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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 March 31, 2003, or
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[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission File No. 0-10587
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FULTON FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2195389
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Penn Square, P.O. Box 4887 Lancaster, Pennsylvania 17604
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(Address of principal executive offices) (Zip Code)
(717) 291-2411
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. 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 - 105,578,000 shares outstanding as of
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April 30, 2003.
---------------
FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2003
INDEX
Description Page
- ----------- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
(a) Consolidated Balance Sheets -
March 31, 2003 and December 31, 2002 ...................................... 3
(b) Consolidated Statements of Income -
Three months ended March 31, 2003 and 2002 ................................ 4
(c) Consolidated Statements of Shareholders' Equity -
Three months ended March 31, 2003 and 2002 ................................ 5
(d) Consolidated Statements of Cash Flows -
Three months ended March 31, 2003 and 2002 ................................ 6
(e) Notes to Consolidated Financial Statements - March 31, 2003 ............... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........................ 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........... 18
Item 4. Controls and Procedures .............................................. 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ..................................... 22
Signatures .................................................................... 23
Certifications ................................................................ 23
Exhibit Index ................................................................. 26
2
Item 1. Financial Statements
FULTON FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per-share data)
March 31 December 31
2003 2002
------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks ................................................................... $ 348,229 $ 314,857
Interest-bearing deposits with other banks ................................................ 10,903 7,899
Mortgage loans held for sale .............................................................. 79,956 70,475
Investment securities:
Held to maturity (Fair value: $32,885 in 2003 and $34,135 in 2002) ................... 31,611 32,684
Available for sale ................................................................... 2,409,730 2,383,607
Loans, net of unearned income ............................................................. 5,289,036 5,317,068
Less: Allowance for loan losses ..................................................... (71,786) (71,920)
----------- -----------
Net Loans .................................................................. 5,217,250 5,245,148
----------- -----------
Premises and equipment .................................................................... 121,873 123,450
Accrued interest receivable ............................................................... 40,704 42,675
Goodwill .................................................................................. 61,048 61,048
Other assets .............................................................................. 109,026 105,935
----------- -----------
Total Assets ............................................................... $ 8,430,330 $ 8,387,778
=========== ===========
LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing ................................................................. $ 1,238,087 $ 1,118,227
Interest-bearing .................................................................... 5,106,481 5,127,301
----------- -----------
Total Deposits ............................................................. 6,344,568 6,245,528
----------- -----------
Short-term borrowings:
Securities sold under agreements to repurchase ....................................... 325,420 297,556
Federal funds purchased .............................................................. 180,000 330,000
Demand notes of U.S. Treasury ........................................................ 2,487 4,638
----------- -----------
Total Short-Term Borrowings ................................................ 507,907 632,194
----------- -----------
Accrued interest payable .................................................................. 27,046 27,608
Other liabilities ......................................................................... 145,980 77,651
Federal Home Loan Bank Advances and long-term debt ........................................ 535,210 535,555
Corporation-obligated mandatorily redeemable capital securities of subsidiary trust ....... 5,500 5,500
----------- -----------
Total Liabilities .......................................................... 7,566,211 7,524,036
----------- -----------
SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
Common stock, $2.50 par value, 400 million shares authorized, 109.2 million shares issued.. 272,940 259,943
Additional paid-in capital ................................................................ 565,042 481,028
Retained earnings ......................................................................... 58,948 138,501
Accumulated other comprehensive income .................................................... 27,479 34,801
Treasury stock (3.6 million shares in 2003 and 3.0 million shares in 2002) ................ (60,290) (50,531)
----------- -----------
Total Shareholders' Equity ................................................. 864,119 863,742
----------- -----------
Total Liabilities and Shareholders' Equity ................................. $ 8,430,330 $ 8,387,778
=========== ===========
- ------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
3
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per-share data)
Three Months Ended
March 31
---------------------------------
2003 2002
------------- -------------
INTEREST INCOME
- -----------------------------------------------------------------------------------------------
Loans, including fees .................................... $ 85,112 $ 94,659
Investment securities:
Taxable ............................................... 20,734 19,629
Tax-exempt ............................................ 2,520 2,381
Dividends ............................................. 1,148 1,054
Other interest income .................................... 670 76
------------- -------------
Total Interest Income ....................... 110,184 117,799
INTEREST EXPENSE
- -----------------------------------------------------------------------------------------------
Deposits ................................................. 25,707 33,574
Short-term borrowings .................................... 1,753 1,513
Long-term debt ........................................... 7,086 6,382
------------- -------------
Total Interest Expense ...................... 34,546 41,469
------------- -------------
Net Interest Income ......................... 75,638 76,330
PROVISION FOR LOAN LOSSES 2,835 2,780
------------- -------------
Net Interest Income After
Provision for Loan Losses ................. 72,803 73,550
------------- -------------
OTHER INCOME
- -----------------------------------------------------------------------------------------------
Investment management and trust services ................. 8,343 7,160
Service charges on deposit accounts ...................... 9,216 8,784
Other service charges and fees ........................... 4,586 4,105
Mortgage banking income .................................. 5,951 3,282
Investment securities gains .............................. 2,229 1,398
Other .................................................... 1,340 1,954
------------- -------------
Total Other Income .......................... 31,665 26,683
------------- -------------
OTHER EXPENSES
- -----------------------------------------------------------------------------------------------
Salaries and employee benefits ........................... 33,320 31,047
Net occupancy expense .................................... 5,080 4,292
Equipment expense ........................................ 2,680 2,799
Data processing .......................................... 2,864 3,213
Advertising .............................................. 1,232 1,793
Intangible amortization .................................. 359 359
Other .................................................... 10,347 11,425
------------- -------------
Total Other Expenses ........................ 55,882 54,928
------------- -------------
Income Before Income Taxes .................. 48,586 45,305
INCOME TAXES 14,543 13,075
------------- -------------
Net Income .................................. $ 34,043 $ 32,230
============= =============
PER-SHARE DATA:
- -----------------------------------------------------------------------------------------------
Net income (basic) ....................................... $ 0.32 $ 0.30
Net income (diluted) ..................................... 0.32 0.30
Cash dividends ........................................... 0.143 0.130
- -----------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
4
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
- --------------------------------------------------------------------------------
(Dollars in thousands, except per-share data)
Accumulated
Other
Number of Additional Comprehen-
Shares Common Paid-In Retained sive Income Treasury
Outstanding Stock Capital Earnings (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 106,162,000 $ 259,943 $ 481,028 $ 138,501 $ 34,801 $ (50,531) $ 863,742
Comprehensive Income:
Net income 34,043 34,043
Other - net unrealized loss
on securities (net of $3.2
million tax benefit) (5,873) (5,873)
Less - reclassification
adjustment for gains
included in net income (net
of $780,000 tax expense) (1,449) (1,449)
---------
Total comprehensive income 26,721
---------
Stock dividend - 5% 12,997 85,470 (98,467) -
Stock issued 192,000 (1,456) 3,246 1,790
Acquisition of treasury stock (756,000) (13,005) (13,005)
Cash dividends - $0.143 per share (15,129) (15,129)
-------------------------------------------------------------------------------------------
Balance at March 31, 2003 105,598,000 $ 272,940 $ 565,042 $ 58,948 $ 27,479 $ (60,290) $ 864,119
=========== ========= ========= ========== ============ ========== =========
Balance at December 31, 2001 108,429,000 $ 207,962 $ 536,235 $ 65,649 $ 12,970 $ (11,362) $ 811,454
Comprehensive Income:
Net income 32,230 32,230
Other - unrealized gain on
securities (net of $838,000 tax
expense) 1,557 1,557
Less - reclassification
adjustment for gains
included in net income (net
of $489,000 tax expense) (909) (909)
----------
Total comprehensive income 32,878
----------
Stock issued 221,000 (2,011) 3,491 1,480
Stock split paid in the form of a
25% stock dividend 51,981 (51,981) -
Acquisition of treasury stock (350,000) (6,068) (6,068)
Cash dividends - $0.130 per share (14,045) (14,045)
-------------------------------------------------------------------------------------------
Balance at March 31, 2002 108,300,000 $ 259,943 $ 482,243 $ 83,834 $ 13,618 $ (13,939) $ 825,699
=========== =========== ========== =========== =========== ========= ==========
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
5
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
(In thousands)
Three Months Ended
March 31
-------------------------------
2003 2002
--------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income .............................................................. $ 34,043 $ 32,230
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses .......................................... 2,835 2,780
Depreciation and amortization of premises and equipment ............ 3,115 3,148
Net amortization of investment security premiums ................... 4,108 247
Investment security gains .......................................... (2,229) (1,398)
Net increase in mortgage loans held for sale ....................... (9,481) (13,606)
Amortization of intangible assets .................................. 359 359
Decrease in accrued interest receivable ............................ 1,971 2,233
Decrease in other assets ........................................... 492 26
Decrease in accrued interest payable ............................... (562) (3,700)
Increase in other liabilities ...................................... 7,813 3,322
------------- -------------
Total adjustments ............................................. 8,421 (6,589)
------------- -------------
Net cash provided by operating activities ..................... 42,464 25,641
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale .................... 277,424 10,555
Proceeds from maturities of securities held to maturity ................. 6,024 5,442
Proceeds from maturities of securities available for sale ............... 350,982 141,734
Purchase of securities held to maturity ................................. (4,969) (1,469)
Purchase of securities available for sale ............................... (607,081) (281,783)
(Increase) decrease in short-term investments ........................... (3,004) 2,512
Net decrease in loans ................................................... 25,061 4,587
Net purchase of premises and equipment .................................. (1,538) (2,181)
------------- -------------
Net cash provided by (used in) investing activities ........... 42,899 (120,603)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits ............................. 155,011 40,109
Net decrease in time deposits ........................................... (55,971) 83,138)
Decrease in long-term debt .............................................. (345) (5,420)
(Decrease) increase in short-term borrowings ............................ (124,287) 61,992
Dividends paid .......................................................... (15,184) (14,042)
Net proceeds from issuance of common stock .............................. 1,790 1,480
Acquisition of treasury stock ........................................... (13,005) (6,068)
------------- -------------
Net cash used in financing activities ......................... (51,991) (5,087)
------------- -------------
Net Increase (Decrease) in Cash and Due From Banks ...................... 33,372 (100,049)
Cash and Due From Banks at Beginning of Period .......................... 314,857 356,539
------------- -------------
Cash and Due From Banks at End of Period ................................ $ 348,229 $ 256,490
============= =============
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest ........................................................... $ 35,108 $ 45,169
Income taxes ....................................................... 955 1,492
- ----------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
6
FULTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 2003
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2003.
NOTE B - Net Income Per Share
The Corporation's basic net income per share is calculated as net income divided
by the weighted average number of shares outstanding. For diluted net income per
share, net income is divided by the weighted average number of shares
outstanding plus the incremental number of shares added as a result of
converting common stock equivalents, calculated using the treasury stock method.
The Corporation's common stock equivalents consist solely of outstanding stock
options.
A reconciliation of the weighted average shares outstanding used to calculate
basic net income per share and diluted net income per share follows:
Three months ended
March 31
-----------------------------
2003 2002
------------ -----------
(in thousands)
Weighted average shares outstanding (basic) ............... 105,922 108,339
Impact of common stock equivalents ........................ 713 740
------------ -----------
Weighted average shares outstanding (diluted) ............. 106,635 109,079
============ ===========
NOTE C - Stock Dividend
The Corporation declared a 5% stock dividend on April 15, 2003 which will be
paid on May 23, 2003 to shareholders of record on April 30, 2003. All share and
per-share information has been restated to reflect the impact of this stock
dividend. In addition, shareholders' equity accounts have been adjusted to
reflect the impact of the dividend, assuming 5.2 million shares will be issued
on the payment date.
NOTE D - Disclosures about Segments of an Enterprise and Related Information
The Corporation does not have any operating segments which require disclosure of
additional information. While the Corporation owns ten separate banks, each
engages in similar activities, provides similar products and services, and
operates in the same general geographical area. The Corporation's non-banking
activities are immaterial and, therefore, separate information has not been
disclosed.
NOTE E - Goodwill and Intangible Assets
In October, 2002, the Corporation adopted Statement of Financial Accounting
Standards No. 147 "Acquisitions of Certain Financial Institutions" (Statement
147). Statement 147 changed the accounting for certain branch acquisitions to
allow the purchase price paid in excess of net assets acquired to be accounted
for as goodwill. Per Statement of Financial Accounting Standards No. 142,
"Goodwill and Intangible Assets", goodwill is not amortized, but is tested at
least annually for impairment. Adoption of Statement 147 resulted in the
restatement of results for the first quarter of 2002. The following table
summarizes the results of this restatement (in thousands, except per share
amounts):
7
2002
----------
Net income, originally reported ........................... $ 32,089
Amortization of goodwill, net of taxes .................... 141
----------
Net income, as restated ................................... $ 32,230
==========
Basic net income per share, originally reported (1) ....... $ 0.30
Amortization of goodwill, net of taxes .................... -
----------
Basic net income per share, as restated ................... $ 0.30
==========
Diluted net income per share, originally reported (1) ..... $ 0.29
Amortization of goodwill, net of taxes .................... -
----------
Diluted net income per share, as adjusted (2) ............. $ 0.30
==========
(1) As restated for the impact of stock dividends and splits.
(2) Amount does not sum due to rounding.
In prior filings, goodwill and intangible assets were combined for presentation
purposes in the consolidated balance sheets. Goodwill is now presented as a
separate line item and intangible assets totaling $10.9 million in 2003 and
$11.2 million in 2002 are included with other assets.
NOTE F - Pending Acquisition
On January 16, 2003, the Corporation entered into a merger agreement to acquire
Premier Bancorp, Inc. (Premier), of Doylestown, Pennsylvania. Premier is a $600
million financial holding company whose primary subsidiary is Premier Bank,
which operates seven community banking offices in Bucks, Northampton and
Montgomery Counties, Pennsylvania.
Under the terms of the merger agreement, each of the approximately 3.5 million
shares of Premier's common stock will be exchanged for 1.407 shares (restated to
reflect the impact of the 5% stock dividend discussed in Note C) of the
Corporation's common stock. In addition, each of the options to acquire
Premier's stock will be converted to options to purchase the Corporation's
stock. The acquisition is subject to approval by bank regulatory authorities and
Premier's shareholders, and is expected to be completed in the third quarter of
2003. As a result of the acquisition, Premier will be merged into the
Corporation and Premier Bank will become a wholly-owned subsidiary.
The acquisition will be accounted for as a purchase. Purchase accounting
requires the Corporation to allocate the total purchase price of the acquisition
to the assets acquired and liabilities assumed, based on their respective fair
values at the acquisition date, with any remaining acquisition cost being
recorded as goodwill. Resulting goodwill balances are then subject to an
impairment review on at least an annual basis. The results of Premier's
operations will be included in the Corporation's financial statements
prospectively from the date of the acquisition.
The total purchase price is estimated to be approximately $90 million, which
includes the value of the Corporation's stock to be issued, Premier options to
be converted and certain acquisition related costs. The net assets of Premier as
of December 31, 2002 were $38.4 million and accordingly, the purchase price
exceeds the carrying value of the net assets by 51.6 million as of this date.
The total purchase price will be allocated to the net assets acquired as of the
merger effective date, based on fair market values at that date. The Corporation
expects to record a core deposit intangible asset and goodwill as a result of
the acquisition accounting.
NOTE G - Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and
8
Disclosure" (Statement 148). Statement 148 clarifies the accounting for options
issued in prior periods when a company elects to transition from Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) accounting to Statement 123, "Accounting for Stock-Based Compensation"
(Statement 123) accounting. It also requires additional disclosures with respect
to accounting for stock-based compensation. Finally, Statement No. 148 amends
Accounting Principles Board Opinion No. 28, "Interim Financial Reporting," to
require disclosure about those effects in interim financial information.
The Corporation has elected to continue application of APB 25 and related
interpretations in accounting for its stock-based employee compensation plans
and, accordingly, no compensation expense is reflected in net income. The
Corporation did not grant any stock options during the first quarter of 2003 or
2002. As such, had stock-based compensation expense been recognized using the
fair value method consistent with Statements 123 and 148, there would have been
no impact on net income or net income per share for these periods.
NOTE H - Reclassifications
Certain amounts in the 2002 consolidated financial statements and notes have
been reclassified to conform to the 2003 presentation.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Management's 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.
FORWARD LOOKING STATEMENTS
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 and the liquidity
position of the Corporation and Parent Company. The Corporation cautions that
these forward-looking statements are subject to various assumptions, risks and
uncertainties. Because of the possibility of changes in these assumptions, risks
and uncertainties, actual results could differ materially from forward-looking
statements.
In addition to the factors identified herein, the following could cause actual
results to differ materially from such forward-looking statements: pricing
pressures on loan and deposit products, actions of bank and nonbank competitors,
changes in local and national economic conditions, changes in regulatory
requirements and regulatory oversight of the Corporation, actions of the Federal
Reserve Board (FRB) and the Corporation's success in merger and acquisition
integration.
The Corporation's forward-looking statements are relevant only as of the date on
which such statements are made. By making any forward-looking statements, the
Corporation assumes no duty to update them to reflect new, changing or
unanticipated events or circumstances.
RESULTS OF OPERATIONS
Quarter ended March 31, 2003 versus Quarter ended March 31, 2002
Fulton Financial Corporation's net income for the first quarter of 2003
increased $1.8 million, or 5.6%, in comparison to net income for the first
quarter of 2002. Diluted net income per share increased $0.02, or 6.7%, compared
to 2002. The increase from 2002 resulted from an increase in other income offset
by a decrease in net interest income, increases in expenses and a higher loan
loss provision.
Net Interest Income
Net interest income decreased $692,000, from $76.3 million in 2002 to $75.6
million in 2003. This decrease was due to continued low interest rates and slow
overall loan growth. The Corporation's average prime lending rate decreased from
4.75% in the first quarter of 2002 to 4.25% in the first quarter of 2003 as a
result of the FRB reducing short-term interest rates in November, 2002. This
reduction in an already low interest rate environment negatively impacted the
Corporation's net interest margin as average yields on earning-assets decreased
faster than the average cost of deposits.
The average yield on earning assets decreased 93 basis points (a 13.9 % decline)
during the period while the cost of interest-bearing liabilities decreased 70
basis points (a 17.5% decline). This resulted in a 38 basis point decrease in
net interest margin compared to the same period in 2002. The Corporation
continues to manage its asset/liability position and interest rate risk through
the methods discussed in the "Market Risk" section of this document.
The following table provides a comparative average balance sheet and net
interest income analysis for the first quarter of 2003 as compared to the same
period in 2002. All dollar amounts are in thousands.
10
Quarter Ended March 31, 2003 Quarter Ended March 31, 2002
-------------------------------------- -------------------------------------
Average Yield/ Average Yield/
ASSETS Balance Interest Rate (1) Balance Interest Rate (1)
- -------------------------------------- ------------ ------------ ---------- ------------ ------------ ---------
Interest-earning assets:
Loans and leases ................... $5,346,978 $ 85,112 6.46% $5,389,770 $ 94,659 7.12%
Taxable investment securities ...... 1,959,036 20,734 4.29 1,398,133 19,629 5.69
Tax-exempt investment securities ... 241,180 2,520 4.24 219,671 2,381 4.40
Equity securities .................. 133,300 1,148 3.49 103,018 1,054 4.15
Short-term investments ............. 54,995 670 4.94 13,972 76 2.21
---------- ----------- ------ ---------- ---------- ------
Total interest-earning assets ........ 7,735,489 110,184 5.78% 7,124,564 117,799 6.71%
Noninterest-earning assets:
Cash and due from banks ............ 257,555 244,949
Premises and equipment ............. 123,372 123,220
Other assets ....................... 238,132 227,330
Less: Allowance for loan losses .... (72,972) (72,441)
---------- ----------
Total Assets ............... 8,281,576 $7,647,622
========== ==========
Quarter Ended March 31, 2003 Quarter Ended March 31, 2002
-------------------------------------- -------------------------------------
Average Yield/ Average Yield/
LIABILITIES AND EQUITY Balance Interest Rate (1) Balance Interest Rate (1)
- -------------------------------------- ------------ ------------ ---------- ------------ ------------ ---------
Interest-bearing liabilities:
Demand deposits .................... $1,049,624 $ 1,623 0.63% $ 820,944 $ 1,275 0.63%
Savings deposits ................... 1,535,872 2,879 0.76 1,455,128 4,114 1.15
Time deposits ...................... 2,512,211 21,205 3.42 2,604,909 28,185 4.39
Short-term borrowings .............. 611,447 1,753 1.16 385,296 1,513 1.59
Long-term debt ..................... 540,906 7,086 5.31 463,706 6,382 5.58
---------- ----------- ------ ---------- ---------- ------
Total interest-bearing liabilities ... 6,250,060 34,546 2.24% 5,729,983 41,469 2.94%
Noninterest-bearing liabilities:
Demand deposits .................... 1,071,184 1,000,248
Other .............................. 95,690 103,531
---------- ----------
Total Liabilities .......... 7,416,934 6,833,762
Shareholders' equity ................. 864,642 813,860
---------- ----------
Total Liabilities and
Shareholders' Equity ..... $8,281,576 $7,647,622
========== ==========
Net interest income .................. $ 75,638 $ 76,330
=========== ==========
Net interest margin (FTE) ............ 4.06% 4.44%
====== =======
(1) Yields on tax-exempt securities are not fully taxable equivalent (FTE).
11
The following table summarizes the changes in interest income and expense due to
changes in average balances (volume) and changes in rates.
2003 vs. 2002
Increase (decrease) due
To change in
Volume Rate Net
---------- ----------- ----------
(in thousands)
Interest income on:
Loans and leases ...................... $ (777) $ (8,770) $ (9,547)
Taxable investment securities ......... 9,943 (8,838) 1,105
Tax-exempt investment securities ...... 244 (105) 139
Equity securities ..................... (320) 414 94
Short-term investments ................ 234 360 594
-------- --------- --------
Total interest-earning assets ....... $ 9,324 $ (16,939) $ (7,615)
======== ========= ========
Interest expense on:
Demand deposits ....................... $ 378 $ (30) $ 348
Savings deposits ...................... 242 (1,477) (1,235)
Time deposits ......................... (1,053) (5,927) (6,980)
Short-term borrowings ................. 917 (677) 240
Long-term debt ........................ 1,107 (403) 704
-------- --------- --------
Total interest-bearing liabilities .. $ 1,591 $ (8,514) $ (6,923)
======== ========= ========
Interest income decreased $7.6 million, or 6.5%, mainly as a result of the 93
basis point decrease in average yields on earning assets, which accounted for a
$16.9 million decline in interest income. This decrease was partially offset by
an increase in interest income due to growth in average balances, mainly in
taxable investment securities. The interest income increase attributable to
volume was $9.3 million.
The decrease in the average yield on earning assets from the first quarter of
2002 was mainly due to several factors. First was the general decrease in
interest rates as a result of the previously mentioned actions of the Federal
Reserve Board. Second, an approximately $646 million change in the mix of the
loan portfolio from fixed rate to floating rate loans occurred which trended the
Corporation toward greater asset sensitivity to interest-rate changes. Finally,
investment securities - which generally have lower yields than loans - became a
larger component of total average earning assets.
The Corporation's average loan portfolio decreased $42.8 million as increases in
commercial mortgages ($108.6 million, or 7.4%) and commercial loans ($161.8
million, or 10.5%) were more than offset by decreases in consumer loans ($84.6
million, or 14.0%) and residential mortgages ($250.9 million, or 17.6%).
Residential mortgages continued to decline as low mortgage rates fueled
refinance activity and most qualifying originated fixed rate mortgages were sold
in the secondary market. In addition, in August 2002 the Corporation sold
approximately $96 million of existing residential mortgages for balance sheet
management purposes. Consumer loans decreased due to payoffs as consumer debt
was refinanced with mortgages and the Corporation electing not to compete with
manufacturer-sponsored automobile loan rate incentives.
Average investment securities increased $612.7 million, or 35.6%, as the growth
in deposits and borrowings exceeded loan growth. The Corporation used the excess
funds to purchase investment securities, particularly mortgage-backed
securities, which grew $583.7 million, or 47.0%. The average yield on investment
securities declined 120 basis points from 5.44% in 2002 to 4.24% in 2003.
Interest expense decreased $6.9 million, or 16.7%, mainly due to the decline in
interest rates. Interest bearing demand and savings deposits increased $309.4
million, or 13.6%, while time deposits decreased
12
$92.7 million, or 3.6%. This change in the deposit mix reflects the depositors'
reluctance to reinvest maturing time deposits at the current low rates.
Short-term borrowings increased $226.2 million, or 58.7%, and long-term debt
increased $77.2 million, or 17.0%. The net $520.1 million, or 9.1%, increase in
average interest-bearing liabilities resulted in only a $1.6 million increase in
interest expense due to the change in the composition of these liabilities. The
70 basis point decline in the average cost of interest-bearing funds resulted in
an $8.5 million decrease in interest expense.
The increase in average short-term borrowings was realized mainly in Federal
funds purchased, which were used to reduce interest rate sensitivity to the
previously mentioned change in the loan mix from fixed to floating rates.
Long-term debt increased $77.2 million, or 16.6%, from the same period in 2002.
The Corporation locked in longer term funding rates through the use of advances
from the Federal Home Loan Bank (FHLB) in order to take advantage of the low
interest rate environment.
Provision and Allowance for Loan Losses
The following table summarizes loans outstanding (including unearned income) as
of the dates shown:
March 31 December 31 March 31
2003 2002 2002
----------- ----------- -----------
(in thousands)
Commercial, financial and agricultural .. $ 1,710,323 $ 1,679,100 $ 1,548,492
Real estate - construction .............. 241,861 248,565 248,109
Real estate - residential mortgage ...... 1,170,664 1,244,781 1,421,517
Real estate - commercial mortgage ....... 1,570,509 1,527,144 1,461,896
Consumer 521,281 543,040 605,898
Leasing and other ....................... 74,398 74,438 79,952
----------- ----------- -----------
Total Loans ........................... $ 5,289,036 $ 5,317,068 $ 5,365,864
=========== =========== ===========
13
The following table summarizes the activity in the Corporation's allowance for
loan losses:
Three Months Ended
March 31
------------------------
2003 2002
----------- ----------
(dollars in thousands)
Loans outstanding at end of period (net of unearned) ............. $5,289,036 $5,365,864
========== ==========
Daily average balance of loans and leases ........................ $5,346,978 $5,389,770
========== ==========
Balance at beginning of period ................................... $ 71,920 $ 71,872
Loans charged-off:
Commercial, financial and agricultural ....................... 1,809 805
Real estate - mortgage ....................................... 644 810
Consumer ..................................................... 1,336 1,724
Leasing and other ............................................ 160 189
---------- ----------
Total loans charged-off ...................................... 3,949 3,528
---------- ----------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural ....................... 310 378
Real estate - mortgage ....................................... 215 38
Consumer ..................................................... 443 542
Leasing and other ............................................ 12 1
---------- ----------
Total recoveries ............................................. 980 959
---------- ----------
Net loans charged-off ............................................ 2,969 2,569
Provision for loan losses ........................................ 2,835 2,780
---------- ----------
Balance at end of period ......................................... $ 71,786 $ 72,083
========== ==========
Net charge-offs to average loans (annualized) .................... 0.22% 0.19%
========== ==========
Allowance for loan losses to loans outstanding ................... 1.36% 1.34%
========== ==========
The following table summarizes the Corporation's non-performing assets as of the
indicated dates.
March 31 Dec. 31 March 31
(Dollars in thousands) 2003 2002 2002
-------- ------- --------
Non-accrual loans ....................... $25,686 $24,090 $22,054
Loans 90 days past due and accruing ..... 10,676 14,095 10,870
Other real estate owned (OREO) .......... 757 938 1,718
------- ------- -------
Total non-performing assets ............. $37,119 $39,123 $34,642
======= ======= =======
Non-accrual loans/Total loans ........... 0.49% 0.45% 0.61%
Non-performing assets/Total assets ...... 0.44% 0.47% 0.44%
Allowance/Non-performing loans .......... 197% 188% 219%
The provision for loan losses for the first quarter of 2003 totaled $2.8
million, an increase of $55,000, or 2.0%, from the same period in 2002. Net
charge-offs totaled $3.0 million, or 0.22% of average loans on an annualized
basis, during the first quarter of 2003, a $400,000, or 15.6%, increase from the
$2.6 million, or 0.19%, in net charge-offs for the first quarter of 2002.
Non-performing assets increased to $37.1 million, or 0.44% of total assets, at
March 31, 2003, from $34.6 million, or 0.44% of total assets, at March 31, 2002.
14
The provision for loan losses resulted from the Corporation's allowance
allocation procedures. Trends that would indicate the need for a higher
provision include the general national and regional economies and the continued
growth in the Corporation's commercial loan and commercial mortgage portfolios,
which are inherently more risky. Despite these factors, the Corporation's asset
quality measures have remained consistent over the past several years. The net
result of the Corporation's allowance allocation procedures was a provision for
loan losses that was essentially unchanged from 2002 and was comparable to total
net charge-offs for the quarter.
Management believes that the allowance balance of $71.8 million at March 31,
2003 is sufficient to cover losses inherent in the loan portfolio on that date
and is appropriate based on applicable accounting standards.
Other Income
Other income for the quarter ended March 31, 2003 was $31.7 million, an increase
of $5.0 million, or 18.7%, over the comparable period in 2002. Excluding
investment securities gains, which increased from $1.4 million in 2002 to $2.2
million in 2003, other income increased $4.1 million, or 16.4%.
The most significant increase was realized in mortgage banking income, which
increased $2.7 million, or 44.8%, to $6.0 million. The Corporation has devoted
additional resources to mortgage banking activities to provide enhanced mortgage
lending services throughout its geographic markets. In addition, the national
monthly average for fixed rate mortgage loans decreased 114 basis points from
7.10% in the first quarter of 2002 to 5.96% in the first quarter of 2003. These
factors resulted in an increase in mortgage loan originations of $75.4 million
for a total of $258.8 million in 2003 as compared to $183.4 million in 2002. In
order to limit interest rate risk, the Corporation generally sells the
qualifying fixed rate mortgage loans it originates, resulting in gains.
Investment management and trust services income increased $1.2 million, or
16.5%, mainly due to brokerage services as fixed-rate annuities have become
popular in the current rate and economic environment. Service charges on deposit
accounts increased $432,000, or 4.9%, mainly due to growth in transaction
accounts, such as savings and demand deposits. Other service charges and fees
increased $481,000, or 11.7%, as the scope and penetration of the Corporation's
other services continued to expand.
Income from debit card transactions increased $111,000, or 9.9%, to $1.2 million
for the first quarter of 2003 due to an increase in purchase volumes. In
response to recent legal settlements between VISA and MasterCard and a third
party, the earnings rate paid by these companies on debit card purchase volumes
is expected to decrease by at least one third from August 1, 2003 through the
end of 2003. Due to uncertainties created by the terms of these settlements,
the impact on debit card income for the Corporation beyond 2003 cannot
reasonably be projected.
Investment securities gains increased $831,000, or 59.4%. Investment securities
gains during the first quarter of 2003 consisted of realized gains of $2.2
million of net gains on the sale of equity securities and $3.2 million on the
sale of available for sale debt securities. These gains were offset by $3.2
million of losses recognized for equity securities exhibiting other than
temporary impairment.
Other Expenses
Total other expenses for the first quarter of 2003 were $55.9 million,
representing an increase of $954,000, or 1.7%, from 2002. The increase was due
to a $2.2 million, or 7.3%, increase in salaries and benefits, and an increase
in occupancy expenses of $788,000, or 18.4%. Partially offsetting these
increases was a decrease in equipment expense of $119,000, or 4.3%, a decrease
in data processing expense of $349,000, or 10.9%, a decrease in advertising
expense of $561,000, or 31.3%, and a decrease in other expense of $1.1 million,
or 9.4%.
Salaries and employee benefits increased $2.2 million, or 7.3%, in comparison to
the first quarter of 2002. The salary expense component increased $1.6 million,
or 6.6%, driven by normal salary increases for existing employees as well an
increase in commissions paid in mortgage banking and trust services. The
employee benefits component of the expense increased $281,000, or 5.3%, due
mainly to rising retirement plan expenses.
Net occupancy expense increased $788,000, or 18.4%, over the same period in
2002, mainly due to the particularly harsh winter in the Corporation's
geographic locations which drove up the cost of snow removal
15
and utilities expenses over the same period in 2002. The remaining increase was
due to general increases in rental costs and real estate taxes. Equipment
expense decreased $119,000, or 4.3%, due to a reduction in depreciation expense
as certain equipment became fully depreciated during 2002.
The 10.9% decrease in data processing expense was due to favorable
renegotiations of certain contracts for data processing services. Advertising
expense decreased $561,000, or 31.3%, mainly due to a significant branding
campaign at the Corporation's lead bank in 2002. Other expense decreased $1.1
million, or 9.4%, to $10.3 million in 2003.
Income Taxes
Income tax expense for the first quarter of 2002 was $14.5 million, a $1.5
million, or 11.2%, increase from $13.1 million in 2002. The Corporation's
effective tax rate was approximately 29.9% in 2003 as compared to 28.9% in 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 at March 31, 2003 remained almost unchanged from
December 31, 2002 at $8.4 billion. Loans outstanding, net of unearned income,
decreased $28.0 million, or 0.1%, during the period. Commercial loans and
commercial mortgages increased $74.6 million, or 2.3%, offset by a decrease in
residential mortgages ($74.1 million, or 6.0%) as a result of refinance
activity. In addition, consumer loans and leases declined $21.8 million, or
3.5%.
Cash and due from banks increased $33.4 million, or 10.6%, during the period.
Due to the nature of these accounts, normal daily balances can fluctuate up or
down in the normal course of business. On a monthly average balance basis, cash
and due from banks increased $10.7 million, or 4.1%. Investment securities
increased $58.1 million, or 2.4%, as securities purchases of $672.9 million
exceeded proceeds from maturities and sales of $632.9 million.
Deposits increased $99.0 million, or 1.6%, from December 31, 2002. In addition
to this slight increase, a change in the mix also occurred. Savings deposits and
demand deposits increased by $122.3 million and $32.7 million, respectively,
while time deposits decreased $56.0 million. This reflects a continuing
sentiment in the financial community that interest rates will start to rise in
the future, leaving consumers reluctant to reinvest maturing time deposits at
the current lower rates.
Short-term borrowings, which consist mainly of Federal funds purchased and
customer cash management accounts, decreased $124.3 million, or 19.7%, during
the first quarter of 2003. Federal funds purchased decreased $150.0 million, or
45.5%, while customer cash management accounts increased $27.9 million, or 9.4%.
Federal funds purchased decreased as a result of the increase in deposits
exceeding the demand for loans. Long-term debt decreased slightly by $345,000,
or 1.0%, as a result of maturing Federal Home Loan Bank advances.
Other liabilities increased $68.3 million, or 88.0%, mainly due to $60.1 million
of investment securities which were purchased in March, but not yet settled at
March 31, 2003.
Capital Resources
Total shareholders' equity increased only $377,000 during the first three months
of 2003. Increases due to net income of $34.0 million and $1.8 million in
issuances of stock, were offset by $15.1 million in cash dividends to
shareholders, $13.0 million of stock repurchases and $7.3 million in unrealized
losses on securities.
16
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 March 31, 2003, 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
3.3 million shares of the Corporation's common stock through June 30, 2002 (the
plan was subsequently extended to December 31, 2002). Stock repurchased was
added to the Corporate treasury to be used for general corporate purposes.
During the first quarter of 2002, the Corporation repurchased 350,000 shares
under these plans.
On December 17, 2002, the Board of Directors approved a program to repurchase up
to 3.2 million shares through June 30, 2003. During the first quarter of 2003,
the Corporation repurchased 756,000 shares under the current plan.
Liquidity
The Corporation must maintain a sufficient level of liquid assets to meet the
cash needs of its customers, who, as depositors, may want to withdraw funds or
who, as borrowers, need credit availability. Liquidity is provided through
scheduled and unscheduled principal and interest payments on outstanding loans
and investments and through the availability of deposits and borrowings. In
addition, the Corporation can borrow on a secured basis from the Federal Home
Loan Bank to meet short-term liquidity needs.
The Corporation's sources and uses of cash were discussed in general terms in
the net interest income section of Management's Discussion. The Consolidated
Statements of Cash Flows provides additional information. The Corporation
generated $42.5 million in cash from operating activities during the first
quarter of 2003, mainly due to net income. Investing activities resulted in a
net cash inflow of $42.9 million, compared to a net cash outflow of $120.6
million in 2002, as prepayments of loans and mortgage-backed securities exceeded
originations and purchases. Finally, financing activities resulted in a net
outflow of $52.0 million as excess funds were used to pay down borrowings.
Liquidity must also be managed at the Fulton Financial Corporation Parent
Company level. For safety and soundness reasons, banking regulations limit the
amount of cash that can be transferred from subsidiary banks to the Parent
Company in the form of loans and dividends. Generally, these limitations are
based on the subsidiary banks' regulatory capital levels and their net income.
The Parent Company has historically been able to meet its cash needs through
normal, allowable dividends and loans. If additional cash needs arise that
cannot be met through dividends and loans, the Parent Company may need to
investigate alternative liquidity sources, including stock or debt issuances.
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 financial institutions include interest
17
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
primarily of common stocks of publicly traded financial institutions (cost basis
of approximately $79.3 million and fair value of $85.0 million at March 31,
2003). The Corporation's financial institutions stock portfolio had gross
unrealized gains of approximately $10.7 million at March 31, 2003.
Although the carrying value of equity investments accounted for less than 1.0%
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.
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 table on page 19 as
such investments do not have maturity dates.
Certain of the Corporation's equity investments have shown negative returns in
tandem with the general performance of equity markets. The Corporation has
evaluated, based on current accounting guidance, whether the decreases in value
of any of these investments constitute "other than temporary" impairment which
would require a write-down through a charge to earnings. During the first
quarter of 2003 the Corporation recorded a pre-tax charge of $3.2 million for
specific equity securities which were determined to have "other than temporary"
impairment in value. If the market values of certain equity securities do not
improve over the next twelve months, additional impairment charges could be
deemed necessary.
In addition to its equity portfolio, the Corporation's investment management and
trust services revenue could be impacted by fluctuations in the securities
markets. A portion of the Corporation's trust revenue is based on the value of
the underlying investment portfolios. If securities markets contract, the
Corporation's revenue could be negatively impacted. In addition, the ability of
the Corporation to sell its equities brokerage services is dependent, in part,
upon consumers' level of confidence in the outlook for rising securities prices.
Interest Rate Risk
Interest rate risk creates exposure in two primary areas. First, changes in
rates have an impact on the Corporation's liquidity position and could affect
its ability to meet obligations and continue to grow. Second, movements in
interest rates can create fluctuations in the Corporation's net income and
changes in the economic value of its equity.
The Corporation employs various management techniques to minimize its exposure
to interest rate risk. An Asset/Liability Management Committee (ALCO),
consisting of key financial and senior management personnel, meets on a weekly
basis. The ALCO is responsible for reviewing the interest rate sensitivity
position of the Corporation, approving asset and liability management policies,
and overseeing the formulation and implementation of strategies regarding
balance sheet positions and earnings. The primary goal of asset/liability
management is to address the liquidity and net income risks noted above.
18
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.
Expected Maturity Period
--------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Beyond
------------- ------------- ----------- ----------- ----------- -------------
Fixed rate loans (1) ............ $ 870,933 $ 636,549 $ 432,918 $ 301,625 $ 192,857 $ 425,137
Average rate ................ 7.04% 7.26% 7.21% 7.24% 7.17% 7.41%
Floating rate loans (1) ......... 872,668 272,234 213,206 176,737 135,094 759,078
Average rate ................ 5.21% 5.51% 5.54% 5.57% 4.76% 4.55%
Fixed rate investments (2) ...... 1,024,477 342,253 140,256 156,834 134,938 460,370
Average rate ................ 4.77% 4.79% 4.53% 4.42% 4.38% 3.92%
Floating rate investments (2) ... 1,000 - - - - 7,942
Average rate ................ 7.55% - - - - 3.48%
Other interest-earning assets ... 90,859 - - - - -
Average rate ................ 5.78% - - - - -
------------- ------------- ----------- ----------- ----------- -------------
Total ........................... $ 2,859,937 $ 1,251,036 $ 786,380 $ 635,196 $ 462,889 $ 1,652,527
Average rate ................ 5.63% 6.20% 6.28% 6.08% 5.65% 5.11%
------------- ------------- ----------- ----------- ----------- -------------
Fixed rate deposits (3) ......... $ 1,283,151 $ 485,409 $ 196,309 $ 145,845 $ 128,670 $ 70,677
Average rate ................ 2.80% 3.60% 3.95% 4.66% 4.61% 4.86%
Floating rate deposits (4) ...... 1,588,089 147,239 147,239 147,239 147,239 1,857,462
Average rate ................ 1.18% 0.16% 0.16% 0.16% 0.16% 0.15%
Fixed rate borrowings (5) ....... 45,623 5,240 78,254 10,268 140,416 255,373
Average rate ................ 4.80% 6.37% 6.29% 3.44% 4.72% 5.12%
Floating rate borrowings (6) .... 502,555 - - - - -
Average rate ................ 1.11% - - - - -
------------- ------------- ----------- ----------- ----------- -------------
Total ........................... $ 3,419,418 $ 637,888 $ 421,802 $ 303,352 $ 416,325 $ 2,183,512
Average rate ................ 1.83% 2.83% 3.06% 2.43% 3.07% 0.88%
------------- ------------- ----------- ----------- ----------- -------------
Estimated
Total Fair Value
------------- ----------
Fixed rate loans (1) ............ $ 2,860,019 $3,282,183
Average rate ................ 7.20%
Floating rate loans (1) ......... 2,429,017 2,316,567
Average rate ................ 5.07%
Fixed rate investments (2) ...... 2,259,128 2,295,458
Average rate ................ 4.54%
Floating rate investments (2) ... 8,942 8,942
Average rate ................ 3.94%
Other interest-earning assets ... 90,859 90,859
Average rate ................ 5.78%
------------- ----------
Total ........................... $ 7,647,965 $7,994,009
Average rate ................ 5.72%
------------- ----------
Fixed rate deposits (3) ......... $ 2,310,061 $2,371,675
Average rate ................ 3.35%
Floating rate deposits (4) ...... 4,034,507 4,034,507
Average rate ................ 0.56%
Fixed rate borrowings (5) ....... 535,174 570,179
Average rate ................ 5.14%
Floating rate borrowings (6) .... 502,555 502,555
Average rate ................ 1.11%
------------- ----------
Total ........................... $ 7,382,297 $7,478,916
Average rate ................ 1.80%
------------- ----------
Assumptions:
(1) Based on contractual maturities, adjusted for expected prepayments.
(2) Based on contractual maturities, adjusted for expected prepayments on
mortgage-backed securities.
(3) Based on contractual maturities of time deposits.
(4) Money market and Super NOW deposits are shown in first year. NOW and
savings accounts are spread based on history of deposit flows.
(5) Amounts are based on expected payoffs and calls of Federal Home Loan Bank
advances.
(6) Amounts are Federal funds purchased and securities sold under agreements to
repurchase, which mature in less than 90 days.
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
19
into predetermined repricing periods. The assets and liabilities in each of
these periods are summed and compared for mismatches within that maturity
segment. Core deposits having noncontractual maturities are placed into
repricing periods based upon historical balance performance. Repricing for
mortgage loans held and for mortgage-backed securities includes the effect of
expected cash flows. Estimated prepayment effects are applied to these balances
based upon industry projections for prepayment speeds. The Corporation's policy
limits the cumulative 6-month gap to plus or minus 15% of total earning assets.
The cumulative 6-month gap as of March 31, 2003 was 1.12.
Simulation of net interest income and of net income is performed for the next
twelve-month period. A variety of interest rate scenarios is used to measure the
effects of sudden and gradual movements upward and downward in the yield curve.
These results are compared to the results obtained in a flat or unchanged
interest rate scenario. Simulation of earnings is used primarily to measure the
Corporation's short-term earnings exposure to rate movements. The Corporation's
policy limits the potential exposure of net interest income to 10% of the base
case net interest income for every 100 basis point "shock" in interest rates. A
"shock' is an immediate upward or downward movement of interest rates across the
yield curve based upon changes in the prime rate. The following table summarizes
the expected impact of interest rate shocks on net interest income:
Annual change
-------------- ------------------- --------------
-------------- in net interest --------------
Rate Shock income % Change
-------------- ------------------- --------------
+300 bp +$ 23.1 million + 8.1%
+200 bp +$ 17.1 million + 5.9%
+100 bp +$ 12.8 million + 4.4%
-100 bp -$ 17.8 million - 6.2%
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 re-pricing risks and options in the Corporation's
balance sheet. A policy limit of 10% of economic equity may be at risk for every
100 basis point "shock" movement in interest rates. The following table
summarizes the expected impact of interest rate shocks on economic value of
equity.
Change in
-------------- ------------------ --------------
-------------- economic value --------------
Rate Shock of equity % Change
-------------- ------------------ --------------
+300 bp +$ 20.4 million + 1.5%
+200 bp +$ 19.2 million + 1.4%
+100 bp +$ 73.0 million + 5.4%
-100 bp -$ 30.6 million - 2.3%
20
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.
21
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.
(b) Reports on Form 8-K:
(1) Form 8-K dated January 16, 2003 disclosing the execution of a
definitive Agreement and Plan of Merger with Premier Bancorp,
Inc.
(2) Form 8-K dated February 4, 2003 reporting a presentation
made at an investor meeting to provide an overview of the
Corporation's strategy and performance.
(3) Form 8-K dated February 14, 2003 amending Form 8-K dated
February 4, 2003 for additional investor presentation
information.
22
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: May 14, 2003 /s/ Rufus A. Fulton, Jr.
------------------------- -----------------------------------------
Rufus A. Fulton, Jr.
Chairman and Chief Executive Officer
Date: May 14, 2003 /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 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
23
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;
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: May 14, 2003 /s/ Rufus A. Fulton, Jr.
------------------- -----------------------------------------
Rufus A. Fulton, Jr.
Chairman and Chief Executive Officer
24
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 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;
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: May 14, 2003 /s/ Charles J. Nugent
----------------------- ---------------------------------------
Charles J. Nugent
Senior Executive Vice President and
Chief Financial Officer
25
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