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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002 , or
----------------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________to__________
Commission File No. 0-10587
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FULTON FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2195389
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Penn Square, P.O. Box 4887 Lancaster, Pennsylvania 17604
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(Address of principal executive offices) (Zip Code)
(717) 291-2411
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value - 103,023,491 shares outstanding
--------------------------------------------------------------
as of July 31, 2002.
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1
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002
INDEX
Description Page
- ----------- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
(a) Consolidated Balance Sheets -
June 30, 2002 and December 31, 2001............................................... 3
(b) Consolidated Statements of Income -
Three and six months ended June 30, 2002 and 2001................................. 4
(c) Consolidated Statements of Shareholders' Equity -
Six months ended June 30, 2002 and 2001........................................... 5
(d) Consolidated Statements of Cash Flows -
Six months ended June 30, 2002 and 2001........................................... 6
(e) Notes to Consolidated Financial Statements - June 30, 2002........................ 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................. 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................... 24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................................. 29
SIGNATURES............................................................................. 30
Exhibit Index.......................................................................... 31
2
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per-share data)
June 30 December 31
2002 2001
--------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks............................................................ $ 282,232 $ 356,539
Interest-bearing deposits with other banks......................................... 3,118 6,968
Mortgage loans held for sale....................................................... 47,127 18,374
Investment securities:
Held to maturity (Fair value: $42,165 in 2002 and $50,492 in 2001)............ 40,757 49,557
Available for sale............................................................ 1,914,993 1,687,787
Loans, net of unearned income...................................................... 5,374,212 5,373,020
Less: Allowance for loan losses.............................................. (72,801) (71,872)
----------------- -----------------
Net Loans................................................. 5,301,411 5,301,148
----------------- -----------------
Premises and equipment............................................................. 123,936 125,617
Accrued interest receivable........................................................ 40,061 43,388
Intangible assets.................................................................. 72,981 73,286
Other assets....................................................................... 100,511 108,047
----------------- -----------------
Total Assets.............................................. $ 7,927,127 $ 7,770,711
================= =================
LIABILITIES
- ----------------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing.......................................................... $ 1,084,920 $ 1,094,158
Interest-bearing............................................................. 4,943,945 4,892,646
----------------- -----------------
Total Deposits............................................ 6,028,865 5,986,804
----------------- -----------------
Short-term borrowings:
Securities sold under agreements to repurchase................................ 298,248 289,659
Federal funds purchased....................................................... 174,000 105,000
Demand notes of U.S. Treasury................................................. 5,332 5,676
----------------- -----------------
Total Short-Term Borrowings............................... 477,580 400,335
----------------- -----------------
Accrued interest payable........................................................... 27,947 35,926
Other liabilities.................................................................. 74,976 71,890
Federal Home Loan Bank Advances and long-term debt................................. 451,280 456,802
Corporation-obligated mandatorily redeemable.......................................
capital securities of subsidiary trust........................................ 5,500 7,500
----------------- -----------------
Total Liabilities......................................... 7,066,148 6,959,257
----------------- -----------------
SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------
Common stock, $2.50 par; Authorized - 400 million shares; Issued - 104.0
million; Outstanding - 103.3 million........................................... 259,586 207,962
Capital surplus.................................................................... 481,991 536,235
Retained earnings.................................................................. 101,051 65,649
Accumulated other comprehensive income............................................. 30,776 12,970
Treasury stock, at cost (671,000 shares in 2002 and 572,000 shares in 2001)........ (12,425) (11,362)
----------------- -----------------
Total Shareholders' Equity................................ 860,979 811,454
----------------- -----------------
Total Liabilities and Shareholders' Equity................ $ 7,927,127 $ 7,770,711
================= =================
- ----------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
3
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per-share data)
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------- ------------------------------
2002 2001 2002 2001
-------------- ------------- --------------- -----------
INTEREST INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
Loans, including fees ..................................... $ 94,094 $ 107,804 $ 188,576 $ 219,534
Investment securities:
Taxable .............................................. 21,185 18,181 40,814 35,445
Tax-exempt ........................................... 2,491 2,372 4,872 4,767
Dividends ............................................ 902 1,191 1,956 2,686
Other interest income ..................................... 63 924 139 1,293
-------------- ------------- -------------- -----------
Total Interest Income ............ 118,735 130,472 236,357 263,725
INTEREST EXPENSE
- -----------------------------------------------------------------------------------------------------------------------------------
Deposits .................................................. 30,840 49,104 64,414 99,527
Short-term borrowings ..................................... 2,057 3,148 3,570 9,002
Long-term debt ............................................ 6,432 6,883 12,814 14,001
-------------- ------------- -------------- -----------
Total Interest Expense ........... 39,329 59,135 80,798 122,530
-------------- ------------- -------------- -----------
Net Interest Income .............. 79,406 71,337 155,559 141,195
PROVISION FOR LOAN LOSSES ................................. 2,680 3,199 5,460 6,378
-------------- ------------- -------------- -----------
Net Interest Income After
Provision for Loan Losses ..... 76,726 68,138 150,099 134,817
-------------- ------------- -------------- -----------
OTHER INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
Investment management and trust services .................. 7,583 6,739 14,743 13,272
Service charges on deposit accounts ....................... 9,300 7,715 18,084 14,692
Other service charges and fees ............................ 4,273 3,995 8,378 7,780
Mortgage banking income ................................... 2,782 3,415 6,064 5,342
Investment securities gains ............................... 1,972 3,856 3,370 6,765
Other ..................................................... 809 639 2,763 1,638
-------------- ------------- -------------- -----------
Total Other Income ............... 26,719 26,359 53,402 49,489
OTHER EXPENSES
- -----------------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits ............................ 32,618 28,702 63,665 56,897
Net occupancy expense ..................................... 4,263 4,097 8,555 8,307
Equipment expense ......................................... 2,716 3,120 5,515 6,071
Data processing ........................................... 2,950 2,847 6,163 5,688
Intangible amortization ................................... 577 981 1,153 1,807
Other 13,446 12,022 26,487 22,786
-------------- ------------- -------------- -----------
Total Other Expenses ............. 56,570 51,769 111,538 101,556
-------------- ------------- -------------- -----------
Income Before Income Taxes ....... 46,875 42,728 91,963 82,750
INCOME TAXES .............................................. 14,027 12,401 27,026 24,172
-------------- ------------- -------------- -----------
Net Income ....................... $ 32,848 $ $ 30,327 $ 64,937 $ 58,578
============== ============= ============== ===========
PER-SHARE DATA:
Net income (basic) ........................................ $ 0.32 $ 0.29 $ 0.63 $ 0.57
Net income (diluted) ...................................... 0.32 0.29 0.63 0.56
Cash dividends ............................................ 0.150 0.136 0.286 0.258
- -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
4
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Accumulated
Other
Shares Common Capital Retained Comprehen- Treasury
(Dollars in thousands, except per-share data) Outstanding Stock Surplus Earnings sive Income Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 ....................... 103,265,000 $207,962 $ 536,235 $ 65,649 $12,970 $(11,362) $ 811,454
Comprehensive income:
Net income ....................................... 64,937 64,937
Other - net unrealized gain on securities (net
---------
of $9.6 million tax expense) ................. 17,806 17,806
---------
Total comprehensive income ..................... 82,743
---------
Stock split paid in the form of a 25%
stock dividend (20.6 million shares) ............. 51,624 (51,693) (69)
Stock issued ....................................... 326,000 (2,551) 5,005 2,454
Acquisition of treasury stock ...................... (334,000) (6,068) (6,068)
Cash dividends - $0.286 per share .................. (29,535) (29,535)
-------------------------------------------------------------------------------
Balance at June 30, 2002 ........................... 103,257,000 $259,586 $ 481,991 $101,051 $30,776 $(12,425) $ 860,979
===============================================================================
Balance at December 31, 2000 ....................... 102,460,000 $198,612 $ 472,828 $ 76,615 $ 1,149 $(18,033) $ 731,171
Comprehensive income:
Net income ..................................... 58,578 58,578
Other - net unrealized gain on securities ---------
(net of $6.2 million tax expense) .............. 11,534 11,534
---------
Total comprehensive income ..................... 70,112
---------
Stock dividend - 5% (4.6 million shares) ........... 9,103 61,377 (70,554) (74)
Stock issued ....................................... 128,000 246 826 1,072
Treasury stock issued .............................. 886,000 488 10,852 11,340
Cash dividends - $0.258 per share .................. (25,862) (25,862)
-------------------------------------------------------------------------------
Balance at June 30, 2001 ........................... 103,474,000 $207,961 $ 535,519 $ 38,777 $12,683 $ (7,181) $ 787,759
===============================================================================
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
5
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
(In thousands)
Six Months Ended
June 30
----------------------------
2002 2001
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ........................................................................... $ 64,937 $ 58,578
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ......................................................... 5,460 6,378
Depreciation and amortization of premises and equipment ........................... 6,314 6,177
Net amortization of investment security premiums .................................. 660 112
Investment security gains ......................................................... (3,370) (6,765)
Net increase in mortgage loans held for sale ...................................... (28,753) (13,854)
Amortization of intangible assets ................................................. 1,153 1,807
Decrease in accrued interest receivable ........................................... 3,327 2,107
Increase in other assets .......................................................... (2,904) (2,528)
(Decrease) increase in accrued interest payable ................................... (7,979) 15
Increase (decrease) in other liabilities .......................................... 1,629 (7)
------------ ------------
Total adjustments .............................................................. (24,463) (6,558)
------------ ------------
Net cash provided by operating activities ...................................... 40,474 52,020
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale ................................. 17,067 79,218
Proceeds from maturities of securities held to maturity .............................. 10,281 28,336
Proceeds from maturities of securities available for sale ............................ 263,605 225,409
Purchase of securities held to maturity .............................................. (1,672) (1,669)
Purchase of securities available for sale ............................................ (477,579) (539,889)
Increase (decrease) in short-term investments ........................................ 3,850 (95,904)
Net decrease (increase) in loans ..................................................... (5,723) 51,510
Net cash paid for Dearden Maguire .................................................... - (14,624)
Net cash paid for Branch Acquisition ................................................. - (28,820)
Purchase of premises and equipment ................................................... (4,633) (17,460)
------------ ------------
Net cash used in investing activities .......................................... (194,804) (313,893)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits .......................................... 146,505 238,243
Net (decrease) increase in time deposits ............................................. (104,444) 236,731
Decrease in long-term debt ........................................................... (7,522) (65,560)
Increase (decrease) in short-term borrowings ......................................... 77,245 (156,404)
Dividends paid ....................................................................... (28,078) (24,458)
Net proceeds from issuance of common stock ........................................... 2,385 12,338
Acquisition of treasury stock ........................................................ (6,068) -
------------ ------------
Net cash provided by financing activities ...................................... 80,023 240,890
------------ ------------
Net Decrease in Cash and Due From Banks .............................................. (74,307) (20,983)
Cash and Due From Banks at Beginning of Period ....................................... 356,539 282,586
------------ ------------
Cash and Due From Banks at End of Period ............................................. $ 282,232 $ 261,603
============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest .......................................................................... $ 88,777 $ 122,515
Income taxes ...................................................................... 25,225 22,441
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
6
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended June 30, 2002
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002.
NOTE B - Net Income Per Share
The Corporation's basic net income per share is calculated as net income divided
by the weighted average number of shares outstanding. For diluted net income per
share, net income is divided by the weighted average number of shares
outstanding plus the incremental number of shares added as a result of
converting common stock equivalents, calculated using the treasury stock method.
The Corporation's common stock equivalents consist solely of outstanding stock
options.
A reconciliation of the weighted average shares outstanding used to calculate
basic net income per share and diluted net income per share follows (in
thousands):
Three months ended Six months ended
June 30 June 30
-------------------------------------------------------------
2002 2001 2002 2001
-------------- ------------- -------------- --------------
Weighted average shares outstanding (basic) ........ 103,190 103,274 103,185 103,077
Impact of common stock equivalents ................. 722 638 714 689
-------------- ------------- -------------- --------------
Weighted average shares outstanding (diluted) ...... 103,912 103,912 103,899 103,766
============== ============= ============== ==============
NOTE C - 5-for-4 Stock Split
The Corporation declared a 5-for-4 stock split on March 19, 2002. The stock
split was paid in the form of a 25% stock dividend on May 20, 2002 to
shareholders of record on April 24, 2002. All share and per-share information
has been restated to reflect the impact of this stock split.
NOTE D - Comprehensive Income
The following table summarizes the reclassification adjustment for realized
security gains (net of taxes) for each of the indicated periods (in thousands):
Six Months Ended
June 30
----------------------------------
2002 2001
---------------- ----------------
Unrealized holding gains arising during period (net of tax) .......... $ 19,997 $ 15,931
Less: reclassification adjustment for realized
gains included in net income ................................... (2,191) (4,397)
---------------- ----------------
Net unrealized gains on securities ................................... $ 17,806 $ 11,534
================ ================
7
NOTE E - New Accounting Standards
Business Combinations and Intangible Assets - In June 2001, the Financial
Accounting Standards Board (FASB) issued Statements of Financial Accounting
Standards Nos. 141, "Business Combinations" (Statement 141) and 142 "Goodwill
and Other Intangible Assets" (Statement 142). Statement 141 requires that the
purchase method of accounting be used for all business combinations and
eliminated the use of pooling of interests for transactions initiated subsequent
to June 30, 2001. Statement 142 eliminated the amortization to expense of
goodwill recorded as a result of such combinations, but requires periodic
evaluation of the goodwill for impairment. Write-downs of the balance, if
necessary, are to be charged to results of operations. Goodwill existing prior
to the issuance of the statement was required to be amortized through December
31, 2001.
The Corporation evaluated its recorded goodwill under Statement 142 as of
January 1, 2002 and concluded that there was no impairment at that date. In
addition, as a result of eliminating amortization of goodwill in 2002, the
Corporation expects to realize a net income benefit of $3.1 million for the
entire year. For the first six months of 2002, the benefit was approximately
$1.6 million, or $0.015 per share (basic and diluted).
In addition, as a result of adopting Statement 142, the Corporation recognized
$848,000 in income from the reversal of negative goodwill balances as of January
1, 2002.
The following table summarizes the Corporation's intangible assets as of June
30, 2002 and 2001 and the amortization expense recognized during the first six
months of 2002 and 2001.
Balance Amortization
-------------------------- --------------------------
Six Months Ended June
- ------------------------------
Type of June 30 30
- ------------------------------ -------------------------- --------------------------
Description Asset Acquisition Date 2002 2001 2002 2001
- ------------------------------ ------------ ---------------------- ------------ ------------ ------------ ------------
(in thousands)
Branch Acquisition (1) June, 2001 $ 29,246 $ 30,949 $ 903 $ 156
Dearden Maguire Goodwill January, 2001 15,108 13,906 - 357
Skylands Comm. Bank Goodwill August, 2000 15,832 16,415 - 648
Central PA Fin. Corp. Goodwill September, 1994 8,808 9,366 - 558
Other (2) Various 3,987 3,490 250 88
------------ ------------ ------------ ------------
$ 72,981 $ 74,126 $ 1,153 $ 1,807
============ ============ ============ ============
(1) Consists of $8.4 million of a core deposit intangible asset and $20.8
million of an unidentifiable intangible asset as defined by Statement of
Financial Accounting Standards No. 72, "Accounting for Certain Acquisitions
of Banking or Thrift Institutions" (Statement 72).
(2) Consists of Statement 72 unidentifiable intangible assets.
The following table adjusts net income and net income per share for the
amortization expense related to Statement 142 goodwill that is no longer being
amortized in 2002 (in thousands, except per-share amounts):
Three Months Ended June 30 Six Months Ended June 30
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income, as reported $ 32,848 $ 30,327 $ 64,937 $ 58,578
Amortization of goodwill - 782 - 1,563
------------ ------------ ------------ ------------
Net income, as adjusted $ 32,848 $ 31,109 $ 64,937 $ 60,141
============ ============ ============ ============
Three Months Ended June 30 Six Months Ended June 30
2002 2001 2002 2001 (1)
------------ ------------ ------------ ------------
Basic net income per share $ 0.32 $ 0.29 $ 0.63 $ 0.57
Amortization of goodwill - 0.01 - 0.02
------------ ---------- ------------ ------------
Basic net income per share, as adjusted $ 0.32 $ 0.30 $ 0.63 $ 0.58
============ ========== ============ ============
Diluted net income per share $ 0.32 $ 0.29 $ 0.63 $ 0.56
Amortization of goodwill - 0.01 - 0.02
------------ ---------- ------------ ------------
Diluted net income per share, as adjusted $ 0.32 $ 0.30 $ 0.63 $ 0.58
============ ========== ============ ============
(1) Basic net income per share, as adjusted, does not sum due to rounding.
NOTE F - Acquisitions
Drovers Bancshares Corporation - On July 1, 2001, the Corporation completed its
acquisition of Drovers Bancshares Corporation (Drovers), an $820 million bank
holding company located in York, Pennsylvania. Under the terms of the merger
agreement, each of the 5.2 million shares of Drovers common stock was exchanged
for 1.628 shares of the Corporation's common stock. In addition, each of the
options to acquire Drovers stock was exchanged for options to purchase the
Corporation's common stock.
8
As a result of the acquisition, Drovers was merged with and into Fulton
Financial Corporation and its wholly owned bank subsidiary, The Drovers &
Mechanics Bank, was merged into Fulton Bank, the Corporation's largest
subsidiary bank.
The acquisition of Drovers was accounted for as a pooling of interests and, as
such, all financial information presented for periods prior to the merger has
been restated to include the accounts and results of operations of Drovers.
Branch Acquisition - On June 8, 2001, the Corporation assumed $315 million of
deposits and purchased $53 million in loans in an acquisition of 18 branches
located in New Jersey, Delaware and Pennsylvania. This transaction was accounted
for as a purchase and the Corporation recorded a core deposit intangible asset
of $9.9 million and an unidentifiable intangible asset of $21.7 million. The
core deposit intangible asset is being amortized on a straight-line basis over
10 years. Since this was a branch acquisition, the unidentifiable intangible
asset does not qualify for the non-amortization provisions of Statement 142 and
will continue to be amortized to expense on a straight-line basis over 25 years.
Dearden, Maguire, Weaver and Barrett, LLC - On January 2, 2001, the Corporation
completed its acquisition of investment management and advisory company Dearden,
Maguire, Weaver and Barrett, LLC (Dearden Maguire).
The acquisition was accounted for as a purchase, and goodwill of approximately
$16.0 million was recorded as the initial purchase price paid in excess of the
fair value of net assets acquired. Additional payments of up to $5.0 million may
become payable upon Dearden Maguire achieving certain revenue goals through
December 31, 2005. The goals and the dates of such payments are specified in the
purchase agreement. Upon payment of any such amounts, goodwill will be
increased.
The goodwill was being amortized to expense on a straight-line basis over 20
years through December 31, 2001. Effective January 1, 2002, the goodwill is no
longer being amortized to expense as required by Statement 142, but will be
evaluated periodically for impairment.
NOTE G - Reclassifications
Certain amounts in the 2001 consolidated financial statements and notes have
been reclassified to conform to the 2002 presentation.
9
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion concerns Fulton Financial Corporation (the Corporation), a
financial holding company incorporated under the laws of the Commonwealth of
Pennsylvania in 1982, and its wholly-owned subsidiaries. This discussion and
analysis should be read in conjunction with the consolidated financial
statements and other financial information presented in this report.
The Corporation has made, and may continue to make, certain forward-looking
statements with respect to its management of net interest income and margin, the
ability to realize gains on equity investments, allowance and provision for loan
losses, expected levels of certain non-interest expenses, the impact of
acquisitions on future results and state income tax expenses. The Corporation
cautions that these forward-looking statements are subject to various
assumptions, risks and uncertainties. Because of the possibility of changes in
these assumptions, risks and uncertainties, actual results could differ
materially from forward-looking statements.
In addition to the factors identified herein, the following could cause actual
results to differ materially from such forward looking statements: pricing
pressures on loan and deposit products, actions of bank and nonbank competitors,
changes in local and national economic conditions, changes in regulatory
requirements and regulatory oversight of the Corporation, actions of the Federal
Reserve Board (FRB), the Corporation's success in merger and acquisition
integration and changes in national, state and local laws.
The Corporation's forward-looking statements are relevant only as of the date on
which such statements are made. By making any forward-looking statements, the
Corporation assumes no duty to update them to reflect new, changing or
unanticipated events or circumstances.
CRITICAL ACCOUNTING POLICIES
The following is a summary of those accounting policies that the Corporation
considers to be most important to the portrayal of its financial condition and
results of operations as they require management's most difficult judgments as a
result of the need to make estimates about the effects of matters that are
inherently uncertain.
Provision and Allowance for Loan Losses - The Corporation periodically reviews
the balance of the allowance for loan losses to assess its adequacy and
increases or decreases its provision based on the results of these reviews. The
Corporation's allowance review procedures consist of the following:
- Identifying large balance loans for individual review under Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan". In general, these consist of large balance
commercial loans and commercial mortgages (Statement 114 loans).
- Calculating the fair value, using observable market prices, discounted cash
flows or the value of the underlying collateral for Statement 114 loans
which are determined to be impaired as defined by Statement 114.
- Classifying all non-impaired large balance loans based on credit risk
ratings and allocating an allowance for loan losses based on appropriate
factors, including recent loss history for similar loans.
- Identifying all smaller balance homogeneous loans for evaluation
collectively under the provisions of Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies". In general, these loans
include residential mortgages, consumer loans, installment loans, smaller
balance commercial loans and mortgages and lease receivables (Statement 5
Loans).
10
- Statement 5 loans are segmented into groups with similar characteristics
and an allowance for loss is allocated to each segment using a factor based
on recent loss history.
- Reviewing the results to determine the appropriate balance of the allowance
for loan losses. This review gives additional consideration to factors such
as the mix of loans in the portfolio, the balance of the allowance relative
to total loans and non-performing assets, trends in the overall risk
profile of the portfolio, trends in delinquencies and non-accrual loans and
local and national economic conditions.
The Corporation has also incorporated the guidance contained in the Securities
and Exchange Commission's Staff Accounting Bulletin No. 102 in assessing the
adequacy of the allowance for loan losses.
The allowance review procedures are performed on a quarterly basis by the
Corporation's Loan Review staff and are applied individually to each of the
Corporation's subsidiary banks. The results are aggregated and reviewed by
Corporation management to conclude as to the adequacy and appropriateness of the
consolidated allowance as of the end of each quarterly period.
Goodwill - With the adoption of Statement 142 on January 1, 2002, the
Corporation discontinued the amortization of goodwill associated with qualifying
acquisitions accounted for as purchases. As of January 1, 2002, and at least
annually thereafter, recorded goodwill is subject to impairment testing to
determine whether write-downs of the recorded balances are necessary.
The Corporation tests for impairment by first allocating its goodwill to defined
reporting units. A fair value is then determined for each reporting unit.
Assuming that the fair values of the reporting units exceed their book values,
no write-down of the recorded goodwill is necessary. If the fair value is less
than the book value, an additional test is necessary to assess the proper
carrying value of the goodwill. As of January 1, 2002, the Corporation
determined that no impairment write-offs were necessary.
Business unit valuation is inherently subjective, with a number of factors based
on assumptions and management judgments. Among these are future growth rates for
the reporting units, discount rates and earnings capitalization rates.
RESULTS OF OPERATIONS
Quarter ended June 30, 2002 versus Quarter ended June 30, 2001
Fulton Financial Corporation's net income for the second quarter of 2002
increased $2.5 million, or 8.3%, in comparison to net income for the second
quarter of 2001. Diluted net income per share increased $0.03, or 10.3%,
compared to 2001. The increase from 2001 resulted from an increase in net
interest income, higher other income and fees and a lower provision for loan
losses, offset by increases in expenses and lower investment securities gains.
Net Interest Income
Two recent events have impacted the Corporation's net interest income. First,
the FRB enacted a series of reductions to short term interest rates, which
resulted in a significant decline in the Corporation's prime lending rate. The
second event was the Corporation's June 2001 acquisition of 18 branches
(Acquired Branches), which included approximately $300 million in deposits and
$50 million in loans.
The rate reduction initially had a negative impact on the Corporation's net
interest income and net interest margin as its assets - particularly floating
rate loans - repriced to lower rates more quickly than its time deposits. In
addition, the deposits assumed from the Acquired Branches replaced some of the
Corporation's short-term borrowings, which were becoming less expensive as rates
declined. While this resulted in further compression of
11
the net interest margin in the short term, this acquisition is expected to be
beneficial from a long-term asset/liability management perspective.
The Corporation's net interest margin reached a low of 4.22% in the third
quarter of 2001 and has since rebounded to reach 4.47% for the second quarter of
2002. This reflects the eventual repricing of time deposits as maturing accounts
were reinvested at lower rates or were held in lower cost demand and savings
deposits. For the second quarter of 2002, net interest income increased $8.1
million, or 11.3%, as compared to the same period in 2001, and the net interest
margin improved to 4.47% from 4.24% a year ago.
The following table provides a comparative average balance sheet and net
interest income analysis for the second quarter of 2002 as compared to the same
period in 2001. All dollar amounts are in thousands.
Quarter Ended June 30, 2002 Quarter Ended June 30, 2001
--------------------------------------- --------------------------------------------
Average Yield/ Average Yield/
ASSETS Balance Interest Rate (1) Balance Interest Rate (1)
- ----------------------------------------- ------------ ------------ ---------- -------------- ------------ -----------
Interest-earning assets:
Loans and leases ....................... $ 5,426,851 $ 94,094 6.95% $ 5,335,239 $ 107,804 8.10%
Taxable investment securities .......... 1,529,697 21,185 5.55 1,191,548 18,181 6.12
Tax-exempt investment securities ....... 232,691 2,491 4.29 216,574 2,372 4.39
Equity securities ...................... 109,048 902 3.32 100,593 1,191 4.75
Short-term investments ................. 16,755 63 1.51 86,885 924 4.27
------------ --------- ------ ----------- ------------ -------
Total interest-earning assets ............ 7,315,042 118,735 6.51% 6,930,839 130,472 7.55%
Noninterest-earning assets:
Cash and due from banks ................ 238,775 234,676
Premises and equipment ................. 124,501 122,462
Other assets ........................... 233,272 202,796
Less: Allowance for loan losses ........ (73,058)
------------
(67,510)
-----------
Total Assets ................... $ 7,838,532 $ 7,423,263
============ ===========
Quarter Ended June 30, 2002 Quarter Ended June 30, 2001
--------------------------------------- --------------------------------------------
Average Yield/ Average Yield/
LIABILITIES AND EQUITY Balance Interest Rate (1) Balance Interest Rate (1)
- ----------------------------------------- ------------ ----------- --------- -------------- ------------ -----------
Interest-bearing liabilities:
Demand deposits ........................ $ 848,303 $ 1,368 0.65% $ 714,923 $ 2,245 1.26%
Savings deposits ....................... 1,529,307 4,293 1.13 1,278,134 6,712 2.11
Time deposits .......................... 2,529,819 25,179 3.99 2,817,844 40,147 5.71
Short-term borrowings .................. 503,366 2,057 1.64 321,331 3,148 3.93
Long-term debt ......................... 457,977 6,432 5.63 502,157 6,883 5.50
------------ --------- ------ ----------- --------- -------
Total interest-bearing liabilities ....... 5,868,772 39,329 2.69% 5,634,389 59,135 4.21%
Noninterest-bearing liabilities:
Demand deposits ........................ 1,042,356 903,838
Other .................................. 97,135 115,483
------------ -----------
Total Liabilities .............. 7,008,263 6,653,710
Shareholders' equity ..................... 830,269 769,553
------------ -----------
Total Liabilities and
Shareholders' Equity ......... $ 7,838,532 $ 7,423,263
============ ===========
Net interest income ...................... $ 79,406 $ 71,337
========= ============
Net yield on interest-earning assets ..... 4.47% 4.24%
====== =======
(1) Yields on tax-exempt securities are not fully taxable equivalent (FTE).
12
The following table summarizes the changes in interest income and expense due to
changes in average balances (volume) and changes in rates.
Three Months Ended June 30
2002 vs. 2001
Increase (decrease) due
To change in
Volume Rate Net
--------------- --------------- ---------------
(in thousands)
Interest income on:
Loans and leases ............................ $ 1,850 $ (15,560) $ (13,710)
Taxable investment securities ............... 6,417 (3,413) 3,004
Tax-exempt investment securities ............ 175 (56) 119
Equity securities ........................... (390) 101 (289)
Short-term investments ...................... (748) (113) (861)
--------------- --------------- ---------------
Total interest-earning assets ............. $ 7,304 $ (19,041) $ (11,737)
=============== =============== ===============
Interest expense on:
Demand deposits ............................. $ 416 $ (1,293) $ (877)
Savings deposits ............................ 1,319 (3,738) (2,419)
Time deposits ............................... (4,095) (10,873) (14,968)
Short-term borrowings ....................... 1,782 (2,873) (1,091)
Long-term debt .............................. (615) 164 (451)
--------------- --------------- ---------------
Total interest-bearing liabilities ........ $ (1,193) $ (18,613) $ (19,806)
=============== =============== ===============
Interest income decreased $11.7 million, or 9.0%, mainly as a result of the 104
basis point decrease in rates, which accounted for a $19.0 million decline in
interest income. As previously discussed, average yields decreased from the
second quarter of 2001 due to a general decrease in interest rates as a result
of the actions of the FRB. The Corporation's prime lending rate averaged 7.26%
during the second quarter of 2001, dropping to an average of 4.75% during the
same period in 2002. The decrease in interest income as a result of rate changes
was partially offset by a $7.3 million increase due to average balance growth,
primarily in investment securities.
The Corporation's average loan portfolio increased by $91.6 million, or 1.7%.
Increases in commercial mortgages ($105.7 million, or 6.7%) and commercial loans
($142.0 million, or 10.0%) were almost entirely offset by decreases in consumer
loans ($18.5 million, or 1.4%) and residential mortgages ($141.1 million, or
14.8%). Consumer loans decreased mainly in direct and indirect automobile loans
($108.0 million or 20.1%) due to the Corporation electing not to compete with
manufacturer-sponsored loan rate incentives. These decreases were offset in part
by increases in home equity loans ($81.5 million, or 13.3%), as consumers took
advantage of the lower rates available on these loans. The residential mortgage
portfolio continued to decline as lower mortgage rates fueled refinance
activity. In addition, in May 2001 the Corporation sold approximately $100
million of existing residential mortgages for balance sheet management purposes.
Average investment securities increased $369.0 million, or 24.2%, as a result of
deposit growth in excess of net increases in loans. The deposit growth was
generated mainly by the Acquired Branches, which contributed $250 million to the
net increase in average balances. The Corporation used these funds to purchase
investment securities, particularly mortgage-backed securities, which grew by
$350.6 million, or 34.3%.
Interest expense decreased $19.8 million, or 33.5%. This resulted from a
combination of declining interest rates, and a shift in the composition of
interest-bearing liabilities from higher rate time deposits and other
interest-bearing liabilities to lower rate demand and savings deposits. Interest
bearing demand and savings deposits increased $384.6 million, or 19.3%, while
all other interest bearing liabilities decreased by $150.2 million, or 4.1%. The
13
Acquired Branches contributed $219 million to the increase in interest-bearing
deposits. The $234.4 million, or 4.2%, increase in average interest-bearing
liabilities actually resulted in a $1.2 million decrease in interest expense,
due to the change in the composition of these liabilities. A 152 basis point
decline in the average cost of interest-bearing funds resulted in a $18.6
million decrease in interest expense.
The average yield on earning assets decreased 104 basis points (a 13.8% decline)
during the period while the cost of interest-bearing liabilities decreased 152
basis points (a 36.1% decline). This resulted in a 23 basis point increase in
net interest margin compared to the same period in 2001. The Corporation
continues to manage its asset/liability position and interest rate risk through
the methods discussed in the "Market Risk" section of this document. Management
believes that these procedures have been effective in managing the net interest
margin during this period of decreasing rates.
Provision and Allowance for Loan Losses
The following table summarizes loans outstanding (including unearned income) as
of the dates shown:
June 30 December 31 June 30
2002 2001 2001
----------------- -------------- --------------
(in thousands)
Commercial, financial and agricultural .. $ 1,551,856 $ 1,495,380 $ 1,439,471
Real estate - construction .............. 241,769 267,627 256,607
Real estate - residential mortgage ...... 1,403,604 1,468,799 1,444,840
Real estate - commercial mortgage ....... 1,517,856 1,428,066 1,390,082
Consumer ................................ 585,288 626,985 715,958
Leasing and other ....................... 73,839 86,163 72,074
----------------- -------------- --------------
Total Loans .......................... $ 5,374,212 $ 5,373,020 $ 5,319,032
================= ============== ==============
14
The following table summarizes the activity in the Corporation's allowance for
loan losses:
Three Months Ended
June 30
-------------------------------
2002 2001
-------------- -------------
(dollars in thousands)
Loans outstanding at end of period (net of unearned) ........... $ 5,374,212 $ 5,319,032
============= =============
Daily average balance of loans and leases ...................... 5,426,851 5,335,239
============= =============
Balance of allowance for loan losses
at beginning of period .................................... $ 72,083 $ 66,029
Loans charged-off:
Commercial, financial and agricultural ..................... 1,548 2,497
Real estate - mortgage ..................................... 156 158
Consumer ................................................... 1,199 1,706
Leasing and other .......................................... 132 179
------------- -------------
Total loans charged-off .................................... 3,035 4,540
------------- -------------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural ..................... 100 229
Real estate - mortgage ..................................... 191 93
Consumer ................................................... 740 774
Leasing and other .......................................... 42 34
------------- -------------
Total recoveries ........................................... 1,073 1,130
------------- -------------
Net loans charged-off .......................................... 1,962 3,410
Allowance purchased (Acquired Branches) ........................ - 2,085
Provision for loan losses ...................................... 2,680 3,199
------------- -------------
Balance at end of period ....................................... $ 72,801 $ 67,903
============= =============
Net charge-offs to average loans (annualized) .................. 0.14% 0.26%
============= =============
Allowance for loan losses to loans outstanding ................. 1.35% 1.28%
============= =============
The following table summarizes the Corporation's non-performing assets as of the
indicated dates.
June 30 Dec. 31 June 30
(Dollars in thousands) 2002 2001 2001
--------------- -------------- ------------
Nonaccrual loans ................................... $ 20,983 $ 22,794 $ 22,553
Loans 90 days past due and accruing ................ 10,588 9,368 9,992
Other real estate owned (OREO) ..................... 1,373 1,817 1,809
--------------- -------------- ------------
Total non-performing assets ........................ $ 32,944 $ 33,979 $ 34,354
=============== ============== ============
Non-performing loans/Total loans ................... 0.59% 0.60% 0.61%
Non-performing assets/Total assets ................. 0.42% 0.44% 0.45%
Non-performing assets/Total loans and OREO ......... 0.61% 0.65% 0.65%
Allowance/Non-performing loans ..................... 231% 223% 209%
15
As a percentage of total loans, commercial loans and mortgages increased to
57.1% of the total portfolio at June 30, 2002 from 54.4% at June 30, 2001. This
shift reflects increases in these loan types as well as a decrease in
residential mortgages from 27.3% in 2001 to 26.1% in 2002 resulting from
refinance activity and sales of residential mortgages. This change in the loan
mix to higher risk commercial loans is considered in the Corporation's
assessment of the adequacy of its allowance for loan losses.
For the second quarter of 2002, net charge-offs totaled $2.0 million, or 0.14%,
of average loans on an annualized basis. This was a $1.4 million, or 42.5%,
improvement from the $3.4 million, or 0.26%, in net charge-offs for the second
quarter of 2001.
Non-performing assets decreased slightly to $32.9 million, or 0.42% of total
assets, at June 30, 2002, from $34.4 million, or 0.45% of total assets, at June
30, 2001. The total provision for loan losses decreased $519,000, or 16.2%, to
$2.7 million in 2002. This decrease was consistent with the reduction in net
charge-offs and during the period. See "Critical Accounting Policies" for a
summary of the Corporation's procedures for assessing the adequacy of the
allowance for loan losses.
The Corporation makes loans to real estate developers in the normal course of
business. From time to time, various economic and geographic conditions may
impact the viability of a developers' construction projects. The Corporation has
$14.5 million in loans outstanding to a developer for both commercial and
residential projects in a geographic area that has been impacted by drought
conditions. Because of drought conditions, the issuance of water and sewer
permits has been delayed. Because of these delays, the projects have not been
completed as originally anticipated and the developer's operations have been
negatively impacted. The developer is currently actively pursuing resolution of
the issues.
As of June 30, 2002, the loans were not classified as non-performing. However,
as of the date of this report, these loans are 30 days past due. The Corporation
continues to closely monitor this lending relationship. Depending on future
developments, some of which are beyond the control of the developer, the loans
may be classified as non-performing in the future.
Other Income
Other income for the quarter ended June 30, 2002 was $26.7 million, an increase
of $360,000, or 1.4%, over the comparable period in 2001. Excluding investment
security gains, which decreased from $3.9 million in 2001 to $2.0 million in
2002, other income increased $2.2 million, or 10.0%.
The most significant increase, in terms of percentage growth, was realized in
service charges on deposit accounts, which increased $1.6 million, or 20.5%, to
$9.3 million. This increase was due to the increase in deposits from the
Acquired Branches as well as strong growth in transaction accounts. This
increase was offset in part by a $633,000, or 18.5%, decrease in mortgage
banking income. In general, refinance volumes have remained strong and continue
to generate healthy gains for the Corporation. However, 2001 included a one-time
gain on the sale of existing mortgages, which contributed $1.0 million in
additional gains. Excluding this gain, mortgage banking income increased
$367,000, or 15.2%. The Corporation's policy is to sell all qualifying fixed
rate mortgage loans it originates in order to limit interest rate risk.
Investment management and trust services income increased $844,000, or 12.5%,
mainly due to brokerage services. Other service charges and fees also realized a
moderate increase of $278,000, or 7.0%, reflecting the Corporation's efforts to
increase non-interest revenues.
Other Expenses
Total other expenses for the second quarter of 2002 of $56.6 million increased
$4.8 million, or 9.3%, from 2001. The increase was mainly due to a $3.9
million, or 13.6%, increase in salaries and benefits. In addition, data
16
processing increased $103,000, or 3.6%, and other expenses increased $2.3
million, or 18.9%. Partially offsetting these increases was a decrease in
intangible amortization of $404,000, or 41.2%.
The increase in salaries and benefits is attributable to the continued growth of
the Corporation, both internally and through the acquisition of additional
branches and the resulting expansion of its employee base. In addition, normal
merit increases and additional overtime and part-time employees to assist in
recent systems conversions also contributed to the increase. The employee
benefits component of the expense increased $1.3 million, or 27.9%, due to the
increase in the number of employees as well as rising health plan expenses and
an increase in retirement plan expense.
Net occupancy expense had a moderate increase of $166,000, or 4.1%, over the
same period in 2001, while equipment expenses were down by $404,000, or 12.9%.
The net occupancy expense increase resulted mainly from depreciation expense and
other occupancy costs related to the Corporation's new office building at its
main office location. Equipment expense decreased due to operational
efficiencies realized from the acquisition of Drovers in July, 2001.
Intangible amortization decreased $404,000, or 41.2%. As a result of adopting
Statement 142, goodwill amortization decreased by $782,000 as compared to 2001.
Partially offsetting this decrease was a $294,000 increase in intangible
amortization as a result of unidentifiable intangible assets and core deposit
intangible assets recorded in connection with the Acquired Branches (See Note E
to the Consolidated Financial Statements).
The 3.6% increase in data processing expense was due to an increase in the
number of accounts and customers being serviced. Other expense increased $1.4
million, or 11.8%, to $13.5 million in 2002. This was due to normal growth and
additional advertising costs related to a significant branding campaign.
Income Taxes
Income tax expense for the second quarter of 2002 was $14.0 million, a $1.6
million, or 13.1%, increase from $12.4 million in 2001. The Corporation's
effective tax rate was approximately 29.9% in 2002 as compared to 29.0% in 2001.
The effective rate is lower than the federal statutory rate of 35% due mainly to
investments in tax-free municipal securities and federal tax credits from
investments in low and moderate income housing partnerships.
In July, 2002, the State of New Jersey enacted tax legislation that could result
in up to $1.5 million of additional state income tax for the Corporation as a
result of its operations in that state. Any additional tax liability will be
recognized over the remainder of 2002.
Six Months ended June 30, 2002 versus Six Months ended June 30, 2001
Fulton Financial Corporation's net income for the first six months of 2002
increased $6.4 million, or 10.9%, in comparison to net income for the same
period in 2001. Diluted net income per share increased $0.07, or 12.5%, compared
to 2001. Net income for the first six months of 2002 of $64.9 million, or $0.63
per share (basic and diluted) represented an annualized return on average assets
(ROA) of 1.69% and an annualized return on average equity (ROE) of 15.93%. This
compares to 2001 net income of $58.6 million, or $0.57 per share (basic) and
$0.56 per share (diluted), for a 1.60% ROA and a 15.63% ROE.
Net Interest Income
For the first six months of 2002, net interest income increased $14.4 million,
or 10.2%. This increase is mainly due to the impact of the FRB rate reductions
and the Acquired Branches. The following table provides a comparative average
balance sheet and net interest income analysis for the first six months of 2002
as compared to the same period in 2001. All dollar amounts are in thousands.
17
Six Months Ended June 30, 2002 Six Months Ended June 30, 2001
----------------------------------------- -----------------------------------------
Average Yield/ Average Yield/
ASSETS Balance Interest Rate (1) Balance Interest Rate (1)
- ------------------------------------------- ------------ ------------ ---------- ----------- ------------ -----------
Interest-earning assets:
Loans and leases ........................ $ 5,408,413 $ 188,576 7.03% $5,356,480 $ 219,534 8.26%
Taxable investment securities ........... 1,464,280 40,814 5.62 1,144,959 35,445 6.24
Tax-exempt investment securities ........ 226,217 4,872 4.34 217,663 4,767 4.42
Equity securities ....................... 106,050 1,956 3.72 103,770 2,686 5.22
Short-term investments .................. 15,371 139 1.82 56,076 1,293 4.65
------------ ------------ ---------- ----------- ------------ -----------
Total interest-earning assets ............. 7,220,331 236,357 6.60 6,878,948 263,725 7.73
Noninterest-earning assets:
Cash and due from banks ................. 241,845 235,608
Premises and equipment .................. 123,863 120,767
Other assets ............................ 230,316 195,212
Less: Allowance for loan losses ......... (72,751) (67,111)
------------ -----------
Total Assets .................... $ 7,743,604 $7,363,424
============ ===========
Interest-bearing liabilities:
Demand deposits ......................... $ 834,698 $ 2,643 0.64% $ 691,796 $ 4,653 1.36%
Savings deposits ........................ 1,492,423 8,407 1.14 1,248,461 14,667 2.37
Time deposits ........................... 2,567,157 53,364 4.19 2,778,457 80,207 5.82
Short-term borrowings ................... 444,657 3,570 1.62 381,816 9,002 4.75
Long-term debt .......................... 460,825 12,814 5.61 512,508 14,001 5.51
------------ ------------ ---------- ----------- ------------ -----------
Total interest-bearing liabilities ........ 5,799,760 80,798 2.81 5,613,038 122,530 4.40
Noninterest-bearing liabilities:
Demand deposits ......................... 1,021,418 878,117
Other ................................... 100,316 116,525
------------ -----------
Total Liabilities ............... 6,921,494 6,607,680
Shareholders' equity ...................... 822,110 755,744
------------ -----------
Total Liabilities and
Shareholders' Equity .......... $ 7,743,604 $7,363,424
============ ===========
Net interest income ....................... $ 155,559 $ 141,195
============ ============
Net interest margin (FTE) ................. 4.45% 4.24%
========== ===========
(1) Yields on tax-exempt securities are not fully taxable equivalent (FTE).
18
The following table summarizes the changes in interest income and expense due to
changes in average balances (volume) and changes in rates.
Six Months Ended
2002 vs. 2001
Increase (decrease) due
To change in
--------------------------------------------------
Volume Rate Net
--------------- --------------- ---------------
(in thousands)
Interest income on:
Loans and leases ...................... $ 2,120 $ (33,078) $ (30,958)
Taxable investment securities ......... 12,798 (7,429) 5,369
Tax-exempt investment securities ...... 172 (67) 105
Equity securities ..................... 59 (789) (730)
Short-term investments ................ (940) (214) (1,154)
--------------- --------------- ---------------
Total interest-earning assets ....... $ 14,209 $ (41,577) $ (27,368)
=============== =============== ===============
Interest expense on:
Demand deposits ....................... $ 967 $ (2,977) $ (2,010)
Savings deposits ...................... 2,856 (9,116) (6,260)
Time deposits ......................... (6,099) (20,744) (26,843)
Short-term borrowings ................. 1,477 (6,909) (5,432)
Long-term debt ........................ (1,407) 220 (1,187)
--------------- --------------- ---------------
Total interest-bearing liabilities .. $ (2,206) $ (39,526) $ (41,732)
=============== =============== ===============
Interest income decreased $27.4 million, or 10.4%, mainly as a result of the 113
basis point decrease in rates, which caused a $41.6 million decline in interest
income. This was offset by a $14.2 million increase resulting from growth in
average balances, particularly investment securities. The Corporation's prime
lending rate averaged 7.90% during the first six months of 2001, dropping to an
average of 4.75% during the same period in 2002.
The Corporation's average loan portfolio grew by approximately $51.9 million, or
1.0%. As was the case with the second quarter, growth in commercial mortgages
($98.1 million, or 6.3%) and commercial loans ($119.3 million, or 8.4%) was
offset by declines in consumer loans ($21.9 million, or 1.7%) and residential
mortgages ($149.4 million, or 15.3%). The residential mortgage portfolio
continued to decline as lower mortgage rates fueled refinance activity. In
addition, in May 2001, the Corporation sold approximately $100 million of
existing residential mortgages for balance sheet management purposes.
Interest expense decreased $41.7 million, or 34.1%, due to a combination of
declining rates, and a shift in the composition of deposit liabilities from
higher cost time deposits to lower rate demand and savings deposits.
Interest-bearing demand and savings deposits increased $386.9, million or 19.9%,
while all other interest-bearing liabilities decreased by $200.1 million, or
5.4%. The Acquired Branches contributed $231.0 million to the increase in
interest-bearing deposits. The $186.7 million, or 3.3%, increase in average
interest-bearing liabilities actually resulted in a $2.2 million decrease in
interest expense, due to the change in the composition of these liabilities. A
159 basis point decline in the average cost of interest-bearing funds resulted
in a $39.5 million decrease in interest expense.
The average yield on earning assets decreased 113 basis points (a 25.7% decline)
during the period while the cost of interest-bearing liabilities decreased 159
basis points (a 36.1% decline). This resulted in a 21 basis point increase in
net interest margin compared to the same period in 2001. See the "Market Risk"
section of this document for a discussion of procedures for managing the
Corporation's net interest income and net interest margin.
19
Provision for Loan Losses
The following table summarizes the activity in the Corporation's allowance for
loan losses:
Six Months Ended
June 30
---------------------------------------
2002 2001
------------------ ------------------
(dollars in thousands)
Loans outstanding at end of period (net of unearned)...... $ 5,374,212 $ 5,319,032
================== ==================
Daily average balance of loans and leases................. $ 5,408,413 $ 5,356,480
================== ==================
Balance of allowance for loan losses
at beginning of period............................... $ 71,872 $ 65,640
Loans charged-off:
Commercial, financial and agricultural................ 2,353 4,218
Real estate - mortgage................................ 966 421
Consumer.............................................. 2,923 3,510
Leasing and other..................................... 321 332
------------------ ------------------
Total loans charged-off............................... 6,563 8,481
------------------ ------------------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural................ 478 371
Real estate - mortgage................................ 229 282
Consumer.............................................. 1,282 1,589
Leasing and other..................................... 43 39
------------------ ------------------
Total recoveries...................................... 2,032 2,281
------------------ ------------------
Net loans charged-off..................................... 4,531 6,200
Allowance purchased (Acquired Branches)................... - 2,085
Provision for loan losses................................. 5,460 6,378
------------------ ------------------
Balance at end of period.................................. $ 72,801 $ 67,903
================== ==================
Net charge-offs to average loans (annualized)............. 0.17% 0.23%
================== ==================
Allowance for loan losses to loans outstanding............ 1.35% 1.28%
================== ==================
Refer to the "Critical Accounting Policies" section of Management's Discussion
of the second quarter results of operations for a summary of the Corporation's
process for establishing the provision and allowance for loan losses.
As a percentage of total loans, commercial loans and mortgages increased to
57.1% of the total portfolio at June 30, 2002 from 54.4% at June 30, 2001. This
shift reflects increases in these loan types as well as a decrease in
residential mortgages from 27.3% in 2001 to 26.1% in 2002 resulting from
refinance activity and sales of residential mortgages. This change in the loan
mix to higher risk commercial loans is considered in the Corporation's
assessment of the adequacy of its allowance for loan losses.
For the first six months of 2002, net charge-offs totaled $4.5 million, or
0.17%, of average loans on an annualized basis. This compares to $6.2 million,
or 0.23%, for the first half of 2001 and 0.20% for all of 2001. Non-performing
loans, including loans 90 days past due and still accruing, to total loans were
0.59% at June 30, 2002 as compared to 0.60% at December 31, 2001 and 0.61% at
June 30, 2001.
20
The provision for loan losses of $5.5 million for the first half of 2002
decreased $918,000, or 14.4%, in comparison to 2001. This decrease was
consistent with the reduction in net charge-offs during the period.
The Corporation makes loans to real estate developers in the normal course of
business. From time to time, various economic and geographic conditions may
impact the viability of a developers' construction projects. The Corporation has
$14.5 million in loans outstanding to a developer for both commercial and
residential projects in a geographic area that has been impacted by drought
conditions. Because of drought conditions, the issuance of water and sewer
permits has been delayed. Because of these delays, the projects have not been
completed as originally anticipated and the developer's operations have been
negatively impacted. The developer is currently actively pursuing resolution of
the issues.
As of June 30, 2002, the loans were not classified as non-performing. However,
as of the date of this report, these loans are 30 days past due. The Corporation
continues to closely monitor this lending relationship. Depending on future
developments, some of which are beyond the control of the developer, the loans
may be classified as non-performing in the future.
Other Income
Other income for the six months ended June 30, 2002 was $53.4 million. This was
an increase of $3.9 million, or 7.9%, over the comparable period in 2001.
Excluding investment security gains, which decreased $3.4 million, or 50.2%, to
$3.4 million in 2002, other income increased $7.3 million, or 17.1%.
The most significant increase, $3.4 million, or 23.1%, was realized in service
charges on deposit accounts. This increase was due to the increase in deposits
from the Acquired Branches as well as strong growth in transaction accounts.
Increases were also realized in investment management and trust services ($1.4
million, or 11.1%), mortgage banking income ($722,000, or 13.5%) and other
service charges and fees ($598,000, or 7.7%). These increases were mainly due to
growth in these areas of the Corporation. Other income increased $1.1 million to
$2.8 million, mainly as a result of the reversal of $848,000 of negative
goodwill.
Other Expenses
Total other expenses for the first six months of 2002 were $111.5 million, a
$10.0 million, or 9.8%, increase over the same period in 2001. The largest
increase was in salaries and benefits, which increased $6.8 million, or 11.9%.
In addition, occupancy expense increased $248,000, or 3.0%, data processing
increased $475,000, or 8.4% and other expense increased $3.7 million or 16.2%.
These increases were partially offset by decreases in equipment expense of
$556,000, or 9.2%, and intangible amortization of $654,000, or 36.2%.
Salaries and employee benefits increased $6.8 million, or 11.9%, in comparison
to the first half of 2001 ($6.6 million, or 13.2%). Of this increase, $1.8
million was attributable to employee benefits, which rose 19.7% due to increases
in the cost of health insurance. Salary expense increased $5.0 million, or
10.4%, due to growth in the employee base and normal merit increases.
Net occupancy expenses increased $248,000, or 3.0%, while equipment expenses
were down by $556,000, or 9.2%. The net occupancy expense increase resulted from
depreciation expense and other occupancy costs related to the Corporation's new
office building at it's main office location. Equipment expense decreased due to
operational efficiencies realized from the acquisition of Drovers in July 2001.
Intangible amortization decreased $654,000 or 36.2%. The $1.6 million decrease
attributable to the non-amortization of goodwill in accordance with Statement
142 was offset by a $747,000 increase in intangible amortization related to the
Acquired Branches.
Data processing expense increased $475,000, or 8.4%, over the same period in
2001. This was due to the increase in the number of accounts and customers being
serviced. Other expense increased $3.7 million, or 16.2%, to $26.5 million in
2002 as compared to $22.8 million in 2001. This was mainly due to a $1.1
million, or 41.9% increase in advertising, for a significant branding campaign.
21
Income Taxes
Income tax expense for the six months ended June 30, 2002 was $27.0 million, a
$2.9 million, or 11.8%, increase from $24.1 million in 2001. The Corporation's
effective tax rate was approximately 29.4% in 2002 as compared to 29.2% in 2001.
The effective rate is lower than the federal statutory rate of 35% due mainly to
investments in tax-free municipal securities and federal tax credits from
investments in low and moderate income housing partnerships.
In July, 2002, the State of New Jersey enacted tax legislation that could result
in up to $1.5 million of additional state income tax for the Corporation as a
result of its operations in that state. Any additional tax liability will be
recognized over the remainder of 2002.
FINANCIAL CONDITION
Total assets of the Corporation at June 30, 2002 increased $156 million, or
2.0%, from December 31, 2001 to $7.9 billion. Loans were essentially flat,
registering only a $1.2 million increase to $5.4 billion at June 30, 2002. While
commercial loans and commercial mortgages increased $146 million, or 1.9%,
residential mortgages continued to decrease ($91.0 million, or 5.2%) as a result
of refinance activity. In addition, consumer loans and leases declined $41.7
million, or 6.7%, mainly in indirect automobile financing.
Cash and due from banks decreased $74.3 million, or 20.8%, from December 31,
2001. The decrease was the result of a sharp increase in demand deposit activity
at the end of December, 2001, resulting in an unusually high Federal Reserve
Bank balance as of December 31, 2001. Investment securities increased $218
million, or 12.7%, as securities purchases of $479.3 million exceeded proceeds
from maturities and sales of $291.1 million. Premises and equipment decreased
$1.7 million, or 1.3%, due to normal depreciation expense and the sale of
certain branch properties.
Deposits increased $42.1 million, or 0.7%, from December 31, 2001. Despite the
small increase, the overall composition of deposits changed significantly
compared to the previous period. Demand and savings deposits increased $37.3
million and $109.2 million, respectively, while time deposits decreased by
$104.4 million. This reflects a general mood in the financial community that
interest rates will start to rise again in the near future, leaving consumers
reluctant to reinvest maturing time deposits at the current lower rates.
Due to the increase in loans exceeding the increase in deposits, the
Corporation's short-term borrowing increased during the first half of 2002.
Federal funds purchased increased $69 million, or 65.7%, while customer
repurchase agreements increased $8.6 million, or 3.0%. The Corporation did
reduce its long-term debt by $5.5 million, or 1.2%, as a result of maturing
Federal Home Loan Bank advances.
The Corporation repurchased $2.0 million of its corporation-obligated mandatory
redeemable capital securities of subsidiary trust during the first half of 2002.
This reduced the balance of the 9.25% financing instrument to $5.5 million.
Capital Resources
Total shareholders' equity increased $49.5 million, or 6.1%, during the first
six months of 2002. This increase was due to net income of $64.9 million and a
$17.8 million improvement in the net unrealized gain on investment securities
and $2.4 million in issuances of stock. Cash dividends to shareholders of $29.5
million and $6.1 million of stock repurchases offset these increases.
Current capital guidelines measure the adequacy of a bank holding company's
capital by taking into consideration the differences in risk associated with
holding various types of assets as well as exposure to off-balance sheet
22
commitments. The guidelines call for a minimum risk-based Tier I capital
percentage of 4.0% and a minimum risk-based total capital percentage of 8.0%.
Tier I capital includes common shareholders' equity less goodwill and
non-qualified intangible assets. Total capital includes all Tier I capital
components plus the allowance for loan losses.
The Corporation is also subject to a "leverage capital" requirement, which
compares capital (using the definition of Tier I capital) to total balance sheet
assets and is intended to supplement the risk based capital ratios in measuring
capital adequacy. The minimum acceptable leverage capital ratio is 3.0% for
institutions such as the Corporation which are highly-rated in terms of safety
and soundness. Other institutions are expected to maintain capital levels at
least one or two percent above the minimum.
As of June 30, 2002, the Corporation and each of its subsidiaries met the
minimum capital requirements. In addition, the Corporation and each of its
subsidiaries' capital ratios exceeded the amounts required to be considered
"well-capitalized" as defined in the regulations.
On January 15, 2002, the Board of Directors approved a plan to repurchase up to
3.1 million shares of the Corporation's common stock through June 30, 2002 (the
plan was extended to December 31, 2002 at the June, 2002 meeting of the Board of
Directors). Stock repurchased will be added to the Corporate treasury and will
be used for general corporate purposes. Through June 30, 2002, the Corporation
had repurchased 334,000 shares under this plan.
MARKET RISK
Market risk is the exposure to economic loss that arises from changes in the
values of certain financial instruments. The types of market risk exposures
generally faced by banking entities include interest rate risk, equity market
price risk, foreign currency risk and commodity price risk. Due to the nature of
its operations, only equity market price risk and interest rate risk are
significant to the Corporation.
Equity Market Price Risk
Equity market price risk is the risk that changes in the values of equity
investments could have a material impact on the financial position or results of
operations of the Corporation. The Corporation's equity investments consist of
common stocks of publicly traded financial institutions (cost basis of
approximately $68.1 million) and U.S. Government agency stock (cost basis of
approximately $ 40.1 million). The Corporation's financial institutions stock
portfolio had net unrealized gains of approximately $9.6 million at June 30,
2002.
Although the book value of equity investments accounted for only 1.4% of the
Corporation's total assets, the unrealized gains on the portfolio represent a
potential source of revenue. The Corporation has a history of periodically
realizing gains from this portfolio and, if values were to decline
significantly, this revenue source could be lost.
The Corporation manages its equity market price risk by investing primarily in
regional financial institutions. Management continuously monitors the fair value
of its equity investments and evaluates current market conditions and operating
results of the companies. Periodic sale and purchase decisions are made based on
this monitoring process. None of the Corporation's equity securities are
classified as trading. Future cash flows from these investments are not provided
in the "Interest Rate Sensitivity" table on the following page since none have
maturity dates.
23
Interest Rate Risk
Interest rate risk creates exposure in two primary areas. First, changes in
rates have an impact on the Corporation's liquidity position and could affect
its ability to meet obligations and continue to grow. Second, movements in
interest rates can create fluctuations in the Corporation's net income and
changes in the economic value of its equity.
The Corporation employs various management techniques to minimize its exposure
to interest rate risk. An Asset/Liability Management Committee (ALCO),
consisting of key financial and senior management personnel, meets on a weekly
basis. The ALCO is responsible for reviewing the interest rate sensitivity
position of the Corporation, approving asset and liability management policies,
and overseeing the formulation and implementation of strategies regarding
balance sheet positions and earnings. The primary goal of asset/liability
management is to address the liquidity and net income risks noted above.
From a liquidity standpoint, the Corporation must maintain a sufficient level of
liquid assets to meet the ongoing cash flow requirements of customers, who, as
depositors, may want to withdraw funds or who, as borrowers, need credit
availability. Liquidity sources are found on both sides of the balance sheet.
Liquidity is provided on a continuous basis through scheduled and unscheduled
principal reductions and interest payments on outstanding loans and investments.
Liquidity is also provided through the availability of deposits and borrowings.
The following table provides information about the Corporation's interest rate
sensitive financial instruments. The table provides expected cash flows and
weighted average rates for each significant interest rate sensitive financial
instrument, by expected maturity period. None of the Corporation's financial
instruments are classified as trading.
24
FULTON FINANCIAL CORPORATION
INTEREST RATE SENSITIVITY
(dollars in thousands) Expected Maturity Period Estimated
----------------------------------------------------------------------
*1 Year 1-2 Years 2-3 Years 3-4 Years 4-5 Years **5 Years Total Fair Value
----------- ----------- --------- --------- --------- ----------- ----------- ----------
Fixed rate loans (1) $1,000,396 $ 686,814 $488,321 $319,490 $253,225 $ 514,756 $3,263,002 $3,384,329
Average rate (1) 7.22% 7.57% 7.58% 7.58% 7.50% 7.37% 7.43%
Floating rate loans (2) 733,671 237,966 201,605 160,316 132,269 645,383 2,111,210 2,099,503
Average rate 5.82% 6.33% 6.28% 6.40% 5.66% 5.21% 5.77%
Fixed rate investments (3) 490,640 391,878 209,779 149,398 117,467 391,790 1,750,952 1,788,388
Average rate 5.68% 5.91% 5.81% 5.74% 5.78% 5.13% 5.64%
Floating rate investments (3) - 1,000 - - - 14,879 15,879 16,143
Average rate - 7.58% - - - 4.54% 4.73%
Other interest-earning assets 50,245 - - - - - 50,245 50,245
Average rate 6.18% - - - - - 6.18%
-----------------------------------------------------------------------------------------------
Total $2,274,952 $1,317,658 $899,705 $629,204 $502,961 $1,566,808 $7,191,288 $7,338,608
Average rate 6.41% 6.85% 6.88% 6.84% 6.61% 5.89% 6.49%
-----------------------------------------------------------------------------------------------
Fixed rate deposits (4) $1,463,305 $ 447,890 $272,601 $ 47,451 $151,846 $ 38,424 $2,421,517 $2,524,183
Average rate 3.61% 3.89% 4.60% 5.16% 4.94% 5.13% 3.91%
Floating rate deposits (5) 994,767 164,799 164,799 164,799 164,799 1,953,385 3,607,348 3,549,517
Average rate 1.82% 0.48% 0.48% 0.48% 0.48% 0.35% 0.78%
Fixed rate borrowings (6) 10,960 37,730 5,243 78,257 272 309,149 441,611 449,438
Average rate 4.09% 5.35% 6.37% 6.29% 5.44% 5.36% 5.51%
Floating rate borrowings (7) 482,249 - 5,000 - - - 487,249 490,601
Average rate 1.65% - 2.23% - - - 1.66%
-----------------------------------------------------------------------------------------------
Total $2,951,281 650,419 $447,643 $290,507 $316,917 $2,300,958 $6,957,725 $7,013,739
Average rate 2.69% 3.11% 3.08% 2.81% 2.62% 1.10% 2.23%
-----------------------------------------------------------------------------------------------
Assumptions:
1) Amounts are based on contractual payments and maturities, adjusted for
expected prepayments.
2) Average rates are shown on a fully taxable equivalent basis using an
effective tax rate of 35%.
3) Amounts are based on contractual maturities, adjusted for expected
prepayments on mortgage-backed securities, and expected calls on other
securities.
4) Amounts are based on contractual maturities of time deposits.
5) Money market, NOW and savings accounts are spread based on history of
deposit flows.
6) Amounts are based on contractual maturities of Federal Home Loan Bank
advances.
7) Amounts are Federal funds purchased and securities sold under agreements
to repurchase, which generally mature in less than 90 days.
* denotes less than
** denotes greater than
25
The Corporation uses three complementary methods to measure and manage interest
rate risk. They are static gap analysis, simulation of earnings, and estimates
of economic value of equity. Using these measurements in tandem provides a
reasonably comprehensive summary of the magnitude of interest rate risk in the
Corporation, level of risk as time evolves, and exposure to changes in interest
rate relationships.
Static gap provides a measurement of repricing risk in the Corporation's balance
sheet as of a point in time. This measurement is accomplished through
stratification of the Corporation's assets and liabilities into predetermined
repricing periods. The assets and liabilities in each of these periods are
summed and compared for mismatches within that maturity segment. Core deposits
having noncontractual maturities are placed into repricing periods based upon
historical balance performance. Repricing for mortgage loans held and for
mortgage-backed securities includes the effect of expected cash flows. Estimated
prepayment effects are applied to these balances based upon industry projections
for prepayment speeds. The Corporation's policy limits the cumulative 6-month
gap to plus or minus 15% of total earning assets. The cumulative 6-month gap as
of June 30, 2002 was 1.13.
Simulation of net interest income and of net income is performed for the next
twelve-month period. A variety of interest rate scenarios is used to measure the
effects of sudden and gradual movements upward and downward in the yield curve.
These results are compared to the results obtained in a flat or unchanged
interest rate scenario. Simulation of earnings is used primarily to measure the
Corporation's short-term earnings exposure to rate movements. The Corporation's
policy limits the potential exposure of net interest income to 10% of the base
case net interest income for every 100 basis point "shock" in interest rates. A
"shock' is an immediate upward or downward movement of interest rates across the
yield curve based upon changes in the prime rate. The following table summarizes
the expected impact of interest rate shocks on net interest income:
Annual change
-------------------- ------------------ ------------------
in net interest
-------------------- ------------------
Rate Shock income % Change
-------------------- ------------------ ------------------
+300 bp +$ 9.7 million + 3.0%
+200 bp +$ 6.3 million + 2.0%
+100 bp +$ 5.6 million + 1.8%
-100 bp -$ 12.6 million - 3.9%
-200 bp -$ 24.1 million - 7.5%
-300 bp -$ 39.2 million -12.3%
Economic value of equity estimates the discounted present value of asset cash
flows and liability cash flows. Discount rates are based upon market prices for
like assets and liabilities. Upward and downward shocks of interest rates are
used to determine the comparative effect of such interest rate movements
relative to the unchanged environment. This measurement tool is used primarily
to evaluate the longer term repricing risks and options in the Corporation's
balance sheet. A policy limit of 10% of economic equity may be at risk for every
100 basis point "shock" movement in interest rates. The following table
summarizes the expected impact of interest rate shocks on economic value of
equity.
Change in
-------------------- --------------
economic value
-------------------- --------------
Rate Shock of equity % Change
-------------------- ---------------------- --------------
+300 bp -$ 22.1 million - 1.7%
+200 bp -$ 4.1 million - 0.3%
+100 bp +$ 9.6 million + 0.7%
-100 bp -$ 25.5 million - 2.0%
-200 bp +$ 15.4 million + 1.2%
-300 bp +$ 45.7 million + 3.5%
26
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -- The following is a list of the exhibits required by
Item 601 of Regulation S-K and filed as part of this report:
(1) Articles of incorporation, as amended and restated, and Bylaws
of Fulton Financial Corporation, as amended - Incorporated by
reference from Exhibit 3 of the Fulton Financial Corporation
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.
(2) Instruments defining the right of securities holders,
including indentures:
(a) Rights Agreement dated June 20, 1989, as amended and
restated on April 27, 1999 between Fulton Financial
Corporation and Fulton Bank - Incorporated by reference
from Exhibit 1 of the Fulton Financial Corporation Current
Report on Form 8-K dated April 27, 1999.
(3) Material Contracts - Executive Compensation Agreements and
Plans:
(a) Severance Agreements entered into between Fulton Financial
and: Rufus A. Fulton, Jr., as of April 17, 1984; R. Scott
Smith, Jr., as of May 17, 1988; Richard J Ashby, Jr., as
of May 17, 1988; and Charles J. Nugent, as of November 19,
1992 - Incorporated by reference from Exhibit 10(a) of the
Fulton Financial Corporation Quarterly Report on Form
10-Q for the quarter ended March 31, 1999.
(b) Incentive Stock Option Plan adopted September 19, 1995 -
Incorporated by reference from Exhibit A of Fulton
Financial Corporation's 1996 Proxy Statement.
(4) Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(5) Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K: None
(1) Form 8-K dated June 5, 2002 reporting a presentation made at
an investor meeting to provide an overview of the
Corporation's strategy and performance.
(2) Form 8-K dated June 25, 2002 reporting the appointment of KPMG
LLP as the Corporation's independent accountants.
27
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FULTON FINANCIAL CORPORATION
Date: August 14, 2002 /s/ Rufus A. Fulton, Jr.
------------------------ ---------------------------
Rufus A. Fulton, Jr.
Chairman and Chief Executive Officer
Date: August 14, 2002 /s/ Charles J. Nugent
------------------------ ------------------------------------
Charles J. Nugent
Senior Executive Vice President and
Chief Financial Officer
28
EXHIBIT INDEX
Exhibits Required Pursuant
to Item 601 of Regulation S-K
3. Articles of incorporation, as amended and restated, and Bylaws of Fulton
Financial Corporation as amended.
4. Instruments defining the rights of security holders, including indentures.
(a) Rights Agreement dated June 20, 1989, as amended and restated on April
27, 1999 between Fulton Financial Corporation and Fulton Bank -
Incorporated by reference to Exhibit 1 of the Fulton Financial
Corporation Current Report on Form 8-K dated April 27, 1999.
10. Material Contracts
(a) Severance Agreements entered into between Fulton Financial and: Rufus
A. Fulton, Jr., as of April 17, 1984; R. Scott Smith, Jr., as of May
17, 1988; Charles J. Nugent, as of November 19, 1992; and Richard J
Ashby, Jr., as of May 17, 1988.
(b) Incentive Stock Option Plan adopted September 19, 1995 - Incorporated
by reference from Exhibit A of Fulton Financial Corporation's 1996
Proxy Statement.
99.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
29