 N/A
Deferred directors fees liability 98,308 71,444 N/A
Income
Earnings on cash surrender value of life insurance 175,184 153,602
112,733
Expenses
Life insurance expense 29,482 23,635 31,990
Supplemental executive retirement expense 61,727 58,698 42,609
Deferred directors fees 27,707 37,424 34,020
Director emeritus fees 17,000 16,000 9,000
Note 19. Subsequent Events
On February 2, 1999 the Bank entered into an agreement
for the construction of a new branch building in
Orbisonia, Pennsylvania. The total estimated cost of
the construction is $ 225,840. The Bank plans to
close its Shade Gap branch (except for the ATM
facility) when the new Orbisonia branch opens.
- -20-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
SELECTED FIVE-YEAR FINANCIAL DATA
1998 1997 1996
1995 1994
Income (000 omitted)
Interest income $ 8,192 $ 7,898 $ 7,513 $ 7,298 $
6,417
Interest expense 4,151 4,036 3,725 3,732
3,269
Provision for loan losses 185 20
65 62 48
Net interest income after
provision for loan losses 3,856 3,842 3,723 3,504
3,100
Securities gains (losses) 4 3 ( 2) 5 2
Other operating income 718 470 391 276 242
Other operating expenses 2,745 2,626 2,425 2,304
2,236
Income before income taxes 1,833 1,689 1,687 1,481
1,108
Applicable income tax 406 384
455 422 319
Net income $ 1,427 $ 1,305 $ 1,232 $ 1,059 $
789
Per share amounts are based on following weighted averages:
1998 - 495,000 1996 - 495,000
1994 - 440,000
1997 - 495,000 1995 - 480,476
Income before income taxes $ 3.70 $ 3.41 $ 3.41 $ 3.08
$ 2.52
Applicable income taxes .82 .77 .92 .88 .73
Net income 2.88 2.64 2.49 2.20 1.79
Cash dividend paid .72 .70 .66 .55 .48
Book value 25.21 23.04 20.50
19.0
8 14.12
Year-End Balance Sheet Figures (000 omitted)
Total assets $ 119,649 $ 105,770 $
102,355 $ 96,449 $ 90,890
Net loans 80,214 70,416 63,791 59,871
60,3
21
Total investment securities 29,183 25,922 28,474 29,365
24,0
60
Deposits-noninterest bearing 11,553 8,159 10,000 7,959
7,266
Deposits-interest bearing 87,788 82,062 81,632 78,399
76,7
28
Total deposits 99,341 90,221 91,632 86,358
83,994
Liabilities for borrowed money 7,100 3,470 0 0 220
Total stockholders' equity 12,479 11,407 10,149 9,445
6,214
Ratios
Average equity/average assets 10.60 10.29 9.80 9.29 7.23
Return on average equity 11.95 11.98 12.49 12.13
12.08
Return on average assets 1.27 1.23 1.23 1.13 .87
- -21-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CHANGES IN INCOME AND EXPENSE - 1998 AND 1997
The schedule below reflects comparative changes in
income and expense included in the Consolidated Statements
of Income for 1998 and 1997 together with changes in asset
and liability volumes associated with these income and
expense items.
1998 Compared to 1997 1997
Compared to 1996
Average
Volumes Income/Expense Average Volumes
Income/Expense
($ 000 omitted) $ %
$ % $
% $ %
Loans 7,439 10.9 604 9.9 5,641 9.0 422 7.4
Investment securities ( 2,596) ( 8.9) ( 315) (17.6) (
970) ( 3.3)
( 39) ( 2.2)
Other investments 88 34.5 5 35.7 (
175) (40.7) 2 5.6
Total 4,931 5.1 294 3.7 4,496 4.9 385 5.1
Interest/borrowed funds 2,312 109.4 117 97.5 918 76.8 54
82.
4
Interest bearing demand
deposits 1,252 8.1 43 10.4 (
230) ( 1.5) 0 0.0
Savings deposits ( 200) ( 1.5) ( 11) ( 3.0) ( 762)
(
5.2)
( 32) ( 8.0)
Time deposits 883 1.6 ( 34) ( 1.1) 4,156 8.4
28
9 10.1
Total 4,247 5.0 115 2.9 4,082 5.0 311 8.4
Net interest income 179 4.6 74 2.0
Provision for loan losses 165 825.0
(
45) (69.2)
Net interest income after
provision for loan losses 14 0.4
119 3
.2
Security transactions 1 33.3
5 249
.3
Other operating income 248 52.8 79
2
0.2
Income before operating expense 263 6.1 203 4.9
Salaries & employee benefits 64 5.4
49 4.
3
Occupancy & equipment expense 104 22.4 47 11.2
FDIC insurance premiums ( 1) ( 9.1)
10 1
,000.0
Other operating expenses ( 48) (
4.9)
95 10.8
Total operating expenses 119 4.5 201 8.3
Income before income taxes 144 8.5 2 .1
Applicable income taxes 22 5.7 (
71) (15.6)
Net income 122 9.4 73 5.9
- -22-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the
years ended December 31, 1998 and 1997 are as follows:
1998
1997
($ 000 omitted Quarter
Ended Quarter
Ended
except per share) Mar. 31 June 30 Sept.
30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
Interest income $ 2,017 $ 2,016 $ 2,104 $ 2,055 $ 1,939
$
1,980 $ 1,978
$ 2,001
Interest expense 1,022 1,020 1,039
1,070 969 1,029 1,017 1,021
Net interest income 995 996 1,065 985 970 951 961 980
Provision for loan losses 35 150 0
0 15 5 0 0
Net interest income
after provision for
loan losses 960 846 1,065 985 955 946 961 980
Securities gains (losses) 4 0 0 0 0 0 1 2
Other income 145 297 116 160 106 125 116 123
Other expenses 676 731 709 629 613
670 625 718
Operating income
before income taxes 433 412 472 516 448 401 453 387
Applicable income taxes 84 96 120 106 116
85 96 87
Net income $ 349 $ 316 $ 352 $ 410 $ 332
$
316
$ 357 $ 300
Net income applicable
to common stock
Per share data:
Net income $ .71 $ .64 $ .71 $ .82 $ .67 $ .64
$
.72 $ .61
- -23-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES
($ 000 omitted)
1998 1997 1996
1995 1994
LOANS
Lines of credit $ 3,332 $ 3,290 $ 3,492 $ 3,556
$
3,606
Tax free 1,281 2,201 2,458 3,027 1,930
Commercial 14,203 13,966 12,702 10,356 10,533
Mortgage 40,916 35,415 32,833 33,430 34,458
Consumer 15,878 13,299 11,045 10,642
10,535
Total loans 75,610 68,171 62,530
61,011 61,062
INVESTMENT SECURITIES
U.S. Government 0 0 254 404 564
U.S. Government agencies 5,863 6,931 6,984 5,361 4,743
State & municipal 5,793 5,090 3,040 1,586 906
Mortgage-backed securities 9,324 13,861 18,730 19,777 17,744
FNMA & FHLMC preferred stock 4,746 2,443 124 0 0
Other 577 392 555 468
407
Total investment securities 26,303 28,717 29,687
27,596
24,364
OTHER SHORT-TERM INVESTMENTS
Federal funds sold 343 255 430
661
536
TOTAL EARNING ASSETS 102,256 97,143 92,647
89,268 85,962
TOTAL ASSETS $ 111,002 $ 105,864 $ 99,844 $ 93,959
$ 90,315
Percent increase 4.9% 6.0% 6.3% 4.0% (1.1)%
DEPOSITS
Interest-bearing demand $ 16,779 $ 15,528 $ 15,758 $ 14,871 $
14,876
Savings 13,616 13,816 14,578 14,663 16,641
Time 54,621 53,738 49,582 47,502 43,919
Total interest-bearing deposits 85,016 83,082 79,918
77,036
75,436
OTHER BORROWINGS
Federal funds purchased 622 276 908 524 408
Liabilities for borrowed money 3,804 1,838 288
185
200
TOTAL INTEREST-BEARING
LIABILITIES 89,442 85,196 81,114 77,745 76,044
- -24-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES (CONTINUED)
1998 1997
1996 1995 1994
AVERAGE RATES EARNED
% %
% % %
Loans
Commercial 9.23 9.11 9.31 9.95 8.90
Mortgage 8.61 8.67 8.64 8.99 7.94
Consumer 8.77 8.89 9.58 10.09 10.14
Tax free 5.82 5.62 5.91 6.05 6.73
Lines of credit 8.81 9.19 9.13 9.84 8.63
Total 8.72 8.73 9.09 9.22 8.45
Investment Securities
U.S. Government 0.00 0.00 6.40 6.40 6.11
U.S. Government agencies 5.95 6.17 6.09 5.86 5.35
State & municipal 4.93 5.00 5.02 5.08 5.34
Mortgage-backed securities 5.50 6.46 6.50 5.94 4.87
Other 5.99 7.27 6.32 6.54 6.17
Total 5.57 6.22 6.08 5.89 5.03
Other Short-Term Investments
Federal funds sold 5.49 5.51 5.30 5.85 4.02
Total earning assets 7.90 8.13 8.11 8.15 7.44
AVERAGE RATES PAID
Time & savings deposits 4.60 4.71 4.59 4.77 4.29
Federal funds purchased 5.57 5.61 5.61 6.09 3.93
Liabilities for borrowed money 5.32 5.68 5.55 6.36 3.74
Total interest-bearing liabilities 4.64 4.74 4.59 4.78 4.29
- -25-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read
in conjunction with the selected supplementary financial
information presented in this report.
OPERATING RESULTS
Net income was $ 1,427,000 for 1998, compared to
$ 1,305,000 for 1997, representing an increase of $ 122,000,
or 9.4%. Net income on an adjusted per share basis for 1998
was $ 2.88, up $ .24 from the $ 2.64 per share realized
during 1997.
Interest income for 1998 was $ 8,192,000, up $
294,000, or 3.7% more than 1997. The increase was due
primarily to higher average balances of loans, which
typically produce higher yields than investments, compared to
1997.
Average earning assets increased 5.1% and 4.9% in 1998
and 1997, respectively. Average loan demand, which typically
produces higher yields than investments, increased 10.9% in
1998. Net loans at December 31, 1998 stood at $ 80,214,000
compared with $ 70,416,000 as of December 31, 1997, an
increase of 13.9%. Average investment securities decreased
8.9% in 1998, with the decrease concentrated in mortgage-
backed securities.
Total interest expense was $ 4,151,000 for 1998, an
increase of $ 115,000, or 2.9% from the
$ 4,036,000 for 1997. Average time deposits, which pay
higher yields, increased 1.6% in 1998. Interest-bearing
deposits stood at $ 87,788,000 at December 31, 1998 compared
with $ 82,063,000 as of December 31, 1997, an increase of
7.0%. Average interest-bearing demand deposits increased
8.1% while other savings deposits decreased 1.5%. Average
borrowed funds increased 109.4%.
Management continues to competitively price its
interest-bearing deposits to maintain a favorable net
interest margin.
Net interest income is the difference between total
interest income and total interest expense. Interest income
is generated through earning assets which include loans,
deposits with other banks, and investments. Interest income
is dependent on many factors including the volume of earning
assets, the level of interest rates and the changes in
interest rates, and volumes of nonperforming loans. The cost
of funds varies with the volume of funds necessary to support
earning assets, the rates paid to maintain deposits, rates
paid on borrowed funds, and the level of interest-free
deposits.
Net interest income for 1998 totaled $ 4,041,000, up
4.6% from 1997. Management continuously monitors liquidity
and interest rate risk through its Asset-Liability Committee
reporting and reprices products to maintain a desired net
interest margin.
Other income represents service charges on deposit
accounts, commissions on loan insurance, fees for travelers'
checks and other services, safe deposit box rents, fees for
trust services, securities gains (losses), gains (losses) on
sales of other real estate owned, and earnings on cash
surrender value of directors and officers life insurance.
Other income increased $ 248,000 from 1997 to 1998.
The increase in 1998 resulted primarily from a $ 178,000 gain
on sale of other real estate owned, a $ 34,000 increase in
trust department income and $ 30,000 increase in other
service charges and fees.
- -26-
The noninterest expenses are classified into four main
categories: salaries, fees and employee benefits; occupancy
expenses and furniture and equipment expenses that include
depreciation, maintenance, utilities, taxes, insurance and
rents; FDIC insurance premiums; and other operating expenses
that include all other expenses incurred in daily operations.
Employee related expenses increased 5.4% and 4.3% for
1998 and 1997, respectively, primarily due to salary and
related benefit increases. Occupancy and furniture and
equipment expenses increased 22.4% and 11.2% in 1998 and
1997, respectively. These increases were due primarily to
the additional depreciation expense associated with the
construction of a new express drive-thru facility, expansion
of automatic teller machine network, and upgrade of the local
area network during 1998. Other operating expenses decreased
4.9% from 1997.
Applicable income taxes changed between 1996, 1997 and
1998 because of changes in pretax accounting income and
taxable income. The effective income tax rate for 1998 was
22.1% compared with 22.7% and 27.0% for 1997 and 1996,
respectively. The decrease in the effective income tax rate
for 1998 and 1997 was due primarily to an increase in tax-
exempt interest on obligations of state and political
subdivisions, the dividends received deduction for FNMA and
FHLMC preferred stock, and the nontaxable income related to
the increase in the cash surrender value of directors and
officers life insurance.
FINANCIAL CONDITION
Total assets at December 31, 1998 were $ 119,649,000,
a 13.1% increase over December 31, 1997. Net loans at
December 31, 1998 totaled $ 80,214,000, an increase of $
9,798,000 over the $ 70,416,000 at December 31, 1997.
The provision for loan losses was $ 185,000 in 1998
compared to $ 20,000 in 1997. The provisions were based on
management's evaluation of the adequacy of the reserve
balance and represent amounts necessary to maintain the
reserve at the appropriate level based on the quality of the
loan portfolio and economic conditions. The bank's history
of net charge-offs has traditionally been better than peer
group performance with an average rate of less than .10% of
average loans outstanding over the past five years. Though
this trend is expected to continue, management intends to
maintain the reserve at appropriate levels based on an
ongoing evaluation of the loan portfolio.
Loans 90 days or more past due (still accruing
interest) and those on nonaccrual status were as follows at
December 31 (in thousands):
90 Days or More
Past Due
Nonaccrual Status
1998 1997
1998 1997
Real estate mortgages $ 405 $ 390 $ 0 $ 361
Installment loans 37 21 0 0
Demand and time loans 0 20 0 52
Total $ 442 $ 431 $ 0 $ 413
A mortgage loan in the amount of $ 310,000 and listed
on nonaccrual status at both December 31, 1997 and 1996 was
restructured in early 1998. As a result, $ 37,393 in
foregone interest at December 31, 1997 was realized as
interest income in 1998. This loan has an outstanding
balance of $ 286,000 at December 31, 1998 and is on a current
payment status.
Total deposits increased to $ 99,341,000 at December
31, 1998 compared with $ 90,221,000 at December 31, 1997.
Noninterest bearing deposits increased 41.6% while interest-
bearing deposits increased 7.0%.
- -27-
Stockholders' equity reached $ 12,479,000 at
December 31, 1998 for a 9.4% increase over the prior year.
The increase in stockholders' equity was due to net income
for the year. Total stockholders' equity represented 10.4%
and 10.8% of total assets at the end of 1998 and 1997,
respectively. Cash dividends paid in 1998 were $ 356,000, up
$ 9,000 over 1997. It is the intention of management and the
Board of Directors to continue to pay a fair return on the
stockholders' investment while retaining adequate earnings to
allow for continued growth.
LIQUIDITY
Liquidity and interest rate sensitivity are related
but distinctly different from one another.
Liquidity involves the bank's ability to meet cash
withdrawal needs of customers and their credit needs in the
form of loans. Liquidity is provided by cash on hand and
transaction balances held at correspondent banks. Liquidity
available to meet credit demands and/or adverse deposit flows
is also made available from sales or maturities of short-term
assets. Additional sources of funds to meet credit needs is
provided by access to the marketplace to obtain interest-
bearing deposits and other borrowings, including special
programs available through Federal Home Loan Bank.
Interest rate sensitivity is the matching or
mismatching of the maturity and rate structure of the
interest-bearing assets and liabilities. It is the
objective of management to control the difference in the
timing of the rate changes for these assets and liabilities
to preserve a satisfactory net interest margin. The
following table approximately reflects the matching of
assets and liabilities maturing within one year and
thereafter, which management feels is adequate to meet
customer cash and credit needs while maintaining a desired
interest rate spread.
Due
Due Due Due
Due
0-
30 31-90 91-180 181-360
After
(000 omitted) Days
Days Days Days 1
Year Total
Rate Sensitive Assets
Investment securities $ 2,222 $ 325 $ 4,592 $ 5,928 $
15,414
$ 28,481
Real estate, commercial
and consumer loans 6,253 11,635 14,333 12,352
36,222 80,795
$ 8,475 $ 11,960 $ 18,925 $ 18,280 $ 51,636 $ 109,276
Rate Sensitive Liabilities
Short-term borrowings $ 2,100 $ 0 $ 0 $
0 $ 0 $ 2,100
Long-term borrowings 0 0 5,000 0 0 5,000
Certificates of deposit
over $ 100,000 1,919 1,051 3,409 2,527
3,124 12,030
Other certificates
of deposit 8,223 4,627 10,190 3,754 17,476 44,270
Money market deposit
accounts 874 1,748 2,622 3,496 0 8,740
Other interest-bearing
deposits 1,137 2,275 3,412 15,924
0 22,748
$ 14,253 $ 9,701 $ 24,633 $ 25,701 $ 20,600 $ 94,888
Cumulative GAP ($ 5,778) ($ 3,519) ($ 9,227) ($ 16,648)
$
14,388
Loan rates have generally decreased over the past
twelve months. Based on current economic indicators and
predictions, management anticipates that interest rates will
remain relatively stable during 1999. As a result,
management has assessed probabilities to each time period
and proportionately included variable rate loans in rate
sensitive assets of one year or less.
- -28-
LIQUIDITY (CONTINUED)
In monitoring and evaluating liquidity, management
generally does not consider regular savings or interest-
bearing checking accounts to be particularly rate sensitive
since it is highly improbable that 100% of these deposits
will be withdrawn within the next 360 days. Therefore,
management has assessed probabilities to each time period and
proportionately included these funds in rate sensitive
liabilities of one year or less.
CAPITAL FUNDS
Internal capital generation has been the primary
method utilized by Fulton Bancshares Corporation to increase
its capital stock. Stockholders' equity exceeded $ 12
million at December 31, 1998. Regulatory authorities have
established capital guidelines in the form of the "leverage"
and "risk-based capital" ratios. The leverage ratio
compares capital to total balance sheet assets, while the
risk-based ratios compare capital to risk-weighted assets
and off-balance-sheet activity in order to make capital
levels more sensitive to risk profiles of individual banks.
A comparison of Fulton Bancshares Corporation's capital
ratios to regulatory minimums at December 31 is as follows:
Fulton Bancshares Corporation Regulatory
Minimum
1998 1997
Requirements
Leverage ratio 10.3% 10.7%
4%
Risk-based capital ratio
Tier I (core capital) 15.8% 16.7%
4%
Combined Tier I and Tier II
(core capital plus allowance
for loan losses) 16.7% 17.4%
8%
Fulton Bancshares Corporation has traditionally been
well above required levels and expects equity capital to
continue to exceed regulatory guidelines and industry
averages. Certain ratios are useful in measuring the ability
of a company to generate capital internally.
The following chart indicates the growth in equity
capital for the past three years.
1998
1997 1996
Equity capital at December 31
($ 000 omitted) $ 12,479 $ 11,407 $ 10,148
Equity capital as a percent of assets
at December 31 10.43% 10.78% 9.91%
Return on average assets 1.27% 1.23% 1.23%
Return on average equity 11.95% 11.98% 12.49%
Cash dividend payout ratio 24.97% 26.56% 26.51%
MARKET RISK MANAGEMENT
The Bank has risk management policies to monitor and
limit exposure to market risk, and works diligently to take
advantage of profit opportunities available in interest rate
movements.
Management continuously monitors liquidity and
interest rate risk through its ALCO reporting, and reprices
products in order to maintain desired net interest margins.
Management expects to continue to direct its marketing
efforts toward attracting more low cost retail deposits while
competitively pricing its time deposits in order to maintain
favorable interest spreads, while minimizing structural
interest rate risk.
- -29-
MARKET RISK MANAGEMENT (CONTINUED)
The following table sets forth the projected
maturities and average rates for all rate sensitive assets
and liabilities based on the following assumptions. All
fixed and variable rate loans were based on original
maturities since the bank has not experienced, and does not
expect, a significant rewriting of loans. Investments are
based on maturity date except certain long-term agencies,
which are classified by call date. The bank has historically
experienced very little deposit runoff and has generally had
net gains in deposits over the years. Based on this
experience, it was estimated that maximum runoff of
noninterest-bearing checking would be 10%, maximum runoff of
NOW checking and other savings would be 25%, and maximum
runoff of money market deposits would be 33%. It was
estimated that maximum runoff of time deposits would be 25%
and these deposits are classified by original maturity date.
- - - - - - - - -
Principal/Notional Amount Maturing In - - - - - - - - -
(In millions)
Fair
Rate sensitive assets 1999 2000
2001 2002 2003 Thereafter Total
Value
Fixed rate loans $ 5,146 $ 4,659 $ 3,869 $ 2,965 $ 2,026 $ 21,072
$
39,737
$ 40,367
Average interest rates 9.05% 9.01% 8.92% 8.75% 8.44% 8.31%
8.53%
Variable rate loans 16,297 812 840 841 865 21,403 41,058 41,058
Average interest rates 1.89% 7.98% 7.98% 7.98% 7.98% 8.03%
7.97%
Fixed rate securities 500 1,250 847 0 6,178 11,855 20,630
20,8
12
Average interest rates 5.12% 5.77% 5.49% 0.0% 6.08% 5.54%
5.70%
Variable rate securities 2,830 1,251 943 707 531 1,589 7,851
7,794
Average interest rates 6.10% 6.10% 6.10% 6.10% 6.10% 6.10%
6.10%
Rate sensitive liabilities
Noninterest-bearing
checking 1,154 1,039 935 841 757 6,827 11,553 11,553
Average interest rates N/A N/A N/A N/A N/A N/A N/A
Savings and interest-
bearing checking 8,570 6,196 4,493 3,266 2,379 6,584
31,48
8 31,488
Average interest rates 2.52% 2.52% 2.52% 2.52% 2.52% 2.52%
2.52%
Time deposits 8,925 8,027 7,177 6,475 6,424 19,272 56,300
56,978
Average interest rates 5.35% 5.49% 5.53% 5.64% 5.63% 5.63%
5.56%
Variable rate borrowings 7,100 7,100 7,087
Average interest rates 4.70% 4.70%
Year 2000 Disclosure
The Year 2000 issue is the result of many software
programs and computer chips that store calendar dates as 2-
digit rather than 4-digit numbers. For example, these
computer programs record the year 1999 as "99". If left
uncorrected, these computer programs could fail or create
erroneous results by or at the Year 2000.
The Bank has undertaken a comprehensive program to
address the Year 2000 issue. The program includes the
following phases: awareness, assessment, renovation,
validation, implementation and contingency planning for
critical systems.
- -30-
Year 2000 Disclosure (Continued)
The Bank's objective is to become Year 2000 ready with
all critical systems by March 31, 1999, allowing substantial
time for further testing, verification and conversion of less
critical systems. The Bank is also requesting assurances
from its significant vendors and customers that they are
addressing the Year 2000 issue to ensure no major disruptions
to the Bank's operations. The Bank's service center (FiServ)
has been updating its system and expects to be compliant in
1999.
The total cost of the Year 2000 project to date has
not been material. The Bank does not expect that future
costs of modifications will have a material adverse effect on
the Bank's financial position or results of operations. The
Bank believes that the most likely worst case Year 2000
scenario would result from vendors or other third parties
failure to achieve Year 2000 readiness. Depending on the
number of third parties, their identity and the nature of the
noncompliance, the Year 2000 issue could have a material
adverse effect on the Bank's financial position or results of
operations. However, the Bank is developing contingency
plans that should be complete by March 31, 1999 should any
problems occur in any of the critical assessment areas.
Accordingly, the Bank does not expect the Year 2000 issue to
result in any material adverse effect on the Bank's financial
position or results of operations.
Significant Events
Effective January 4, 1999, trust and estate services
previously provided by the Fulton County National Bank &
Trust Company (Bank) are now serviced by Sentry Trust Company
(Sentry) acting as agent for the Bank's trust assets.
Pursuant to a service agreement entered into by the Bank and
Sentry, Sentry has opened a branch office in the Penn's
Village Shopping Center in McConnellsburg, PA.
Sentry was formed in 1997 by local business people and
bankers in Franklin County, PA and is an independent,
nondepository trust company chartered by the Pennsylvania
Department of Banking. To date, Sentry manages approximately
$ 91 million in assets and its staff of professionals have an
average of 15 years of experience.
It is the Bank's goal to continue to provide quality
trust services to its customers and to offer, through Sentry,
additional services such as investment management, estate
planning, cash management, employee benefit planning,
financial and business planning, discount brokerage, and tax
planning. The Bank will refer customers to Sentry as a full
service provider. Sentry will have the full authority to act
as agent for the Bank with respect to investment management,
personal trust administration, estate planning, estate
settlement services, cash management, qualified retirement
plans, and financial planning. The authority to act as agent
for the Bank shall extend only to those matters that have
been vested in the Bank by reason of a trust, plan or other
document appointing the Bank as a fiduciary to the
individual, entity or plan.
The Bank and Sentry believe this trust services
arrangement will expand services and benefit the customers of
the Bank. The Bank looks forward to working together with
Sentry to serve the people of Fulton and Huntingdon counties.
The Bank does not anticipate a significant impact to future
net income as a result of this change.
Future Impact of Recently Issued Accounting Standards
In June 1998 the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard
(SFAS) No. 133 - "Accounting for Derivative Instruments and
Hedging Activities". This statement establishes accounting
and reporting standards for derivatives and hedging
activities. In October 1998 the FASB issued SFAS No. 134 -
"Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise". This statement requires entities that
are engaged in mortgage banking activities to classify
mortgage-backed securities as trading securities following
the securitization of mortgage loans held for sale. Fulton
Bancshares Corporation has no derivative instruments and does
not engage in hedging activities. The Bank has no loans held
for sale nor do they engage in securitization of loans.
Therefore, management does not expect that either of the
aforementioned statements will impact future results of
operations.
- -31-
STOCK MARKET ANALYSIS AND DIVIDENDS
The corporation's common stock is traded inactively in
the over-the-counter market. As of December 31, 1998 the
approximate number of shareholders of record was 490.
Market Cash
Market Cash
Price Dividend
Price Dividend
1998
1997
First Quarter $ 45.00 $ .165 $ 35.00 $ .16
Second Quarter 50.00 .165 35.00 .16
Third Quarter 55.00 .19 40.00 .185
Fourth Quarter 55.00 .20 45.00 .195
- -32-
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
1. Fulton County National Bank and Trust, Pennsylvania; a
national bank organized February 24, 1887 under the
Pennsylvania Banking Code.
It converted to a national banking association on
September 5, 1933.
2. Fulton County Community Development Corporation, which
was formed on June 7, 1996 under the Pennsylvania
Business Corporation Law of 1988, as amended.
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
Board of Directors and Shareholders
Fulton Bancshares Corporation
We consent to the incorporation by reference in
registration statements (Form SB-2 No. 33-85626) of Fulton
Bancshares Corporation of our report dated February 10, 1999,
appearing in this annual report on Form 10-K of Fulton
Bancshares Corporation for the year ended December 31, 1998.
SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, PA
March 23, 1999