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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 September 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
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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
(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 - 101,548,960 shares outstanding as of
October 31, 2002.
1
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2002
INDEX
Description Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
(a) Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001 ............................. 3
(b) Consolidated Statements of Income -
Three and nine months ended September 30, 2002 and 2001 .............. 4
(c) Consolidated Statements of Shareholders' Equity -
Nine months ended September 30, 2002 and 2001 ........................ 5
(d) Consolidated Statements of Cash Flows -
Nine months ended September 30, 2002 and 2001 ........................ 6
(e) Notes to Consolidated Financial Statements - September 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
Item 4. Controls and Procedures ........................................ 28
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................... 29
SIGNATURES .............................................................. 30
Exhibit Index ........................................................... 33
2
PART 1. -- FINANCIAL INFORMATION
Item 1. Financial Statements
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------------------------------------
(Dollars in thousands, except per-share data)
September 30 December 31
2002 2001
------------------------------------
ASSETS
- ---------------------------------------------------------------------------------------------------------------------
Cash and due from banks ........................................................ $ 311,611 $ 356,539
Interest-bearing deposits with other banks ..................................... 4,830 6,968
Mortgage loans held for sale ................................................... 44,500 18,374
Investment securities:
Held to maturity (Fair value: $40,078 in 2002 and $54,420 in 2001) ........... 38,552 49,557
Available for sale ........................................................... 2,110,566 1,687,787
Loans, net of unearned income .................................................. 5,329,501 5,373,020
Less: Allowance for loan losses ............................................. (72,689) (71,872)
---------------- ----------------
Net Loans ................................................. 5,256,812 5,301,148
---------------- ----------------
Premises and equipment ......................................................... 122,718 125,617
Accrued interest receivable .................................................... 40,533 43,388
Intangible assets .............................................................. 73,057 73,286
Other assets ................................................................... 100,511 108,047
---------------- ----------------
Total Assets .............................................. $ 8,103,690 $ 7,770,711
---------------- ----------------
LIABILITIES
- ----------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing .......................................................... $ 1,122,212 $ 1,094,158
Interest-bearing ............................................................. 5,136,992 4,892,646
---------------- ----------------
Total Deposits ............................................ 6,259,204 5,986,804
---------------- ----------------
Short-term borrowings:
Securities sold under agreements to repurchase ............................... 328,176 289,659
Federal funds purchased ...................................................... 50,500 105,000
Demand notes of U.S. Treasury ................................................ 5,640 5,676
---------------- ----------------
Total Short-Term Borrowings ............................... 384,316 400,335
---------------- ----------------
Accrued interest payable ....................................................... 30,458 35,926
Other liabilities .............................................................. 120,123 71,890
Federal Home Loan Bank Advances and long-term debt ............................. 450,896 456,802
Corporation-obligated mandatorily redeemable
capital securities of subsidiary trust ....................................... 5,500 7,500
---------------- ----------------
Total Liabilities ......................................... 7,250,497 6,959,257
---------------- ----------------
SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------
Common stock, $2.50 par; Authorized - 400 million shares; Issued - 104.0
million; Outstanding - 102.0 million in 2002 and 103.3 million in 2001 ....... 259,586 207,962
Capital surplus ................................................................ 481,545 536,235
Retained earnings .............................................................. 119,723 65,649
Accumulated other comprehensive income ......................................... 27,414 12,970
Treasury stock, at cost (2.0 million shares in 2002 and 715,000 shares
in 2001) ..................................................................... (35,075) (11,362)
---------------- ----------------
Total Shareholders' Equity ................................ 853,193 811,454
---------------- ----------------
Total Liabilities and Shareholders' Equity ................ $ 8,103,690 $ 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 Nine Months Ended
September 30 September 30
-------------------------------- --------------------------------
2002 2001 2002 2001
------------- -------------- -------------- --------------
INTEREST INCOME
- -----------------------------------------------------------------------------------------------------------------------
Loans, including fees ........................... $ 91,867 $ 104,754 $ 280,443 $ 324,288
Investment securities:
Taxable ...................................... 21,489 21,174 62,303 56,619
Tax-exempt ................................... 2,489 2,349 7,361 7,116
Dividends .................................... 1,015 1,218 2,971 3,904
Other interest income ........................... 90 514 229 1,807
-------------- ------------- -------------- --------------
Total Interest Income ........... 116,950 130,009 353,307 393,734
INTEREST EXPENSE
- -----------------------------------------------------------------------------------------------------------------------
Deposits ........................................ 31,353 47,188 95,767 146,715
Short-term borrowings ........................... 1,510 2,337 5,080 11,339
Long-term debt .................................. 6,455 7,100 19,269 21,101
-------------- ------------- -------------- --------------
Total Interest Expense .......... 39,318 56,625 120,116 179,155
-------------- ------------- -------------- --------------
Net Interest Income ............. 77,632 73,384 233,191 214,579
PROVISION FOR LOAN LOSSES ....................... 4,370 5,533 9,830 11,911
-------------- ------------- -------------- --------------
Net Interest Income After
Provision for Loan Losses ...... 73,262 67,851 223,361 202,668
-------------- ------------- -------------- --------------
OTHER INCOME
- -----------------------------------------------------------------------------------------------------------------------
Investment management and trust services ........ 6,890 7,133 21,633 20,405
Service charges on deposit accounts ............. 9,506 8,509 27,590 23,201
Other service charges and fees .................. 4,693 4,400 13,071 12,180
Mortgage banking income ......................... 5,807 2,766 11,871 8,108
Investment securities gains ..................... 2,677 4,100 6,047 10,865
Other 1,827 414 4,590 2,052
-------------- ------------- -------------- --------------
Total Other Income .............. 31,400 27,322 84,802 76,811
OTHER EXPENSES
- -----------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits .................. 33,336 30,115 97,001 87,012
Net occupancy expense ........................... 4,556 4,418 13,111 12,725
Equipment expense ............................... 2,859 3,336 8,374 9,407
Data processing ................................. 3,018 2,909 9,181 8,597
Merger-related expenses ......................... - 7,105 - 7,105
Intangible amortization ......................... 360 1,496 1,078 3,303
Other 12,238 12,399 38,725 35,185
-------------- ------------- -------------- --------------
Total Other Expenses ............ 56,367 61,778 167,470 163,334
-------------- ------------- -------------- --------------
Income Before Income Taxes ...... 48,295 33,395 140,693 116,145
INCOME TAXES .................................... 14,474 9,233 41,652 33,405
-------------- ------------- -------------- --------------
Net Income ...................... $ 33,821 $ 24,162 $ 99,041 $ 82,740
============== ============= ============== ==============
PER-SHARE DATA:
Net income (basic) .............................. $ 0.33 $ 0.23 $ 0.96 $ 0.80
Net income (diluted) ............................ 0.33 0.23 0.95 0.80
Cash dividends .................................. 0.150 0.136 0.436 0.394
- -----------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
4
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 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 ................................... 99,041 99,041
Other - net unrealized gain on securities
(net of $7.8 million tax) ................. 14,444 14,444
----------
Total comprehensive income ................ 113,485
----------
Stock split paid in the form of a 25%
stock dividend (20.6 million shares) ......... 51,624 (51,693) (69)
Stock issued .................................... 328,000 (2,997) 6,346 3,349
Acquisition of treasury stock ................... (1,616,000) (30,059) (30,059)
Cash dividends - $0.436 per share ............... (44,967) (44,967)
----------------------------------------------------------------------------------
Balance at September 30, 2002 ................... 101,977,000 $ 259,586 $ 481,545 $ 119,723 $ 27,414 $ (35,075) $ 853,193
==================================================================================
Balance at December 31, 2000 .................... 102,460,000 $ 198,612 $ 472,828 $ 76,615 $ 1,149 (18,033) $ 731,171
Comprehensive income:
Net income ................................... 82,740 82,740
Other - net unrealized gain on securities
(net of $10.8 million tax ) ............... 20,045 20,045
----------
Total comprehensive income ................ 102,785
----------
Stock dividend - 5% (4.6 million shares) ........ 9,103 61,377 (70,554) (74)
Stock issued .................................... 1,194,000 247 2,441 12,358 15,046
Treasury stock issued ........................... (171,000) (2,933) (2,933)
Cash dividends - $0.394 per share ............... (39,555) (39,555)
----------------------------------------------------------------------------------
Balance at September 30, 2001 .................. 103,483,000 $ 207,962 $ 536,646 $ 49,246 $ 21,194 $ (8,608) $ 806,440
==================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
5
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------------
(In thousands)
Nine Months Ended
September 30
--------------------------
2002 2001
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income .............................................................. $ 99,041 $ 82,740
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses ............................................... 9,830 11,911
Depreciation and amortization of premises and equipment ................. 9,550 9,757
Net amortization of investment security premiums ....................... 1,502 (136)
Investment security gains .............................................. (6,047) (10,865)
Net increase in mortgage loans held for sale ............................ (26,126) (23,243)
Amortization of intangible assets ....................................... 1,078 3,303
Decrease in accrued interest receivable ................................. 2,855 1,418
Decrease in other assets ................................................ (1,082) (6,423)
(Decrease) increase in accrued interest payable ......................... (5,468) 140
Increase (decrease) in other liabilities ................................ 1,251 (12,669)
---------- -----------
Total adjustments ................................................... (12,657) (26,807)
---------- -----------
Net cash provided by operating activities ............................ 86,384 55,933
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale .................... 23,765 109,044
Proceeds from maturities of securities held to maturity ................. 15,824 36,406
Proceeds from maturities of securities available for sale ............... 489,080 335,123
Purchase of securities held to maturity ................................. (5,027) (4,622)
Purchase of securities available for sale .............................. (863,088) (788,247)
Increase (decrease) in short-term investments ........................... 2,138 2,794
Net decrease (increase) in loans ........................................ 34,506 84,815
Net cash paid for Dearden Maguire ....................................... - (16,224)
Net cash paid for Branch Acquisition .................................... - (28,820)
Purchase of premises and equipment ...................................... (6,651) (21,441)
---------- -----------
Net cash used in investing activities ................................ (309,453) (291,172)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits ............................. 295,135 330,128
Net (decrease) increase in time deposits ................................ (22,735) 141,607
Decrease in long-term debt .............................................. (7,906) (65,871)
Increase (decrease) in short-term borrowings ............................ (16,019) (157,113)
Dividends paid .......................................................... (43,555) (36,979)
Net proceeds from issuance of common stock .............................. 3,280 14,972
Acquisition of treasury stock ........................................... (30,059) (2,933)
---------- -----------
Net cash provided by financing activities ............................ 178,141 223,811
---------- -----------
Net Decrease in Cash and Due From Banks ................................. (44,928) (11,428)
Cash and Due From Banks at Beginning of Period .......................... 356,539 282,586
---------- -----------
Cash and Due From Banks at End of Period ................................ $ 311,611 $ 271,158
========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest ............................................................. $ 125,584 $ 179,155
Income taxes ......................................................... 37,798 21,886
- ------------------------------------------------------------------------------------------------------
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 nine-month period ended September 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
Fulton Financial Corporation's (The Corporation) 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 Nine months ended
September 30 September 30
--------------------------- ------------------------------
2002 2001 2002 2001
----------- ---------- ---------- ----------
Weighted average shares outstanding (basic) .... 102,841 103,576 103,069 103,245
Impact of common stock equivalents ............ 685 718 705 699
----------- ---------- ---------- ----------
Weighted average shares outstanding (diluted) .. 103,526 104,294 103,774 103,944
=========== ========== ========== ==========
NOTE C - 5-for-4 Stock Split
A 5-for-4 stock split was paid in the form of a 25% stock dividend on May 20,
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):
Nine Months Ended
September 30
-----------------------
2002 2001
Unrealized holding gains arising during period (net of tax) .. $ 18,375 $ 27,107
Less: reclassification adjustment for realized
gains included in net income ........................... 3,931 7,062
-------- --------
Net unrealized gains on securities ........................... $ 14,444 $ 20,045
======== ========
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 goodwill to be
evaluated for impairment at least annually. Write-downs of the balance, if
necessary, are to be charged to the results of operations in the period in which
the impairment is determined. 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 nine months of 2002, the benefit was approximately
$2.3 million, or $0.02 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.
When it was issued, Statement 142 was not applicable to acquisitions of
branches, which were required to be accounted for under the provisions of FASB
Statement 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions". The purchase price in excess of net assets acquired in branch
transactions continued to be amortized to expense after the adoption of
Statement 142.
On October 1, 2002, the FASB issued Statement 147, "Acquisitions of Certain
Financial Institutions", which allowed the excess purchase price recorded in
qualifying branch acquisitions to be treated in the same manner as Statement 142
goodwill. Upon adoption of Statement 147, its provisions are to be applied
retroactively to the adoption date for Statement 142, which was January 1, 2002
for the Corporation.
Upon adoption, previously reported amortization expense related to Statement 147
branch acquisitions must be reversed and the Statement 142 rules regarding
testing goodwill for impairment must be applied. The Corporation reversed
amortization expense of $217,000 ($141,000, net of tax) in each of the first two
quarters of 2002 related to Statement 147 goodwill. As a result of testing this
goodwill for impairment, the Corporation determined that no write-offs were
necessary at January 1, 2002.
The following table summarizes the Corporation's intangible assets as of
September 30, 2002 and 2001 and the amortization expense recognized during the
first nine months of 2002 and 2001.
Balance Amortization
--------------------- ---------------------
Nine Months Ended
September 30 September 30
Type of --------------------- ---------------------
Description Asset Acquisition Date 2002 2001 2002 2001
- --------------------- --------- ---------------- --------- -------- -------- ---------
(in thousands)
Branch Acquisition Goodwill June, 2001 $ 21,271 $ 21,685 $ - $ 580
Branch Acquisition CDI (1) June, 2001 8,174 9,047 705 239
Dearden Maguire Goodwill January, 2001 15,108 15,307 - 555
Skylands Comm. Bank Goodwill August, 2000 15,832 16,123 - 874
Central PA Fin. Corp. Goodwill September, 1994 8,808 9,098 - 827
Other (2) Various 3,864 3,452 373 228
--------- -------- -------- --------
$ 73,057 $ 74,712 $ 1,078 $ 3,303
========= ======== ======== ========
8
(1) Core deposit intangible asset.
(2) Consists of Statement 72 unidentifiable intangible assets which do not
qualify as a business combination per Statement 147.
The following table adjusts net income and net income per share for the
amortization expense related to Statements 142 and 147 goodwill that is no
longer being amortized in 2002 (in thousands, except per-share amounts):
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income, as reported ......................... $ 33,821 $ 24,162 $ 99,041 $ 82,740
Amortization of goodwill, net of taxes .......... - 998 - 2,633
---------- ---------- ---------- ----------
Net income, as adjusted ......................... $ 33,821 $ 25,160 $ 99,041 $ 85,373
========== ========== ========== ==========
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
2002 2001 2002 2001(1)
---------- ---------- ---------- ----------
Basic net income per share ...................... $ 0.33 $ 0.23 $ 0.96 $ 0.80
Amortization of goodwill, net of taxes .......... - 0.01 - 0.03
---------- ---------- ---------- ----------
Basic net income per share, as adjusted ......... $ 0.33 $ 0.24 $ 0.96 $ 0.83
---------- ---------- ---------- ----------
Diluted net income per share .................... $ 0.33 $ 0.23 $ 0.95 $ 0.80
Amortization of goodwill, net of taxes .......... - 0.01 - 0.03
---------- ---------- ---------- ----------
Diluted net income per share, as adjusted ....... $ 0.33 $ 0.24 $ 0.95 $ 0.82
========== ========== ========== ==========
(1) Diluted 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.
As a result of the acquisition, Drovers was merged with and into the 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 goodwill of $21.7 million. The core deposit intangible asset
is being amortized on a straight-line basis over 10 years. The goodwill was
being amortized to expense on a straight-line basis
9
over 25 years through December 31, 2001. Effective January 1, 2002, the goodwill
is no longer being amortized to expense as required by Statement 147, but will
be evaluated periodically for impairment.
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.
10
Item 2. 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 non-bank
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. In 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 estimated 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).
- 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.
11
- 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 Statements 142 and 147, effective 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 September 30, 2002 versus Quarter ended September 30, 2001
- --------------------------------------------------------------------------
Fulton Financial Corporation's net income for the third quarter of 2002
increased $9.7 million, or 40.0%, in comparison to net income for the third
quarter of 2001. Diluted net income per share increased $0.10, or 43.5%,
compared to 2001. Net income for 2001 was reduced by $6.4 million of
merger-related expenses, net of tax. Excluding the impact of these nonrecurring
expenses, income per share increased $0.04 or 13.8%, and income increased $3.3
million, or 10.8%. The increase from 2001 resulted from an increase in net
interest income, higher other income and fees, a lower provision for loan
losses, and a decrease in goodwill amortization. These increases were partially
offset by increases in operating expenses and lower investment securities gains.
Net Interest Income
- -------------------
The Corporation's net interest income has been impacted by a series of
reductions to short-term interest rates enacted by the FRB over the past 18
months. These rate reductions resulted in significant decreases to the
Corporation's prime lending rate as well as a decline in the general interest
rate environment, primarily in shorter-term rates.
The rate reductions 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. During
2002, however, the Corporation's longer-term liabilities, primarily time
deposits, repriced to lower rates resulting in an increase to the Corporation's
net interest margin.
12
For the third quarter of 2002, net interest income increased $4.2 million, or
5.8%, as compared to the same period in 2001, and the net interest margin
improved to 4.32% from 4.22% a year ago mainly due to the time deposit
repricing.
The following table provides a comparative average balance sheet and net
interest income analysis for the third quarter of 2002 as compared to the same
period in 2001. All dollar amounts are in thousands.
Quarter Ended September 30, 2002 Quarter Ended September 30, 2001
---------------------------------------- ----------------------------------------
Average Yield/ Average Yield/
ASSETS Balance Interest Rate (1) Balance Interest Rate (1)
- ----------------------------------- -------------- ------------ --------- ------------- ----------- --------
Interest-earning assets:
Loans and leases .................... $ 5,378,685 $ 91,867 6.78% $ 5,321,613 $ 104,754 7.81%
Taxable investment securities ....... 1,627,876 21,489 5.24 1,337,693 21,174 6.28
Tax-exempt investment securities .... 233,740 2,489 4.22 215,374 2,349 4.33
Equity securities ................... 115,390 1,015 3.49 199,646 1,218 2.42
Short-term investments .............. 19,891 90 1.80 52,996 514 3.85
-------------- ------------ --------- ------------- ----------- --------
Total interest-earning assets ......... 7,375,582 116,950 6.29% 7,127,322 130,009 7.24%
Noninterest-earning assets:
Cash and due from banks ............. 262,971 247,309
Premises and equipment .............. 123,775 129,031
Other assets ........................ 249,111 241,098
Less: Allowance for loan losses ..... (74,136) (71,284)
-------------- --------------
Total Assets ................ $ 7,937,303 $ 7,673,476
============== ==============
Quarter Ended September 30, 2002 Quarter Ended September 30, 2001
---------------------------------------- ----------------------------------------
Average Yield/ Average Yield/
LIABILITIES AND EQUITY Balance Interest Rate (1) Balance Interest Rate (1)
- ----------------------------------- -------------- ------------ --------- ------------- ----------- --------
Interest-bearing liabilities:
Demand deposits ..................... $ 939,683 $ 1,966 0.83% $ 790,331 $ 2,318 1.16%
Savings deposits .................... 1,534,828 4,332 1.12 1,346,518 5,934 1.75
Time deposits ....................... 2,599,115 25,055 3.82 2,875,375 38,936 5.37
Short-term borrowings ............... 387,159 1,510 1.55 293,323 2,337 3.16
Long-term debt ...................... 456,602 6,455 5.61 502,477 7,100 5.61
-------------- ------------ --------- ------------- ----------- --------
Total interest-bearing liabilities .... 5,917,387 39,318 2.64% 5,808,024 56,625 3.87%
Noninterest-bearing liabilities:
Demand deposits ..................... 1,066,328 956,776
Other ............................... 94,915 110,449
-------------- --------------
Total Liabilities ........... 7,078,630 6,875,249
Shareholders' equity .................. 858,673 798,227
-------------- --------------
Total Liabilities and
Shareholders' Equity ...... $ 7,937,303 $ 7,673,476
============== ==============
Net interest income ................... $ 77,632 $ 73,384
-------------- --------------
Net interest margin (FTE) ............. 4.32% 4.22%
--------- --------
(1) Yields on tax-exempt securities are not presented on a fully taxable
equivalent (FTE) basis.
13
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 September 30
2002 vs. 2001
Increase (decrease) due
to change in
Volume Rate Net
---------- ---------- ----------
(in thousands)
Interest income on:
Loans and leases ..................... $ 1,119 $ (14,006) $ (12,887)
Taxable investment securities ........ 4,748 (4,433) 315
Tax-exempt investment securities ..... 193 (53) 140
Equity securities .................... (514) 311 (203)
Short-term investments ............... (321) (103) (424)
---------- ---------- ----------
Total interest-earning assets ....... $ 5,225 $ (18,284) $ (13,059)
========== ========== ==========
Interest expense on:
Demand deposits ...................... $ 428 $ (780) $ (352)
Savings deposits ..................... 833 (2,435) (1,602)
Time deposits ........................ (3,742) (10,139) (13,881)
Short-term borrowings ................ 744 (1,571) (827)
Long-term debt ....................... (653) 8 (645)
---------- ---------- ----------
Total interest-bearing liabilities .. $ (2,390) $ (14,917) $ 17,307)
========== ========== ==========
Interest income decreased $13.1 million, or 10.0%, mainly as a result of the 95
basis point decrease in yields, which accounted for a $18.3 million decline in
interest income. As previously discussed, average yields decreased from the
third 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 6.57%
during the third 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 $5.2 million increase due to average balance growth,
primarily in investment securities.
The Corporation's average loan portfolio increased by $57.1 million, or 1.1%.
Increases in commercial mortgages ($110.8 million, or 7.9%) and commercial loans
($145.5 million, or 10.3%) were almost entirely offset by decreases in consumer
loans ($130.7 million, or 18.8%), and residential mortgages ($126.1 million, or
15.3%). Consumer loans decreased mainly in direct and indirect automobile loans
($121.9 million, or 23.0 %) 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 ($61.5 million, or 9.6%), 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.
Average investment securities increased $191.1 million or 10.6%, mainly as a
result of deposit growth in excess of net increases in loans. Total average
deposits increased $171.0 million or 2.8% since the third quarter of 2001. The
Corporation used the excess funds to purchase investment securities,
particularly mortgage-backed securities, which grew by $192.5 million, or 15.1%.
In addition, the increase in investment securities, was partially funded by an
increase in short-term borrowings.
Interest expense decreased $17.3 million, or 30.6%. This resulted from a
combination of declining interest rates, and a shift in the composition of
interest-bearing liabilities from higher to lower rate liabilities. Interest
bearing demand and savings deposits increased $337.7 million, or 14.5%, and
non-interest bearing deposits increased $109.6 million or 11.5%, while time
deposits decreased by $276.3 million, or 9.6%. In addition, an increase in
short-term borrowings of $93.4 million, or 32%, was partially used to reduce the
corporation's
14
higher rate long term borrowings, particularly Federal Home Loan Bank Advances,
which decreased by $44.9 million or 9.1%. The $203.4 million, or 3.0%, increase
in average liabilities actually resulted in a $2.4 million decrease in interest
expense, due to the change in the composition of these liabilities. A 123 basis
point decline in the average cost of interest-bearing liabilities resulted in a
$14.9 million decrease in interest expense.
The average yield on earning assets decreased 95 basis points (a 13.1% decline)
during the period while the cost of interest-bearing liabilities decreased 123
basis points (a 31.8% decline). This resulted in a 10 basis point increase in
net interest margin compared to the same period in 2001. The low interest rate
environment and the additional liquidity that the Corporation has generated
through mortgage loan refinancings and deposit growth will continue to place
downward pressure on net interest income and net interest margin. The estimated
impact of changes in interest rates on the Corporation's net interest income is
discussed in Item 3, "Quantitative and Qualitative Disclosures About Market
Risk".
Provision and Allowance for Loan Losses
- ---------------------------------------
The following table summarizes loans outstanding (including unearned income) as
of the dates shown:
September 30 December 31 September 30
2002 200 2001
------------- ------------- -------------
(in thousands)
Commercial, financial and agricultural ... $ 1,606,897 $ 1,495,380 $ 1,398,964
Real estate - construction ............... 242,518 267,627 260,975
Real estate - residential mortgage ....... 1,310,599 1,468,799 1,461,221
Real estate - commercial mortgage ........ 1,528,167 1,428,066 1,432,459
Consumer ................................. 564,992 626,985 658,932
Leasing and other ........................ 76,328 86,163 71,434
------------- ------------- -------------
Total Loans ........................... $ 5,329,501 $ 5,373,020 $ 5,283,985
============= ============= =============
15
The following table summarizes the activity in the Corporation's allowance for
loan losses:
Three Months Ended
September 30
-----------------------------
2002 2001
------------ -------------
(dollars in thousands)
Loans outstanding at end of period (net of unearned) .... $ 5,329,501 $ 5,283,985
============= =============
Daily average balance of loans and leases ............... $ 5,378,685 $ 5,321,613
============= =============
Balance of allowance for loan losses
at beginning of period ............................. $ 72,801 $ 67,903
Loans charged-off:
Commercial, financial and agricultural ................ 3,931 802
Real estate - mortgage ................................ 129 139
Consumer .............................................. 1,082 1,674
Leasing and other ..................................... 155 48
------------ -------------
Total loans charged-off ............................... 5,297 2,663
------------ -------------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural ................ 258 225
Real estate - mortgage ................................ 32 17
Consumer .............................................. 514 661
Leasing and other ..................................... 11 18
------------ -------------
Total recoveries ...................................... 815 921
------------ -------------
Net loans charged-off ................................... 4,482 1,742
Provision for loan losses ............................... 4,370 2,833
Provision for loan losses, merger-related ............... - 2,700
------------ -------------
Balance at end of period ................................ $ 72,689 $ 71,694
============= =============
Net charge-offs to average loans (annualized) ........... 0.33% 0.13%
============= =============
Allowance for loan losses to loans outstanding .......... 1.36% 1.36%
============= =============
The following table summarizes the Corporation's non-performing assets as of the
indicated dates.
September 30 Dec. 31 September 30
2002 2001 2001
------------------ --------------- -----------------
Nonaccrual loans ........................ $ 29,698 $ 22,794 $ 23,484
Loans 90 days past due and accruing ..... 15,872 9,368 8,932
Other real estate owned (OREO) .......... 1,614 1,817 1,575
------------------ --------------- -----------------
Total non-performing assets ............. $ 47,184 $ 33,979 $ 33,991
================== =============== =================
Non-performing loans/Total loans ........ 0.86% 0.60% 0.61%
Non-performing assets/Total assets ...... 0.58% 0.44% 0.44%
Allowance/Non-performing loans .......... 160% 223% 221%
The Corporation's non-performing assets and net charge-offs increased from 2001
mainly as a result of one commercial relationship. 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
developer's 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 these
drought conditions, the issuance of water and sewer permits has been
16
delayed. Because of these delays, the projects have not been completed as
originally anticipated and the developer's operations have been negatively
impacted.
During the third quarter, the Corporation placed these loans on non-accrual
status and charged-off $3.4 million based on estimates of collectibility. At
this time, the Corporation expects that it will not incur any additional
material losses on these loans, based on the value of the underlying collateral.
Excluding the impact of these loans, total non-performing assets would have been
$36.1 million, or 0.45% of total assets, and annualized net charge-offs would
have been 0.08% of average loans outstanding.
As a percentage of total loans, commercial loans and mortgages increased to
58.8% of the total portfolio at September 30, 2002 from 53.6% at September 30,
2001. This shift reflects increases in these loan types as well as a decrease in
residential mortgages from 27.7% in 2001 to 24.6% 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 third quarter of 2002, net charge-offs totaled $4.5 million, or 0.33%,
of average loans on an annualized basis. This was a $2.7 million, or 157.2%,
increase from the $1.7 million, or 0.13%, in net charge-offs for the third
quarter of 2001. This increase was mainly due to the previously discussed
commercial relationship.
Non-performing assets increased to $47.2 million, or 0.58% of total assets, at
September 30, 2002, as compared to $34.0 million, or 0.44% of total assets, at
September 30, 2001. Excluding the $2.7 million provision for loan losses
recorded as a result of the Drover's merger, the provision increased $1.5
million. This increase is due to the higher risk level associated with the
change in the loan mix. See "Critical Accounting Policies" for a summary of the
Corporation's procedures for assessing the adequacy of the allowance for loan
losses.
Other Income
- ------------
Other income for the quarter ended September 30, 2002 was $31.4 million, an
increase of $4.1 million, or 14.9%, over the comparable period in 2001.
Excluding investment security gains, which decreased from $4.1 million in 2001
to $2.7 million in 2002, other income increased $5.5 million, or 23.7%.
The most significant increase was realized in mortgage banking income, which
increased $3.0 million, or 110%, to $5.8 million due to increased gains on
mortgage sales resulting from strong refinance volumes. The Corporation's policy
is to sell qualifying originated fixed rate mortgage loans and retain the
servicing in order to minimize interest rate risk.
Also contributing to the growth in other income is the increase in service
charges on deposit accounts which increased $997,000 or 11.7%. The increase in
service charges on deposit accounts is the direct result of strong growth in
transaction accounts. Service charges on deposit accounts include overdraft fees
which increased $646,000, or 19.8% and cash management fees which increased
$270,000, or 17.8%.
Investment management and trust services income decreased $243,000, or 3.4%,
mainly due to the general slowdown in the equity markets. Other service charges
and fees realized a moderate increase of $293,000, or 6.7%, reflecting the
Corporation's efforts to increase non-interest revenues. Other income also grew
as a result of earnings on the Corporation's life insurance contracts and
$310,000 in gains on fixed asset sales.
Other Expenses
- --------------
Total other expenses for the third quarter of 2002 of $56.4 million represented
a decrease of $ 5.4 million, or 8.8%, from 2001. Other expenses in the third
quarter of 2001 included $7.1 million in merger-related expenses. Excluding
these one-time charges, other expenses increased $1.7 million or 3.1%. The
increase was mainly due to a $3.2 million, or 9.7%, increase in salaries and
benefits. Partially offsetting this increase
17
was a $1.1 million, or 73.5% reduction in intangible amortization and a
$477,000, or 14.3% decrease in equipment expense.
The increase in salaries and benefits is attributable to the continued growth of
the Corporation. Salary expense increased $2.1 million, or 7.8% compared to the
same period in 2001. The employee benefits component of the expense increased
$1.1 million, or 22.8%, 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 $138,000, or 3.1%, over the
same period in 2001, while equipment expenses were down by $477,000, or 14.3%.
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 $1.1 million, or 73.5% as a result of adopting
Statements 142 and 147. (See Note E to the Consolidated Financial Statements).
The 3.7% increase in data processing expense was due to an increase in the
number of accounts and customers being serviced. Other expense decreased
$161,000, or 1.3%, to $12.2 million in 2002, due to several non-recurring items
in 2001.
Income Taxes
- ------------
Income tax expense for the third quarter of 2002 was $14.5 million, a $5.2
million, or 56.8%, increase from $9.2 million in 2001. The Corporation's
effective tax rate was approximately 30.0% in 2002 as compared to 27.6% in 2001.
Excluding the impact of the non-recurring merger-related expenses, the effective
tax rate for the third quarter of 2001 would have been 29.3%. The increase in
the effective tax rate in 2002 was mainly due to the State of New Jersey tax
legislation enacted in July, 2002, which added $650,000 of additional state
income tax for the Corporation during the quarter.
In general, 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.
Nine Months ended September 30, 2002 versus Nine months ended September 30, 2001
- --------------------------------------------------------------------------------
The Corporation's net income for the first nine months of 2002 increased $16.3
million, or 19.7%, in comparison to net income for the same period in 2001.
Diluted net income per share increased $0.15, or 18.8%, compared to 2001. Net
income for 2001 was reduced by $6.4 million of merger-related expenses, net of
tax. Excluding the impact of these merger-related expenses, income per share
increased $0.09 or 10.5% and income increased $9.9 million or 11.1%. Net income
for the first nine months of 2002 of $99.0 million, or $0.96 per share (basic)
and $0.95 per share (diluted) represented an annualized return on average assets
(ROA) of 1.70% and an annualized return on average equity (ROE) of 15.87%.
Net Interest Income
- -------------------
For the first nine months of 2002, net interest income increased $18.6 million,
or 8.7%. This increase is mainly due to the impact of the FRB rate reductions
and the Corporation's June, 2001 acquisition of 18 branches (Acquired Branches),
which included approximately $300 million in deposits and $50 million in loans.
The following table provides a comparative average balance sheet and net
interest income analysis for the first nine months of 2002 as compared to the
same period in 2001. All dollar amounts are in thousands.
18
Nine Months Ended Sept. 30, 2002 Nine Months Ended Sept. 30, 2001
--------------------------------------- ----------------------------------------
Average Yield/ Average Yield/
ASSETS Balance Interest Rate (1) Balance Interest Rate (1)
- -------------------------------------- ------------- ------------- -------- -------------- ------------- --------
Interest-earning assets:
Loans and leases .................... $ 5,398,395 $ 280,443 6.95% $ 5,344,730 $ 324,288 8.11%
Taxable investment securities ....... 1,519,411 62,303 5.48 1,243,185 56,619 6.09
Tax-exempt investment securities .... 228,753 7,361 4.30 216,891 7,116 4.39
Equity securities ................... 109,197 2,971 3.64 102,804 3,904 5.08
Short-term investments .............. 16,895 229 1.81 55,038 1,807 4.39
------------- ------------- -------- -------------- ------------- --------
Total interest-earning assets ......... 7,272,651 353,307 6.50 6,962,648 393,734 7.56
Noninterest-earning assets:
Cash and due from banks ............. 248,964 239,551
Premises and equipment .............. 123,834 123,552
Other assets ........................ 236,649 210,677
Less: Allowance for loan losses ..... (73,218) (68,517)
------------- --------------
Total Assets ................ $ 7,808,880 $ 7,467,911
------------- --------------
Interest-bearing liabilities:
Demand deposits ..................... $ 870,078 $ 4,609 0.71% $ 725,002 $ 6,970 1.29%
Savings deposits .................... 1,506,714 12,739 1.13 1,281,506 20,601 2.15
Time deposits ....................... 2,577,925 78,419 4.07 2,811,118 119,144 5.67
Short-term borrowings ............... 425,280 5,080 1.60 351,993 11,339 4.31
Long-term debt ...................... 459,402 19,269 5.61 509,127 21,101 5.54
------------- ------------- -------- -------------- ------------- --------
Total interest-bearing liabilities .... 5,839,399 120,116 2.75 5,678,746 179,155 4.22
Noninterest-bearing liabilities:
Demand deposits ..................... 1,036,553 904,624
Other ............................... 98,497 114,480
------------- --------------
Total Liabilities ........... 6,974,449 6,697,850
Shareholders' equity .................. 834,431 770,061
------------- --------------
Total Liabilities and
Shareholders' Equity ...... $ 7,808,880 $ 7,467,911
------------- --------------
Net interest income ................... $ 233,191 $ 214,579
------------- --------------
Net interest margin (FTE) ............. 4.41% 4.23%
-------- --------
(1) Yields on tax-exempt securities are not fully taxable equivalent (FTE).
19
The following table summarizes the changes in interest income and expense due to
changes in average balances (volume) and changes in rates.
Nine Months Ended
2002 vs. 2001
Increase (decrease) due
to change in
-------------------------------------
Volume Rate Net
----------- ----------- -----------
(in thousands)
Interest income on:
Loans and leases ..................... $ 3,235 $ (47,080) $ (43,845)
Taxable investment securities ........ 12,506 (6,822) 5,684
Tax-exempt investment securities ..... 372 (127) 245
Equity securities .................... 243 (1,176) (933)
Short-term investments ............... (1,252) (326) (1,578)
----------- ----------- -----------
Total interest-earning assets ....... $ 15,105 $ (55,532) $ (40,427)
=========== =========== ===========
Interest expense on:
Demand deposits ...................... $ 1,408 $ (3,769) $ (2,361)
Savings deposits ..................... 3,627 (11,489) (7,862)
Time deposits ........................ (9,892) (30,833) (40,725)
Short-term borrowings ................ 2,362 (8,621) (6,259)
Long-term debt ....................... (2,045) 213 (1,832)
----------- ----------- -----------
Total interest-bearing liabilities .. $ (4,540) $ (54,499) $ (59,039)
=========== =========== ===========
Interest income decreased $40.4 million, or 10.3%, mainly as a result of the 106
basis point decrease in average yields, which caused a $55.5 million decline in
interest income. This was offset by a $15.1 million increase resulting from
growth in average balances, particularly investment securities. The
Corporation's prime lending rate averaged 7.50% during the first nine 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 $53.7 million, or
1.0%. As was the case with the third quarter, growth in commercial mortgages
($98.0 million, or 6.2%) and commercial loans ($128.1 million, or 9.0%) was
offset by declines in consumer loans ($34.2 million, or 2.6%) and residential
mortgages ($143.6 million, or 15.2%). The residential mortgage portfolio
continued to decline as lower mortgage rates fueled refinance activity.
Interest expense decreased $59.1 million, or 33.0%, 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. Average
demand and savings deposits increased $502.2 million or 17.3%, while average
time deposits and other interest-bearing liabilities decreased by $210.0
million, or 5.7%. The Acquired Branches contributed $141.3 million to the
increase in average interest-bearing deposits. The $276.6 million, or 4.1%,
increase in average liabilities actually resulted in a $4.5 million decrease in
interest expense, due to the change in the composition of these liabilities. A
147 basis point decline in the average cost of interest-bearing funds resulted
in a $54.5 million decrease in interest expense.
The average yield on earning assets decreased 106 basis points (a 14.0% decline)
during the period while the cost of interest-bearing liabilities decreased 147
basis points (a 34.8% decline). This resulted in an 18 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.
20
Provision for Loan Losses
- -------------------------
The following table summarizes the activity in the Corporation's allowance for
loan losses:
Nine Months Ended
September 30
--------------------------------
2002 2001
------------- -------------
(dollars in thousands)
Loans outstanding at end of period (net of unearned) ... $ 5,329,501 $ 5,283,985
============= =============
Daily average balance of loans and leases .............. $ 5,398,395 $ 5,344,730
============= =============
Balance of allowance for loan losses
at beginning of period ............................ $ 71,872 $ 65,640
Loans charged-off:
Commercial, financial and agricultural ............. 6,284 5,020
Real estate - mortgage ............................. 1,095 560
Consumer ........................................... 4,005 5,184
Leasing and other .................................. 476 380
------------- -------------
Total loans charged-off ............................ 11,860 11,144
------------- -------------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural ............. 736 596
Real estate - mortgage ............................. 261 299
Consumer ........................................... 1,796 2,250
Leasing and other ................................. 54 57
------------- -------------
Total recoveries ................................... 2,847 3,202
------------ -------------
Net loans charged-off .................................. 9,013 7,942
Provision for loan losses .............................. 9,830 9,211
Provision for loan losses, merger-related .............. - 2,700
------------- -------------
Balance at end of period ............................... $ 72,689 $ 71,694
============= =============
Net charge-offs to average loans (annualized) .......... 0.22% 0.20%
============= =============
Allowance for loan losses to loans outstanding ......... 1.36% 1.36%
============= =============
Refer to the "Critical Accounting Policies" section of Management's Discussion
of 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
58.8% of the total portfolio at September 30, 2002 from 52.6% at September 30,
2001. This shift reflects increases in these loan types as well as a decrease in
residential mortgages from 28.2% in 2001 to 24.6% 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 nine months of 2002, net charge-offs totaled $9.0 million, or
0.22%, of average loans on an annualized basis. This compares to $7.9 million,
or 0.20%, for the first nine months 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 0.86% at September 30, 2002 as compared to 0.60% at December
31, 2001 and 0.61% at September 30, 2001. The increase in non-performing assets
is mainly due to the loans outstanding to a real estate developer which was put
into non-accrual during the third quarter of 2002 - See third quarter section of
Management's Discussion of the Allowance and Provision for Loan Losses for more
detail.
21
The provision for loan losses of $9.8 million for the first nine months of 2002
decreased $2.1 million, or 17.5%, in comparison to 2001. The provision for the
first nine months of 2001 included a $2.7 million special provision related to
the Drover's merger. Excluding that special provision, loan loss provision in
2002 would have increased by $619,000, which reflects the change in the loan mix
to a larger percentage of higher risk commercial loans.
Other Income
- ------------
Other income for the nine months ended September 30, 2002 was $84.8 million.
This was an increase of $8.0 million, or 10.4%, over the comparable period in
2001. Excluding investment security gains, which decreased $4.8 million, or
44.3%, to $6.1 million in 2002, other income increased $12.8 million, or 19.4%.
The most significant increase, $4.4 million, or 18.9%, 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.
Service charges on deposit accounts include overdraft fees, which increased $2.6
million, or 31.2%, and cash management fees which increased $1.1 million, or
23.7%.
The most significant increase in terms of percentage growth, was realized in
mortgage banking income, which increased $3.8 million or 46.4%. Refinance
volumes throughout the first nine months of 2002 have remained strong due to the
historically low interest rate environment. The Corporation's policy is to sell
qualifying originated fixed rate mortgages and retain the servicing to minimize
interest rate risk.
Increases were also realized in investment management and trust services ($1.2
million, or 6.0%), and other service charges and fees ($891,000, or 7.3%). These
increases were mainly due to growth in these areas of the Corporation. Other
income increased $2.5 million to $4.6 million, as a result of the reversal of
$848,000 of negative goodwill, $811,000 in gains on fixed assets, and an
increase in earnings on the Corporation's life insurance contracts.
Other Expenses
- --------------
Total other expenses for the first nine months of 2002 were $167.5 million, a
$4.1 million, or 2.5%, increase over the same period in 2001. Other expenses in
2001 included $7.1 million in merger-related expenses. Excluding these one-time
charges, other expenses increased $11.2 million or 7.2%. The largest increase
was in salaries and benefits, which increased $10.0 million, or 11.5%. In
addition, occupancy expense increased $386,000, or 3.0%, data processing
increased $584,000, or 6.8% and other expense increased $3.5 million or 10.1%.
These increases were partially offset by decreases in equipment expense of $1.0
million, or 11.0%, and intangible amortization of $2.2 million, or 67.4%.
Salaries and employee benefits increased 10.0 million, or 11.5% to $97.0 million
in comparison to the first nine months of 2001 of $87.0 million. Of this
increase, $2.9 million was attributable to employee benefits, which rose 20.8%
due to increases in the cost of health insurance and retirement plan expenses.
Salary expense increased $7.2 million, or 10.0%, due to growth in the employee
base, including additional employees from the Acquired Branches, and normal
merit increases.
Net occupancy expenses increased $386,000, or 3.0%, while equipment expenses
were down by $1.0 million, or 11.0%. The net occupancy expense increase resulted
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 $2.2 million, or 67.4% due to the
non-amortization of goodwill in accordance with Statements 142 and 147.
Data processing expense increased $584,000, or 6.8%, over the same period in
2001. This was due to the increase in the number of accounts and customers being
serviced. Other expense increased $3.5 million, or 10.1%, to $38.7 million in
2002 as compared to $35.2 million in 2001. This was due to a $926,000, or 22.8%
22
increase in advertising, for a significant branding campaign, a $634,200 or
44.0% increase in operating risk losses related to overdrafts and robberies, and
a general increase in expenses due to growth.
Income Taxes
- ------------
Income tax expense for the nine months ended September 30, 2002 was $41.7
million, a $8.2 million, or 24.7%, increase from $33.4 million in 2001. The
Corporation's effective tax rate was approximately 29.6% in 2002 as compared to
28.8% in 2001. Excluding the impact of the non-recurring merger-related expenses
in 2001, the effective tax rate was 29.2%. The increase in the effective tax
rate from 2002 to 2001 was mainly due to the State of New Jersey tax legislation
enacted in July, 2002, which added $950,000 of additional state income tax
expense during the first nine months of 2002. 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.
FINANCIAL CONDITION
- -------------------
Total assets of the Corporation increased $333.0 million, or 4.3%, from December
31, 2001 to $8.1 billion at September 30, 2002. Loans decreased $43.5 million,
or 1.0% to $5.3 billion at September 30, 2002. While commercial loans and
commercial mortgages increased $122.1 million, or 4.2%, residential mortgages
continued to decrease ($50.7 million, or 3.5%) as a result of refinance
activity. In addition, consumer loans and leases declined $43.9 million, or
6.2%, mainly in indirect automobile financing.
Cash and due from banks decreased $44.9 million, or 12.6%, 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 $411.8
million, or 23.7%, partially due to securities purchases of $868.1 million
exceeding proceeds from maturities and sales of $528.8 million. Investment
securities have increased mainly due to the increase in deposits exceeding net
loan demand. Premises and equipment decreased $2.9 million, or 2.3%, due to
normal depreciation expense and the sale of certain branch properties.
Deposits increased $272.4 million, or 4.5%, from December 31, 2001. Most of the
increase has been in demand and savings accounts. Demand and savings deposits
increased $194.9 million and $100.2 million, respectively, while time deposits
decreased by $22.7 million. This reflects a general mood in the financial
community that interest rates should start to rise again in the future, leaving
consumers reluctant to reinvest maturing time deposits at the current lower
rates.
Due to the increase in deposits exceeding the increase in loans, the
Corporation's short-term borrowing also decreased during the first nine months
of 2002. Federal funds purchased decreased $54.5 million, or 54.2%. Partially
offsetting the decrease in short-term borrowings was an increase in customer
repurchase agreements, which increased $38.5 million, or 13.3%. The Corporation
also reduced its Federal Home Loan Bank long-term debt by $5.9 million, or
12.9%, 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 $41.7 million, or 5.1%, during the first
nine months of 2002. This increase was due to net income of $99.0 million and a
$14.4 million improvement in the net unrealized gain on investment securities
and $3.3 million in issuance of stock. Cash dividends to shareholders of $45.0
million and $30.1 million of stock repurchases offset these increases.
23
Current capital guidelines measure the adequacy of a bank holding company's
capital by taking into consideration the differences in risk associated with
holding various types of assets as well as exposure to off-balance sheet
commitments. The guidelines call for a minimum risk-based Tier I capital
percentage of 4.0% and a minimum risk-based total capital 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 September 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 September 30, 2002, the
Corporation had repurchased 1,616,000 shares under this plan.
Item 3. Quantitative and Qualitative Disclosures about 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 $74.1 million), U.S. Government agency stock (cost basis of
approximately $42.9 million) and equity mutual funds (cost basis of
approximately $12.5 million). The Corporation's financial institutions stock
portfolio had gross unrealized gains of approximately $8.0 million at September
30, 2002.
Although the book value of equity investments accounted for only 1.6% 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.
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.
24
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.
25
FULTON FINANCIAL CORPORATION
INTEREST RATE SENSITIVITY
(dollars in thousands) Expected Maturity Period
---------------------------------------------------------------------------
Less Than Greater Than
1 Year 1-2 Years 2-3 Years 3-4 Years 4-5 Years 5 Years
----------- ----------- --------- ---------- --------- ------------
Fixed rate loans (1) ........... $ 1,047,138 $ 682,527 $ 458,680 $ 300,193 $ 216,874 $ 433,870
Average rate (1) ........... 7.25% 7.52% 7.51% 7.52% 7.48% 7.00%
Floating rate loans (2) ........ 777,523 278,238 224,344 174,798 140,222 595,094
Average rate ............... 5.80% 6.10% 6.00% 6.11% 5.22% 5.02%
Fixed rate investments (3) ..... 687,070 488,126 243,468 143,874 107,517 292,835
Average rate ............. 5.49% 5.60% 5.37% 5.28% 5.36% 5.28%
Floating rate investments (3) .. 1,000 - - - - 13,532
Average rate ............... 7.58% - - - 4.41%
Other interest-earning assets .. 49,330 - - - - -
Average rate ............... 5.03% - - - - -
----------- ----------- --------- --------- -------- -----------
Total .......................... $ 2,562,061 $ 1,448,891 $ 926,492 $ 618,865 $ 464,613 $ 1,335,331
Average rate ............... 6.30% 6.60% 6.58% 6.60% 6.31% 5.71%
----------- ----------- --------- --------- -------- -----------
Fixed rate deposits (4) ........ $ 1,470,998 $ 432,161 $ 251,052 $ 57,705 $ 205,343 $ 61,266
Average rate ............... 3.40% 3.81% 4.52% 4.70% 4.90% 5.08%
Floating rate deposits (5) ..... 1,346,568 151,107 151,107 151,107 151,107 1,829,684
Average rate ............... 1.82% 0.23% 0.23% 0.23% 0.23% 0.22%
Fixed rate borrowings (6) ...... 11,270 37,733 83,247 261 413 308,612
Average rate ............... 3.98% 5.35% 6.29% 5.55% 5.15% 5.36%
Floating rate borrowings (7) ... 388,676 5,000 - - - -
Average rate ............... 1.53% 2.23% - - - -
----------- ----------- --------- --------- --------- -----------
Total .......................... $ 3,217,512 626,001 $ 485,406 $ 209,073 $ 356,863 $ 2,199,561
Average rate ............... 2 .51% 3.03% 3.49% 1.47% 2.92% 1.08%
----------- ----------- --------- --------- --------- -----------
(dollars in thousands) Estimated
Total Fair Value
----------- -----------
Fixed rate loans (1) ........... $ 3,139,282 $ 3,342,780
Average rate (1) ........... 7.35%
Floating rate loans (2) ........ 2,190,219 2,182,357
Average rate ............... 5.63%
Fixed rate investments (3) ..... 1,962,890 2,020,082
Average rate ............... 5.45%
Floating rate investments (3) .. 14,532 14,816
Average rate ............... 4.63%
Other interest-earning assets .. 49,330 49,330
Average rate ............... 5.03%
----------- -----------
Total .......................... $ 7,356,253 $ 7,609,365
Average rate ............... 6.31%
----------- -----------
Fixed rate deposits (4) ........ $ 2,478,525 $ 2,645,750
Average rate ............... 3.78%
Floating rate deposits (5) ..... 3,780,679 3,695,011
Average rate ............... 0.79%
Fixed rate borrowings (6) ...... 441,536 474,087
Average rate ............... 5.50%
Floating rate borrowings (7) ... 393,676 399,472
Average rate ............... 1.54%
----------- -----------
Total .......................... $ 7,094,416 $ 7,214,323
Average rate ............... 2.17%
----------- -----------
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.
26
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 non-contractual 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 September 30, 2002 was 1.15.
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 (due to the
current low rates, only the 100 basis shock in a downward scenario is shown):
Annual change
in net interest
Rate Shock income % Change
-------------- ------------------- ------------
+300 bp +$ 17.2 million + 5.4%
+200 bp +$ 17.1 million + 5.4%
+100 bp +$ 7.3 million + 2.3%
-100 bp -$ 11.9 million - 3.8%
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 (due to the current low rates, only the 100 basis shock in a downward
scenario is shown):
Change in
economic value of
Rate Shock equity % Change
-------------- ------------------- ------------
+300 bp -$ 29.3 million - 2.1%
+200 bp -$ 3.1 million - 0.2%
+100 bp +$ 8.6 million + 0.6%
-100 bp -$ 21.7 million - 1.6%
27
Item 4. Controls and Procedures
- --------------------------------
Within the 90 days prior to the filing date of this report, the Corporation
carried out an evaluation, under the supervision and with the participation of
the Corporation's management, including the Corporation's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15. Based upon that evaluation, the Corporation's Chief Executive
Officer and Chief Financial Officer concluded that the Corporation's disclosure
controls and procedures are effective. Disclosure controls and procedures are
controls and procedures that are designed to ensure that information required to
be disclosed in Corporation reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
we carried out this evaluation.
28
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:
(1) Form 8-K dated August 27, 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 September 20, 2002 reporting a presentation made at an
investor meeting to provide an overview of the Corporation's strategy
and performance.
29
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: November 14, 2002 /s/ Rufus A. Fulton, Jr.
------------------------- ----------------------------------------
Rufus A. Fulton, Jr.
Chairman and Chief Executive Officer
Date: November 14, 2002 /s/ Charles J. Nugent
------------------------- ------------------------------------------
Charles J. Nugent
Senior Executive Vice President and
Chief Financial Officer
CERTIFICATION
I, Rufus A. Fulton, Jr. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fulton Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
30
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Rufus A. Fulton, Jr.
------------------------- ------------------------------------------
Rufus A. Fulton, Jr.
Chairman and Chief Executive Officer
CERTIFICATION
I, Charles J. Nugent, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fulton Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
31
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Charles J. Nugent
------------------------- ------------------------------------------
Charles J. Nugent
Senior Executive Vice President and
Chief Financial Officer
32
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.
33