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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission file number: 33-85626
FULTON BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Commonwealth of Pennsylvania 25-1598464
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Lincoln Way East
McConnellsburg, Pennsylvania 17233
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (717) 485-3144
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 20, 2002
(Common stock, .625 par value) 492,770
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders' report for the year ended
December 31, 2001 are incorporated by reference into Parts I and
II. Portions of the Proxy Statement for 2001 Annual Meeting of
Security Holders are incorporated by reference in Part III of this
Form 10-K.
Item 1. Business.
Description of the Company
Fulton Bancshares Corporation (the "Company"), a
Pennsylvania business corporation, is a bank holding company
registered with and supervised by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). The Company
was incorporated on March 29, 1989 under the business corporation
law of the Commonwealth of Pennsylvania for the purpose of
becoming a bank holding company. Since commencing operations, the
Company's business has consisted primarily of managing and
supervising the Fulton County National Bank and Trust Company (the
"Bank"), and its principal source of income has been dividends
paid by the Bank. The Company has two wholly-owned subsidiaries -
the Bank, and Fulton County Community Development Corporation
("FCCDC"), which was formed on June 7, 1996 to support efforts of
the local downtown business revitalization project by making low
interest loans to eligible small businesses for the purpose of
facade improvement. FCCDC had minimal activity in 2001, and has
no employees.
The principal executive office of the Company is located
at 100 Lincoln Way East, McConnellsburg, Fulton County,
Pennsylvania 17233. The telephone number of the Company is (717)
485-3144.
The Company has no employees.
Supervision and Regulation - The Company
The Company is subject to the provisions of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company
Act"), and to supervision by the Federal Reserve Board. The Bank
Holding Company Act requires the Company to secure the prior
approval of the Federal Reserve Board before it owns or controls,
directly or indirectly, more than five percent (5%) of the voting
shares or substantially all of the assets of any institution,
including another bank. The Bank Holding Company Act prohibits
acquisition by the Company of more than five percent (5%) of the
voting shares of, or interest in, all or substantially all of the
assets of any bank located outside of Pennsylvania unless such
acquisition is specifically authorized by the laws of the state in
which such bank is located.
A bank holding company is prohibited from engaging in or
acquiring direct or indirect control of more than five percent
(5%) of the voting shares of any company engaged in nonbanking
activities unless the Federal Reserve Board, by order or
regulation, has found such activities to be so closely related to
banking or managing or controlling banks as to be a proper
incident thereto.
The Company is required to file an annual report with
the Federal Reserve Board and any additional information that the
Federal Reserve Board may require pursuant to the Bank Holding
Company Act. The Federal Reserve Board may also make examinations
of the Company and any or all of its subsidiaries.
Federal law prohibits acquisitions of control of a bank
holding company without prior notice to certain federal bank
regulators. Control is defined for this purpose as the power,
directly or indirectly, to direct the Management or policies of
the bank or bank holding company or to vote 25% or more of any
class of voting securities of the bank holding company. A person
or group holding revocable proxies to vote 25% or more of the
stock of a bank or its holding company would presumably be deemed
to control the institution for purposes of this federal law.
Subsidiary banks of a bank holding company are subject
to certain restrictions imposed by the Federal Reserve Act on any
extensions of credit to the bank holding company or any of its
subsidiaries, on investments in the stock or other securities of
the bank holding company and on taking of such stock or securities
as collateral for loans to any borrower.
Permitted Activities
The Federal Reserve Board permits bank holding companies
to engage in activities so closely related to banking or managing
or controlling banks as to be a proper incident thereto. The
Company does not at this time engage in any of the permissible
activities described below, nor does the Company have any current
plans to engage in these activities in the foreseeable future.
While the types of permissible activities are subject to
a variety of limitations and to change by the Federal Reserve
Board, the principal activities that presently may be conducted by
a bank holding company and may in the future be engaged by the
Company are: (1) making, acquiring or servicing loans and other
extensions of credit for its own account or for the account of
others, such as would be made by consumer finance, credit card,
mortgage, commercial finance and factoring companies; (2)
operating as an industrial bank or similar entity in the manner
authorized by state law so long as the institution does not both
accept demand deposits and make commercial loans; (3) operating as
a trust company in the manner authorized by federal or state law
so long as the institution does not make certain types of loans or
investments or accept deposits, except as may be permitted by the
Federal Reserve Board; (4) acting as an investment or financial
advisor to investment companies and other persons; (5) leasing
personal and real property or acting as agent, broker or advisor
in leasing property; (6) making equity and debt investments in
corporations or projects designed primarily to promote community
welfare; (7) providing to others financially oriented data
processing or bookkeeping services; (8) acting as an insurance
agent or broker in relation to insurance for itself and its
subsidiaries or for insurance directly related to extensions of
credit; (9) acting as underwriter for credit life insurance and
credit accident and health insurance: (10) providing courier
services of a limited character; (11) providing management
consulting advice to nonaffiliated banks and nonbank depository
institutions; (12) selling money orders, travelers' checks and
United States savings bonds; (13) performing appraisals of real
estate; (14) acting as intermediary for the financing of
commercial or industrial income-producing real estate by arranging
for the transfer of the title, control and risk of such a real
estate project to one or more investors; (15) providing securities
brokerage services, related securities credit activities and
incidental activities such as offering custodial services,
individual retirement accounts and cash management services, if
the securities brokerage services are restricted to buying and
selling securities solely as agent for the account of customers
and do not include securities underwriting or dealing or
investment advice or research services; (16) underwriting and
dealing in obligations of the United States, general obligations
of states and their political subdivisions such as bankers'
acceptances and certificates of deposit; (17) providing general
information, advisory services and statistical forecasting with
respect to foreign exchange markets; (18) acting as a futures
commission merchant in the execution and clearance on major
commodity exchanges of futures contracts and options on futures
contracts for bullion, foreign exchange, government securities,
certificates of deposit and other money market instruments; (19)
performing personal property appraisals that require expertise
regarding all types of personal and business property, including
intangible property such as corporate securities; (20) providing
commodity trading and futures commission merchant advice; (21)
providing consumer financial counseling to individuals on
consumer-oriented financial management matters, including debt
consolidation, mortgage applications, bankruptcy, budget
management, real estate tax shelters, tax planning, retirement and
estate planning, insurance and general investment management, so
long as this activity does not include the sale of specific
products or investments; (22) providing tax planning and
preparation advice to corporations and individuals; (23) providing
check guaranty services to subscribing merchants; (24) operating a
collection agency and credit bureau; and (25) acquiring and
operating thrift institutions, including savings and loan
associations, building and loan associations and FDIC-insured
savings banks.
Certain Provisions of Pennsylvania Banking Law
Under the Pennsylvania Banking Code of 1965, as amended,
(the "Code"), the Company has been permitted since March 4, 1990
to control an unlimited number of banks. However, the Company
would be subject to the requirements of the Bank Holding Company
Act as discussed in the "Supervision and Regulation - The Company"
section above.
Also since March 4, 1990, the Code authorizes reciprocal
interstate banking without any geographic limitation. Reciprocity
between states exists when a foreign state's law authorizes
Pennsylvania bank holding companies to acquire banks or bank
holding companies located in that state on terms and conditions
substantially no more restrictive than those applicable to such an
acquisition by a bank holding company located in that state. For
a further discussion of interstate banking and branching, see the
section entitled "Legislation and Regulatory Changes" below.
Legislation and Regulatory Changes
From time to time, legislation is enacted which has the
effect of increasing the cost of doing business, limiting or
expanding permissible activities or affecting the competitive
balance between banks and other financial institutions. Proposals
to change the laws and regulations governing the operations and
taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, and before various
bank regulatory agencies. No prediction can be made as to the
likelihood of any major changes or the impact such changes might
have on the Company and its subsidiary, the Bank. Certain changes
of potential significance to the Company are discussed below.
The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking and Branch Act")
permits interstate banking to occur. Bank holding companies,
pursuant to an amendment to the Bank Holding Company Act, can
acquire a bank located in any state, as long as the acquisition
does not result in the bank holding company controlling more than
10% of the deposits in the United States, or 30% of the deposits
in the target bank's state. The legislation permits states to
waive the concentration limits and require that the target
institution be in existence for up to five years before it can be
acquired by an out-of-state bank or bank holding company.
Interstate branching and merging of existing banks is permitted
after September 29, 1997 if the bank is adequately capitalized and
demonstrates good management.
The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") was enacted in August of 1989.
This law was enacted primarily to improve the supervision of
savings associations by strengthening capital, accounting and
other supervisory standards. In addition, FIRREA reorganized the
FDIC by creating two deposit insurance funds to be administered by
the FDIC: The Savings Association Insurance Fund and the Bank
Insurance Fund. Customers' deposits held by the Bank are insured
under the Bank Insurance Fund. FIRREA also regulates real estate
appraisal standards and the supervisory/enforcement powers and
penalty provisions in connection with the regulation of the Bank.
Effects of Inflation
Inflation has some impact on the Company's, the Bank's,
and FCCDC's operating costs. Unlike many industrial companies,
however, substantially all of the Bank's and FCCDC's assets and
liabilities are monetary in nature. As a result, interest rates
have a more significant impact on the Company's, the Bank's, and
FCCDC's performance than the general level of inflation. Over
short periods of time, interest rates may not necessarily move in
the same direction or in the same magnitude as prices of goods and
services.
Monetary Policy
The earnings of the Company, the Bank, and FCCDC are
affected by domestic economic conditions and the monetary and
fiscal policies of the United States Government and its agencies.
An important function of the Federal Reserve System is to
regulate the money supply and interest rates. Among the
instruments used to implement those objectives are open market
operations in United States government securities and changes in
reserve requirements against member bank deposits. These
instruments are used in varying combinations to influence overall
growth and distribution of bank loans, investments and deposits,
and their use may also affect rates charged on loans or paid for
deposits.
The Bank is a member of the Federal Reserve System and,
therefore, the policies and regulations of the Federal Reserve
Board have a significant effect on its deposits, loans and
investment growth, as well as the rate of interest earned and
paid, and are expected to affect the Bank's operations in the
future. The effect of such policies and regulations upon the
future business and earnings of the Company, the Bank, and FCCDC
cannot be predicted.
Environmental Regulation
There are several federal and state statutes which
regulate the obligations and liabilities of financial institutions
pertaining to environmental issues. In addition to the potential
for attachment of liability resulting from its own actions, a bank
may be held liable under certain circumstances for the actions of
its borrowers, or third parties, when such actions result in
environmental problems on properties that collateralize loans held
by the Bank. Further, the liability has the potential to far
exceed the original amount of the loan issued by the Bank.
Currently, the Company, the Bank, and FCCDC are not party to any
pending legal proceeding pursuant to any environmental statute,
nor is the Company, the Bank, or FCCDC aware of any circumstances
which may give rise to liability under any such statute.
Description of the Bank
The Bank was organized on February 24, 1887 as a
Pennsylvania state-chartered banking institution. It converted to
a national banking association on September 5, 1933, and is
presently under the supervision of the Office of the Comptroller
of the Currency (the "Comptroller"). The Bank is a member of the
Federal Reserve System. Customers' deposits held by the Bank are
insured by the FDIC to the maximum extent permitted by law. The
Bank's legal headquarters are located at 100 Lincoln Way East,
McConnellsburg, Fulton County, Pennsylvania 17233.
The Bank engages in a full service commercial and
consumer banking business, including the acceptance of time and
demand deposits and the making of secured and unsecured commercial
and consumer loans, and offering trust services. The Bank's
primary service area is located in Fulton County, Pennsylvania.
Specifically, the main office of the Bank is located in
McConnellsburg, the county seat. Within the defined service area
of the Bank's main office, the banking business is highly
competitive. In addition to local community banks, the Bank
competes with regionally-based commercial banks, all of which have
greater assets, capital and lending limits. The Bank also
competes with savings banks, savings and loan associations, money
market funds, insurance companies, stock brokerage firms,
regulated small loan companies, credit unions and with the issuers
of commercial paper and other securities.
In order to compete effectively in this market and to
obtain business from individuals, small and medium-sized
businesses and professionals, the Bank offers specialized services
such as extended hours of operation and personal and business
checking accounts at competitive rates in addition to traditional
commercial and consumer banking and trust services. The Bank
accepts time, demand and savings deposits, including passbook
accounts, statement savings accounts, NOW accounts, money market
accounts, certificates of deposit and club accounts. The Bank
makes secured and unsecured commercial, consumer, mortgage and
construction loans. Consumer loans include revolving credit
lines. The following support services are offered by the Bank to
make financial management more efficient and convenient for its
customers: bank by mail, direct deposit, drive-in banking,
Federal Tax Depository, automatic teller machine, night deposit
services, notary public services, payroll deduction plan, bond
coupon collections, foreign money exchange, safe deposit boxes,
signature guarantees, travelers checks, money orders, cashiers
checks, treasury securities, U.S. Savings Bonds, individual
retirement accounts, and utility and municipal payments. The Bank
also offers its customers access to discount brokerage services,
mutual funds, and other alternative investment products through
its affiliation with Sentry Trust Company. The Bank expects to
experience a modest increase in growth.
Lending Activities
It is the Bank's general policy to grant all of its
loans in its primary trade area. This trade area includes all of
Fulton County, southern Huntington County, western Franklin
County, eastern Bedford County and the Hancock, Maryland area.
The Bank's lending objectives are as follows: (1) to establish a
diversified loan portfolio composed of a predetermined mix of
mortgage loans, commercial loans, consumer loans and all other
loan types; (2) to provide a satisfactory rate of return to its
shareholders by properly pricing loans to include the cost of
funds, administrative costs, bad debts, local economic conditions,
competition, customer relationships, the term of the loan, credit
risk, and collateral quality; and, (3) to provide protection for
its depositors by maintaining a predetermined level of loans to
deposits to ensure liquidity. The Bank recognizes that the
lending of money is a community responsibility which involves a
degree of credit risk and is willing to undertake such risks by
utilizing standard banking procedures and making prudent judgments
when extending credit.
The Bank makes loans to both individual consumers and
commercial entities. The types of loans offered include: (1)
loans for businesses and individuals on a short term or seasonal
basis; (2) mortgage and construction loans, (3) loans to
individuals for consumer purchases such as appliances, furniture,
vacations, etc.: (4) loans secured by marketable stock and bonds
providing adequate margins for market fluctuations; (5) short term
working capital loans secured by the assignment of accounts
receivable and inventory; (6) automobile loans, (7) second liens
on commercial and residential real estate, (8) home equity lines
of credit, and (9) PHEAA student loans. Loans of these types will
be considered desirable by the Bank provided such loans meet the
test of sound credit.
The Bank has adopted the following loan-to-value ratios,
in accordance with standards adopted by its bank supervisory
agencies:
Loan Category
Loan-to-Value
Limit
Raw land
65%
Land development
75%
Construction:
Commercial, multifamily, and
other nonresidential
80%
1 to 4-family residential
85%
Improved property
85%
Owner-occupied 1 to 4 family and
home equity
90%
The Bank does not assume undue risk on any loan within the loan
portfolio, and takes appropriate steps to secure all loans as
necessary.
Concentration
The Bank is neither dependent upon deposits from nor
exposed to loan concentrations to a single customer, the loss of
which would have a material adverse effect on the financial
condition of the Bank. Although the Bank has a diversified loan
portfolio, a significant portion of its customers' ability to
honor their contracts is dependent upon the agribusiness economic
sector (approximately 20% of loan portfolio).
Employees
As of December 31, 2001, the Bank has forty-seven (47)
full-time equivalent employees.
Supervision and Regulation - The Bank
The operations of the Bank are subject to federal and
state statutes applicable to banks chartered under the banking
laws of the United States, to members of the Federal Reserve
System and to banks whose deposits are insured by the FDIC. The
operations of the Bank are also subject to regulations of the
Comptroller, the Federal Reserve Board and the FDIC. The primary
supervisory authority of the Bank is the Comptroller, which
regulates and examines the Bank. The Comptroller has authority to
prevent national banks from engaging in unsafe or unsound
practices in conducting their businesses.
Federal and state banking laws and regulations govern,
among other things, the scope of a bank's business, the
investments a bank may make, the reserves against deposits a bank
must maintain, loans a bank makes and collateral it takes, the
maximum interest rates a bank may pay on deposits, the activities
of a bank with respect to mergers and consolidations and the
establishment of branches. Under Pennsylvania law, the Bank may
establish or acquire branch offices, subject to certain
limitations, in any county of the state. National bank branches,
however may be established within the permitted area only after
approval by the Comptroller.
As a subsidiary bank of a bank holding company, the Bank
is subject to certain restrictions imposed by the Federal Reserve
Act on any extensions of credit to the bank holding company or its
subsidiaries, or investments in the stock or other securities as
collateral for loans. The Federal Reserve Act and Federal Reserve
Board regulations also place certain limitations and reporting
requirements on extensions of credit by the Bank to principal
shareholders of its parent holding company, among others, and to
related interests of such principal shareholders. In addition,
such legislation and regulations may affect the terms upon which
any person becoming a principal shareholder of a holding company
may obtain credit from banks with which the subsidiary Bank
maintains a correspondent relationship.
FDIC
Under the Federal Deposit Insurance Act, the Comptroller
possesses the power to prohibit institutions regulated by it (such
as the Bank) from engaging in any activity that would be an unsafe
and unsound banking practice or would otherwise be in violation of
the law. Moreover, the Financial Institutions Regulatory and
Interest Rate Control Act of 1978 ("FIRA") generally expanded the
circumstances under which officers or directors of a bank may be
removed by the institution's federal supervisory agency, restricts
lending by a bank to its executive officers, directors, principal
shareholders or related interests thereof and restricts management
personnel of a bank from serving as directors or in other
management positions with certain depository institutions whose
assets exceed a specified amount or which have an office within a
specified geographic area, and restricts management personnel from
borrowing from another institution that has a correspondent
relationship with their bank. Additionally, FIRA requires that no
person may acquire control of a bank unless the appropriate
federal supervisory agency has been given sixty (60) days prior
written notice and within that time has not disapproved the
acquisition or otherwise extended the period for disapproval.
Control for purposes of FIRA, means the power, directly or
indirectly, to direct the management or policies or to vote
twenty-five percent (25%) or more of any class of outstanding
stock of a financial institution or its respective holding
company. A person or group holding revocable proxies to vote
twenty-five percent (25%) or more of the outstanding common stock
of a financial institution or holding company such as the Company,
would presumably be deemed to control the institution for purposes
of FIRA.
Garn-St Germain
The Garn-St Germain Depository Institutions Act of 1982
("1982 Act") removed certain restrictions on a bank's lending
powers and liberalized its depository capabilities. The 1982 Act
also amended FIRA (see above) by changing the statutory limits on
lending by a bank to its executive officers, directors, principal
shareholders or related interests thereof and by relaxing certain
reporting requirements. The 1982 Act, however, also tightened
FIRA provisions respecting management interlocks and correspondent
bank relationships involving a bank's management personnel.
CRA
Under the Community Reinvestment Act of 1977, as amended
("CRA"), the Comptroller is required to assess the record of all
financial institutions regulated by it to determine if these
institutions are meeting the credit needs of the community
(including low and moderate income neighborhoods) which they serve
and to take this record into account in its evaluation of any
application made by any of such institutions for, among other
things, approval of a branch or other deposit facility, office
relocation, a merger or an acquisition of bank shares. The
Financial Institutions Reform, Recovery and Enforcement Act of
1989 amended the CRA to require, among other things, that the
Comptroller make publicly available the evaluation of a bank's
record of meeting the credit needs of its entire community,
including low and moderate income neighborhoods. This evaluation
will include a descriptive rating and a statement describing the
basis for the rating, which is publicly disclosed.
BSA
Under the Bank Secrecy Act ("BSA"), banks and other
financial institutions are required to report to the Internal
Revenue Service currency transactions of more than $ 10,000 or
multiple transactions of which the Bank is aware in any one day
that aggregate in excess of $ 10,000. Civil and criminal
penalties are provided under the BSA for failure to file a
required report, for failure to supply information required by the
BSA or for filing a false or fraudulent report.
CEBA
An omnibus federal banking bill, known as the
Competitive Equality Banking Act ("CEBA"), was signed into law in
August of 1987. Included in the legislation were measures: (1)
imposing certain restrictions on transactions between banks and
their affiliates; (2) expanding the powers available to Federal
bank regulators in assisting failed and failing banks; (3)
limiting the amount of time banks may hold certain deposits prior
to making such funds available for withdrawal and any interest
thereon; and (4) requiring that any adjustable rate mortgage loan
secured by a lien on a one-to-four family dwelling include a
limitation on the maximum rate at which interest may accrue on the
principal balance during the term of such loan.
FDICIA
Capital Categories
In December of 1991 the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") became law. Under
FDICIA, institutions must be classified, based on their risk-based
capital ratios into one of five defined categories, as illustrated
below:
Total Risk-
Based Ratio
Tier 1
Risk-Based
Ratio
Tier 1
Leverage
Ratio
Under a
Capital
Order or
Directive
CAPITAL CATEGORY
Well capitalized
> 10.0
> 6.0
> 5.0
No
Adequately
capitalized
> 8.0
> 4.0
> 4.0*
Undercapitalized
< 8.0
< 4.0
< 4.0*
Significantly
Undercapitalized
< 6.0
< 3.0
< 3.0
Critically
undercapitalized
< 2.0
* 3.0 for those banks having the highest available
regulatory rating.
Based on the above criteria, the Bank is classified
as "well capitalized".
Prompt Corrective Action
In the event an institution's capital deteriorates to
the undercapitalized category or below, FDICIA prescribes an
increasing amount of regulatory intervention, including: (1) the
institution of a capital restoration plan and a guarantee of the
plan by a parent institution; and (2) the placement of a hold on
increases in assets, number of branches or lines of business. If
capital has reached the significantly or critically
undercapitalized levels, further material restrictions can be
imposed, including restrictions on interest payable on accounts,
dismissal of management and (in critically undercapitalized
situations) appointment of a receiver. For well capitalized
institutions, FDICIA provides authority for regulatory
intervention where the institution is deemed to be engaging in
unsafe or unsound practices or receives a less than satisfactory
examination report rating for asset quality, management, earnings
or liquidity. All but well capitalized institutions are
prohibited from accepting brokered deposits without prior
regulatory approval.
Operational Controls
Under FDICIA, financial institutions are subject to
increased regulatory scrutiny and must comply with certain
operational, managerial and compensation standards to be developed
by Federal Reserve Board regulations.
FDICIA also requires the regulators to issue new rules
establishing certain minimum standards to which an institution
must adhere including standards requiring a minimum ratio of
classified assets to capital, minimum earnings necessary to absorb
losses and minimum ratio of market value to book value for
publicly held institutions. Additional regulations are required
to be developed relating to internal controls, loan documentation,
credit underwriting, interest rate exposure, asset growth and
excessive compensation, fees and benefits.
Examinations and Audits
Annual full-scope, on site examinations are required for
all FDIC-insured institutions except institutions with assets
under $ 250 million which are well capitalized, well managed and
not subject to a recent change in control, in which case, the
examination period is every eighteen (18) months. Banks with
total assets of $ 150 million or more are required to submit to
their supervising federal and state banking agencies a publicly
available annual audit report and are subject to additional
accounting and reporting regulations.
Truth-In-Savings
A separate subtitle within FDICIA, called the "Bank
Enterprise Act of 1991", requires "truth-in-savings" on consumer
deposit accounts so that consumers can make meaningful comparisons
between the competing claims of banks with regard to deposit
accounts and products. Under this provision, the Bank is required
to provide information to depositors concerning the terms of their
deposit accounts, and in particular, to disclose the annual
percentage yield. There are some operational costs of complying
with the Truth-In-Savings law.
Federal regulators recently issued regulations to
implement the privacy provisions of the Gramm-Leach-Bliley Act
(Financial Services Modernization Act). This new law took effect
in 2000 and requires banks to notify consumers about their privacy
policies and to give them an opportunity to "opt-out" or prevent
the bank from sharing "nonpublic personal information" about them
with nonaffiliated third parties. The Bank has developed privacy
policies and procedures to provide timely disclosure of such
policies and a convenient means for consumers to opt out of the
sharing of their information with unaffiliated third parties.
The earnings of the Bank, and therefore the earnings of
the Company are affected by general economic conditions,
management policies, and the legislative and governmental actions
of various regulatory authorities including the FRB, the
Comptroller and the FDIC.
In addition to banking and securities laws, regulations
and regulatory agencies, the Company also is subject to various
other laws, regulations and regulatory agencies throughout the
United States. Further more, various proposals, bills and
regulations have been and are being considered in the United
States Congress, and various other governmental regulatory and
legislative bodies, which could result in changes in the
profitability and governance of the Company. It cannot be
predicted whether new legislation or regulations will be adopted
and, if so, how they would affect the Company.
References under the caption "Supervision and Regulation" to
applicable statutes, regulations and orders are brief summaries of
portions thereof which do not purport to be complete and which are
qualified in their entirety by reference thereto.
Important Factors relating to Forward Looking Statements
The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about their
companies without fear of litigation so long as those statements
are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors
that could cause actual results to differ materially from those
projected in such statements. In connection with certain
statements made in this report and those that may be made in the
future by or on behalf of the Company which are identified as
forward-looking statements, the Company notes that the following
important factors, among others, could cause actual results to
differ materially from those set forth in any such forward-looking
statement. Further, such forward-looking statements speak only as
of the date on which such statement or statements are made, and
the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the
occurrence of unanticipated events.
The business and profitability of a financial services
organization such as the Company is influenced by prevailing
economic conditions and governmental policies. The actions and
policy directives of the FRB determine to a significant degree the
cost and the availability of funds obtained from money market
sources for lending and investing. FRB polices and regulations
also influence, directly and indirectly, the rates of interest
paid by commercial banks on their interest-bearing deposits and
may also impact the value of financial instruments held by the
Company. The nature and impact on the Company of future changes
in economic and market conditions and monetary and fiscal
policies, both foreign and domestic, are not predictable and are
beyond the Company's control. In addition, these conditions and
policies can impact the Company's customers and counterparties
which may increase the risk of default on their obligations to the
Company and its affiliates. They can also affect the competitive
conditions in the markets and products within which the Company
operates, which can have an adverse impact on the Company's
ability to maintain its revenue streams.
As part of its ongoing business, the Company assumes
financial exposures to interest rates, currencies, equities and
other financial products. In doing so, the Company is subject to
unforeseen events which may not have been anticipated or which may
have effects which exceed those assumed within its risk management
processes. This risk can be accentuated by volatility and
reduction in liquidity and those markets which in turn can impact
the Company's ability to hedge and trade the positions concerned.
In addition, the Company is dependent on its ability to access
the financial markets for its funding needs.
As noted in "Supervision and Regulation", the Company is
regulated by and subject to various regulators. The actions of
these regulators can have an impact on the profitability and
governance of the Corporation. Increases by regulatory
authorities of minimum capital, reserve, deposit insurance and
other financial viability requirements can also affect the
Company's profitability.
The Company is subject to operational and control risk
which is the potential for loss caused by a breakdown in
communication, information, processing and settlement systems or
processes or lack of compliance with the procedures on which they
rely either within the Company or within the broader financial
systems infrastructure.
As with any financial institution, the Company and its
affiliates are also subject to the risk of litigation and to an
unexpected or adverse outcome in such litigation. Competitive
pressures in the marketplace and unfavorable or adverse publicity
and news coverage can have the effect of lessening customer demand
for the Company's services. Ultimately, the Company's businesses
and their success are dependent on the Company's ability to
attract and retain high quality employees.
Item 2. Properties
The main administrative office of the Bank, which also
includes a drive-up facility, is located in McConnellsburg,
Pennsylvania. The Bank currently has seven branch offices one of
which is located at Penn's Village on Route 16 at the east end of
McConnellsburg, Pennsylvania. This branch office opened on
May 11, 1981. In addition, the Bank installed an ATM at the
Penn's Village Shopping Center in March, 1989. The Bank also
serves the communities surrounding the Pennsylvania/Maryland
border through its branch office located in Warfordsburg,
Pennsylvania. This branch opened for business on April 4, 1983.
On the same day, a third branch office was opened in Hustontown,
Pennsylvania, which services northern Fulton County. Finally, to
service the southern end of Huntington County, the Bank acquired a
branch in Shade Gap, Pennsylvania, on September 26, 1988. On July
15, 1999, the Bank opened a branch, including an ATM, at the Sandy
Ridge Mall in Orbisonia, PA. To service the western portion of
Franklin County, the Bank opened a branch, including an ATM, on
Route 30 in St. Thomas, PA on November 15, 1999. On February 11,
2002, the Bank opened a branch in Breezwood, Pennsylvania,
including an ATM, to service eastern Bedford County. On January
7, 1997 ATM's were opened at the Warfordsburg and Hustontown
branches. In June, 1998 the Bank opened an ATM at the Shade Gap
branch and added an ATM to its main office drive-up facility. The
main office, Warfordsburg, Hustontown, Orbisonia and Breezewood
branches are owned by the Bank. The Penn's Village branch is
rented.
The Bank closed its Shade Gap branch (except for the ATM
facility) on June 30, 2000.
Item 3. Legal Proceedings.
Fulton Bancshares Corporation is an occasional party to
legal actions arising in the ordinary course of its business. In
the opinion of the Company's management, Fulton Bancshares
Corporation has adequate legal defenses and/or insurance coverage
respecting any and each of these actions and does not believe that
they will materially affect the Company's operations or financial
position.
Item 4. Submission of Matters to Vote of Security Holders.
None
Item 5. Market for Registrant's Common Stock and Related
Security Holder Matters.
The corporation's common stock is traded on a limited
basis in the local over-the-counter market. As of December 31,
2001, the approximate number of shareholders of record was 525.
Market prices at the end of each quarter are based on the latest
sales prices.
Market
Cash
Market
Cash
Price
Dividend
Price
Dividend
2001
2000
First Quarter
$ 31.00
$ .20
$ 51.00
$ .18
Second Quarter
33.00
.20
40.00
.18
Third Quarter
33.00
.25
37.00
.23
Fourth Quarter
33.50
.30
34.125
.27
Dividend restrictions are detailed in Note 15 of the
annual shareholders report and are incorporated herein by
reference.
The Company occasionally reissues shares of stock held
in Treasury as compensation for services rendered to employees.
In 2001, 25 shares of treasury stock were reissued, covering $ 837
in compensation. In 2000, 45 shares of treasury stock were
reissued, covering compensation of $ 1,800.
Item 6. Selected Financial Data.
The selected five-year financial data on page 23 of the
annual shareholders' report for the year ended December 31, 2001
is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Management's discussion and analysis of financial
condition and results of operations included on pages 28 through
33 of the annual shareholders' report is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data, some of
which is required under Guide 3 (statistical disclosures by bank
holding companies) are shown on pages 2 through 27 of the annual
shareholders' report for the year ended December 31, 2001 and are
incorporated herein by reference. Additional schedules required
in addition to those included in the annual shareholders' report
are submitted herewith.
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
For additional information concerning liquidity, refer to
statistical disclosures applicable to the investment and loan portfolio.
Closely related to the management of liquidity is the management of
rate sensitivity which focuses on maintaining stability in the net interest
margin. As illustrated in the table below the tax equivalent net interest
margin ranged from 3.6% to 3.9% of average earning assets during the past 3
years. An asset/liability committee monitors and coordinates the overall
asset/liability strategy.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Rates and Interest Differential Tax Equivalent Yields
Years Ended December 31
ASSETS
2001
2000
1999
(000 omitted)
Average
Balance
Interest
Rate
Average
Balance
Interest
Rate
Average
Balance
Interest
Rate
Investment
securities:
Taxable interest
income
$ 23,097
$ 1,410
6.1%
$ 21,209
$ 1,282
6.0%
$ 20,185
$ 1,144
5.7%
Nontaxable interest
income
2,817
135
4.8
3,997
200
5.0
5,903
292
4.9
Total investment
securities
25,914
1,545
6.0
25,206
1,482
5.9
26,088
1,436
5.5
Loans (net of
unearned
discounts)
105,028
8,585
8.2
98,052
8,506
8.7
87,902
7,322
8.3
Other short-term
investments
1,514
54
3.6
73
4
5.5
18
1
5.5
Total interest
earning assets
132,456
$ 10,184
7.7%
123,331
$ 9,992
8.1%
114,008
$ 8,759
7.7%
Allowance for loan
losses
( 863)
( 815)
( 695)
Cash and due from
banks
3,601
3,495
3,201
Bank premises and
equipment
3,572
3,624
3,137
Other assets
5,618
4,369
4,334
Total assets
$ 144,384
$ 134,004
$ 123,985
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing
demand deposits
$ 10,992
$ 199
1.8%
$ 10,204
$ 218
2.1%
$ 16,951
$ 401
2.4%
Savings deposits
16,891
363
2.1
18,618
482
2.6
13,834
351
2.5
Time deposits
71,974
3,908
5.4
62,871
3,553
5.7
56,443
2,990
5.3
Short-term
borrowings
16,389
962
5.9
15,913
957
6.0
11,804
583
4.9
Total interest
bearing
liabilities
116,246
$ 5,432
4.7%
107,606
$ 5,210
4.8%
99,032
$ 4,325
4.4%
Demand deposits
12,534
12,368
11,362
Other liabilities
921
866
666
Total liabilities
129,701
120,840
111,060
Stockholders'
equity
14,683
13,164
12,925
Total liabilities &
stockholders'
equity
$ 144,384
$ 134,004
$ 123,985
Net interest
income/net
yield on
average earning
assets
$ 4,752
3.6%
$ 4,782
3.9%
$ 4,434
3.9%
For purposes of calculating loan yields, the average loan volume
includes nonaccrual loans. For purposes of calculating yields on nontaxable
interest income, the taxable equivalent adjustment is made to equate nontaxable
interest on the same basis as taxable interest. The marginal tax rate was 34%
for 2001, 2000, and 1999.
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
CHANGES IN NET INTEREST INCOME TAX EQUIVALENT YIELDS
2001 Versus 2000
Increase (Decrease)
Due to Change in
2000 Versus 1999
Increase (Decrease)
Due to Change in
Average
Volume
Average
Rate
Total
Increase
(Decrease)
Average
Volume
Average
Rate
Total
Increase
(Decrease)
(000 omitted)
Interest Income
Loans (net of
unearned
discounts)
$ 631
($ 552)
$ 79
$ 845
$ 339
$ 1,184
Taxable
investment
securities
104
24
128
65
73
138
Nontaxable
investment
securities
( 59)
( 6)
( 65)
( 94)
2
( 92)
Other short-
term
investments
79
( 29)
50
3
0
3
Total
interest
income
755
( 563)
192
819
414
1,233
Interest Expense
Interest
bearing
demand
13
( 32)
( 19)
( 160)
( 23)
( 183)
Savings
deposits
( 43)
( 76)
( 119)
121
10
131
Time deposits
550
( 195)
355
341
222
563
Short-term
borrowings
26
( 21)
5
203
171
374
Total
interest
expense
546
( 324)
222
505
380
885
Net interest
income
($ 30)
$ 348
Changes which are attributed in part to volume and in part to
rate are allocated in proportion to their relationships to the amounts
of changes.
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
The following table shows the maturities of investment
securities at book value as of December 31, 2001, and weighted average
yields of such securities. Yields are shown on a tax equivalent basis,
assuming a 34% federal income tax rate.
Within 1
year
After 1
year but
within 5
years
After 5
years but
within 10
years
After 10
years
Total
(000 omitted)
Bonds:
Corporate
Book value
$ 0
$ 499
$ 498
$ 0
$ 997
Yield
0%
5.62%
4.83%
0%
5.23%
U. S. Government
agencies
Book value
0
7,000
7,000
0
14,000
Yield
0%
3.77%
4.13%
0%
3.95%
State and municipal
Book value
0
310
1,324
653
2,287
Yield
0%
6.06%
7.02%
7.17%
6.99%
Mortgage-Backed
Book value
0
0
0
4,035
4,035
Yield
0%
0%
0%
4.09%
4.09%
Total book value
$ 0
$ 7,809
$ 8,822
$ 4,688
$ 21,319
Yield
0%
3.98%
4.60%
4.52%
4.36%
Other Debt Securities:
FHLMC/FNMA non-
cumulative
preferred stock
Book value
$ 9,443
Yield
7.43%
Equity Securities:
Total Equity
Securities
$ 1,233
Yield
4.24%
Total Investment
Securities
$ 31,995
Yield
5.26%
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
LOAN PORTFOLIO
The following table presents the loan portfolio at the end of
each of the last five years:
(000 omitted)
2001
2000
1999
1998
1997
Commercial,
financial and
agricultural
$ 17,418
$ 13,097
$ 12,294
$ 11,401
$ 7,180
Real estate -
Construction
0
0
0
0
0
Real estate -
Mortgage
78,796
80,020
69,273
58,915
53,624
Installment and
other personal
loans (net of
unearned discount)
8,287
9,788
10,228
10,478
10,099
Total loans
$ 104,501
$ 102,905
$ 91,795
$ 80,794
$ 70,903
Presented below are the approximate maturities of the loan
portfolio (excluding real estate mortgages and installments) at
December 31, 2001:
Under One
Year
One to
Five
Years
Over
Five
Years
Total
(000 omitted)
Commercial, financial and
agricultural
$ 13,459
$ 2,973
$ 986
$ 17,418
Real estate - Construction
0
0
0
0
Total
$ 13,459
$ 2,973
$ 986
$ 17,418
The following table presents the approximate amount of fixed
rate loans and variable rate loans due as of December 31, 2001:
Fixed Rate
Loans
Variable
Rate Loans
(000 omitted)
Due within one year
$ 6,774
$ 20,127
Due after one but within five years
15,149
8,521
Due after five years
22,772
31,158
Total
$ 44,695
$ 59,806
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31
2001
2000
1999
1998
1997
(000 omitted)
Average total loans
outstanding (net of
unearned income)
$ 105,028
$ 98,052
$ 87,902
$ 75,610
$ 68,171
Allowance for loan losses,
beginning of period
$ 847
$ 800
$ 580
$ 487
$ 444
Additions to provision for
loan losses charged to
operations
15
45
195
185
20
Loans charged off during
the year
Commercial
20
3
14
67
6
Installment
14
29
34
47
40
Total charge-off's
34
32
48
114
46
Recoveries of loans
previously charged off:
Commercial
2
24
63
16
49
Installment
15
10
10
6
20
Total recoveries
17
34
73
22
69
Net loans charged off
17
( 2)
( 25)
92
( 23)
Allowance for loan losses,
$ 845
$ 847
$ 800
$ 580
$ 487
Ratio of net loans charged
off to average loans
outstanding
.02%
( .01)%
.12%
( .03)%
( .05)%
The provision is based on an evaluation of the adequacy of
the allowance for possible loan losses. The evaluation includes, but is
not limited to, review of net loan losses for the year, the present and
prospective financial condition of the borrowers and evaluation of
current and projected economic conditions.
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
LOANS
The following table sets forth the outstanding balances
of those loans on a nonaccrual status and those on accrual status
which are contractually past due as to principal or interest
payments for 30 days or more at December 31.
2001
2000
1999
1998
1997
(000 omitted)
Nonaccrual loans
$ 289
$ 0
$ 0
$ 0
$ 413
Accrual loans:
Restructured
$ 0
$ 0
$ 0
$ 0
$ 0
30 through 89 days
past due
4,121
1,787
1,084
1,458
1,466
90 days or more past
due
922
549
168
442
431
Total accrual loans
$ 5,043
$ 2,336
$ 1,252
$ 1,900
$ 1,897
See Note 3 of the notes to consolidated financial
statements for details of income recognized and foregone revenue
on nonaccrual loans for the past three years.
Management has not identified any significant problem
loans in the accrual loan categories shown above.
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
The following is an allocation by loan categories of the
allowance for loan losses at December 31 for the last five years. In
retrospect the specific allocation in any particular category may prove
excessive or inadequate and consequently may be reallocated in the
future to reflect the then current conditions. Accordingly, the entire
allowance is available to absorb losses in any category:
(000 omitted)
Years Ended December 31
2001
2000
Allowance
Amount
Percentage
of Loans
to Total
Loans
Allowance
Amount
Percentage
of Loans
to Total
Loans
(000 omitted)
Commercial, financial and
agricultural
$ 141
16.67%
$ 108
12.73%
Real estate - Construction
0
0.0
0
0.00
Real estate - Mortgage
637
75.40
659
77.76
Installment
67
7.93
80
9.51
Total
$ 845
100.00%
$ 847
100.00%
Years Ended December 31
1999
1998
Allowance
Amount
Percentage
of Loans
to Total
Loans
Allowance
Amount
Percentage
of Loans
to Total
Loans
(000 omitted)
Commercial, financial and
agricultural
$ 107
13.37%
$ 82
14.11%
Real estate - Construction
0
0.00
0
0.00
Real estate - Mortgage
609
76.13
423
72.92
Installment
84
10.50
75
12.97
Total
$ 800
100.00%
$ 580
100.00%
Years Ended December 31
1997
Allowance
Amount
Percentage of Loans
to Total Loans
(000 omitted)
Commercial, financial and
agricultural
$ 49
10.13%
Real estate - Construction
0
0.00
Real estate - Mortgage
368
75.63
Installment
70
14.24
Total
$ 487
100.00%
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
DEPOSITS
The average amounts of deposits are summarized below:
Years Ended December 31
2001
2000
1999
(000 omitted)
Demand deposits
$ 12,534
$ 12,368
$ 11,362
Interest bearing demand
deposits
10,992
10,204
16,951
Savings deposits
16,891
18,618
13,834
Time deposits
71,974
62,871
56,443
Total deposits
$ 112,391
$ 104,061
$ 98,590
The following is a breakdown of maturities of time
deposits of $ 100,000 or more as of December 31, 2001:
Maturity
(000 omitted)
Certificates of Deposit
Three months or less
$ 12,688
Over three months through six months
2,669
Over six months through twelve months
7,623
Over twelve months
2,255
$ 25,235
RETURN ON EQUITY AND ASSETS (APPLYING DAILY AVERAGE BALANCES)
The following table presents a summary of significant
earnings and capital ratios:
2000
2000
1999
Assets
$ 144,384
$ 134,004
$ 123,985
Net income
$ 1,486
$ 1,439
$ 1,437
Equity
$ 14,683
$ 13,164
$ 12,925
Cash dividends paid
$ 468
$ 425
$ 426
Return on assets
1.03%
1.07%
1.16%
Return on equity
10.12%
10.94%
11.19%
Dividend payout ratio
31.50%
29.5%
29.7%
Equity to asset ratio
10.17%
9.82%
10.36%
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December 31
2001
2000
1999
1998
1997
(000 omitted)
Interest income
$ 10,185
$ 9,992
$ 8,759
$ 8,148
$ 7,875
Interest expense
5,432
5,210
4,325
4,151
4,036
Net interest income
4,753
4,782
4,434
3,997
3,839
Provision for loan losses
15
45
195
185
20
Net interest income after
provision for loan losses
4,738
4,737
4,239
3,812
3,819
Other income:
Trust
19
18
12
97
63
Service charges - Deposits
189
177
160
140
146
Other service charges,
collection and exchange,
charges, commission fees
125
124
127
123
93
Other operating income
306
203
290
362
171
Total other income
639
522
589
722
473
Income before operating
expense
5,377
5,259
4,828
4,534
4,292
Operating expenses:
Salaries and employees
benefits
1,560
1,509
1,314
1,242
1,178
Occupancy and equipment
expense
729
728
647
569
465
Other operating expenses
1,162
1,133
1,050
934
983
Total operating expenses
3,451
3,370
3,011
2,745
2,626
Income before income taxes
1,926
1,889
1,817
1,789
1,666
Income tax
440
449
380
391
376
Net income applicable to
common stock
$ 1,486
$ 1,440
$ 1,437
$ 1,398
$ 1,290
Per share data:
Earnings per common share
$ 3.02
$ 2.91
$ 2.90
$ 2.82
$ 2.61
Cash dividend - Common
.95
.86
.86
.72
.70
Weighted average number of
common shares
492,747
494,054
495,000
495,000
495,000
* Based on 495,000 shares issued
Item 9. Disagreements on Accounting and Financial Disclosures.
Not applicable.
PART III
The information required by Items 10, 12 and 13 is
incorporated by reference from Fulton Bancshares Corporation's
definitive proxy statement for the 2002 Annual Meeting of
shareholders filed pursuant to Regulation 14A.
Item 11. Executive Compensation
Shown below is information concerning the annual compensation
for services in all capacities to the Company, the Bank, and FCCDC for
the fiscal years ended December 31, 2001, 2000, and 1999 of the Chief
Executive Officer. There were no other officers of the Company, the
Bank, or FCCDC whose total annual salary and bonus during that time
frame exceeded $ 100,000.
Summary Compensation Table
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
Name and
Principal
Position
Year
Salary
($)
Bonus
($)
Other Annual
Compensation
($)
Restricted
Stock
Award(s)
($)
Options/
SARS
(#)
LTIP
Payouts
($)
All Other
Compensation
($)
Annual Compensation
Long-Term Compensation
Clyde H.
Bookheimer,
President &
CEO
2001
130,008
$ 0
$ 0
$ 0
$ 0
$ 0
$ 163,903
2000
124,708
0
0
0
0
0
86,814
1999
117,208
0
0
0
0
0
61,990
Footnotes:
(1) All other compensation includes the following:
Directors
Fringe
Benefits
(Personal
Use of
Bank Owned
Vehicle)
Retirement
Plan
Supplemental
Executive
Retirement
Plan
Deferred
Directors
Fees
2001
$ 0
$ 1,232
$ 13,890
$ 148,781
$ 0
2000
0
1,356
10,641
74,817
0
1999
0
1,234
12,149
48,607
0
The supplemental executive retirement plan was funded by single
premium life insurance policies on the CEO, with the Bank named as
beneficiary. Actual payments to the CEO amounting to $ 96,000 annually
will not begin until 2005. At December 31, 2001, the cash surrender
value of the policies was $ 1,234,048.
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.
(a) Certain documents filed as part of Form 10-K
Financial Statement Schedules and Exhibits
(1) Financial statements. See Item 8 of this
report for the index to financial
statements.
(2) Financial statement schedules. See Item 8 of
this report.
Schedule I - Distribution of assets, liabilities
and stockholders' equity, interest rates and
interest differential tax equivalent yields
Schedule II - Changes in net interest income tax
equivalent yields
Schedule III - Investment portfolio
Schedule IV - Loan portfolio
Schedule V - Summary of loan loss experience
Schedule VI - Nonaccrual and delinquent loans
Schedule VII - Allocation of allowance for loan
losses
Schedule VIII - Schedule of deposits, return on
equity and assets
Schedule IX - Consolidated summary of operations
(3) Exhibits.
Exhibit Numbers
(2) Plan of acquisition, reorganization,
arrangement, liquidation or succession.
Not applicable.
(3) (a) Articles of incorporation. Incorporated by
reference to Exhibit 3A to the Registrant's
Registration Statement on Form SB-2,
Registration No. 33-85626.
(b) By-laws. Incorporated by reference to
Exhibit 3B to the Registrant's
Registration Statement on Form SB-2,
Registration No. 33-85626.
(4) Instruments defining the rights of
security holders including indentures.
The rights of the holders of Registrant's
common stock are contained in:
(i) Articles of Incorporation of Fulton
Bancshares Corporation, filed as Exhibit 3A
to Registrant's Registration Statement on
Form SB-2 (Registration No. 33-85626).
(ii) By-laws of Fulton Bancshares Corporation,
filed as Exhibit 3B to the Registrant's
Registration Statement on Form SB-2
(Registration No. 33-85626).
(9) Voting trust agreement. Not applicable.
(10) Material contracts. None.
(11) Statement re: computation of per share
earnings. See Item 5 of this report.
(12) Statements re: computation of ratios. Not
applicable.
(13) Annual report to security holders. Filed herein.
(16) Letter re: change in certifying accountant.
not applicable.
(18) Letter re: change in accounting principles.
Not applicable.
(21) Subsidiaries of the registrant. Filed
herewith as Exhibit 21.
(22) Published report regarding matters submitted
to vote of security holders. Not applicable.
(23) Consents of experts and counsel. Filed
herewith.
(24) Power of attorney. Not applicable.
(27) Financial data schedule. Filed herewith under Item
8.
(28) Information from reports furnished to state
insurance regulatory authorities. Not
applicable.
(99) Additional exhibits. Not applicable.
(b) Reports on Form 8-K. None.
SIGNATURES
In accordance with the requirements of Section 13 or
15(d) of the Securities Act of 1934, this report was signed by the
following persons on behalf of the Registrant in the capacities
and on the dates indicated.
Signature Title Date
/S/ Clyde H. Bookheimer Director, President & March 28, 2002
Clyde H. Bookheimer CEO (Principal Executive
Officer)
/S/ David L. Seiders Director March 28, 2002
David L. Seiders
/S/ Cecil B. Mellott Director & Vice March 28, 2002
Cecil B. Mellott Chairman
/S/ Robert C. Snyder Director & March 28, 2002
Robert C. Snyder Chairman
/S/ Ellis L. Yingling Director & Vice March 28, 2002
Ellis L. Yingling Chairman
/S/ Clair R. Miller Director March 28, 2002
Clair R. Miller
Exhibit Index
Exhibit No.
13 Annual report to shareholders
21 Subsidiaries of the Registrant
23.1 Independent Auditor's Consent
27 Financial data schedule
Exhibit 13
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets 2
Statements of income 3
Statements of changes in stockholders' equity 4
Statements of cash flows 5 and 6
Notes to consolidated financial statements 7 - 22
ACCOMPANYING FINANCIAL INFORMATION
Selected five year financial data 23
Changes in income and expense 24
Summary of quarterly financial data 25
Statements of average balances and average rates 26 and 27
Management's discussion and analysis of consolidated financial condition
and results of operations 28 - 33
Stock market analysis and dividends 33
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Fulton Bancshares Corporation
McConnellsburg, Pennsylvania
We have audited the accompanying consolidated balance sheets of the Fulton Bancshares
Corporation and its wholly-owned subsidiaries as of December 31, 2001 and 2000 and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each of the three years ended
December 31, 2001. These consolidated financial statements are the responsibility of the corporation's
management. Our responsibility is to express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Fulton Bancshares Corporation and its wholly-owned subsidiaries
as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three
years ended December 31, 2001 in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 21 to the financial statements, the Corporation corrected errors in the
accounting of the amortization and accretion of premiums and discounts on certain investments purchased from
1997 to 2000, which resulted in restatement of the prior year financial statements.
/S/Smith Elliott Kearns & Company, LLC
Chambersburg, Pennsylvania
February 11, 2002
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
2001
2000
(As Restated)
ASSETS
Cash and due from banks
$ 5,529,420
$ 4,275,716
Investment securities available for sale
30,798,647
23,390,869
Federal Reserve, Atlantic Central Bankers Bank
and Federal Home Loan Bank stocks
1,100,850
1,252,150
Loans, net of reserve for loan losses
2001 - $ 845,045; 2000 - $ 847,121
103,655,616
102,058,473
Premises and equipment
3,673,746
3,647,287
Cash surrender value of life insurance
4,430,903
4,212,760
Accrued interest receivable
902,805
965,383
Real estate owned other than premises
83,341
86,610
Other assets
679,517
591,074
Total assets
$ 150,854,845
$ 140,480,322
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing
$ 13,486,097
$ 13,025,353
Interest bearing
103,552,356
92,106,363
117,038,453
105,131,716
Other borrowed funds
17,325,000
20,000,000
Accrued interest payable
424,743
502,398
Other liabilities
822,770
642,647
Total liabilities
135,610,966
126,276,761
Stockholders' Equity
Common stock: par value $.625 per share; 4,000,000
shares authorized; 495,000 shares issued
309,375
309,375
Additional paid-in capital
2,051,106
2,051,275
Retained earnings
13,035,796
12,017,652
Accumulated other comprehensive (loss)
( 62,672)
( 84,009)
Treasury stock, shares at cost -
2001- 2,230; 2000 - 2,255
( 89,726)
( 90,732)
Total stockholders' equity
15,243,879
14,203,561
Total liabilities and stockholders' equity
$ 150,854,845
$ 140,480,322
The Notes to Consolidated Financial Statements are an integral part of these statements.
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2001, 2000 and 1999
2001
2000
1999
(As Restated)
(As Restated)
Interest Income
Interest and fees on loans
$ 8,584,709
$ 8,505,771
$ 7,322,507
Interest and dividends on investment securities:
Other U. S. Government agencies
587,996
635,046
512,438
Mortgage-backed securities
228,320
287,347
326,034
Obligations of state and political subdivisions
135,056
199,461
291,740
FNMA and FHLMC preferred stock
463,856
267,674
250,349
Other interest and dividends
130,407
92,949
55,550
Interest on federal funds sold
54,335
4,107
792
Total interest income
10,184,679
9,992,355
8,759,410
Interest Expense
Interest on deposits
4,470,576
4,252,368
3,741,753
Interest on federal funds purchased
2,632
5,760
3,557
Interest on other borrowed money
959,091
951,684
579,538
Total interest expense
5,432,299
5,209,812
4,324,848
Net interest income before provision for loan losses
4,752,380
4,782,543
4,434,562
Provision for Loan Losses
15,000
45,000
195,000
Net interest income after provision for loan losses
4,737,380
4,737,543
4,239,562
Other Income
Service charges on deposit accounts
189,186
177,226
159,652
Other service charges and fees
108,567
111,181
117,567
Earnings - Cash surrender value of life insurance
249,418
197,110
160,185
Life insurance death benefit income
0
0
113,576
Trust services
19,002
18,390
21,233
Gain on sale of investment securities
57,329
5,905
5,918
Other income
15,975
12,647
10,783
Total other income
639,477
522,459
588,914
Other Expenses
Salaries, fees and employee benefits
1,559,673
1,508,929
1,314,159
Net occupancy expense of bank premises and
furniture and equipment expense
729,435
727,963
646,955
FDIC insurance premiums
19,754
20,811
11,258
Other expenses
1,141,725
1,112,743
1,038,913
Total other expenses
3,450,587
3,370,446
3,011,285
Income before income taxes
1,926,270
1,889,556
1,817,191
Applicable income tax
440,016
449,785
380,031
Net income
$ 1,486,254
$ 1,439,771
$ 1,437,160
Earnings per common share
$ 3.02
$ 2.91
$ 2.90
The Notes to Consolidated Financial Statements are an integral part of these statements.
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OD CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2001, 2000, 1999
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
(Loss)
Treasury
Stock
Total
Stockholders'
Equity
(as restated)
(as restated)
Balance, December 31, 1998
$ 309,375
$ 2,051,275
$ 9,991,022
$ 126,925
$ 0
$ 12,478,597
Comprehensive income:
Net income
1,437,160
1,437,160
Change in unrealized (loss) on
investment securities available
for sale, net of tax of $ $ 379,558
( 736,790)
( 736,790)
Total comprehensive income
700,370
Cash dividends ($ .86 per share)
0
0
( 425,700)
0
0
( 425,700)
Balance, December 31, 1999
309,375
2,051,275
11,002,482
( 609,865)
0
12,753,267
Comprehensive income:
Net income
1,439,771
1,439,771
Change in unrealized gain on
investment securities available
for sale, net of tax of $ 270,896
525,856
525,856
Total comprehensive income
1,965,627
Purchases of treasury stock
(2,300 shares)
( 92,532)
( 92,532)
Issuance of treasury stock
(45 shares)
1,800
1,800
Cash dividends ($ .86 per share)
0
0
( 424,601)
0
0
( 424,601)
Balance, December 31, 2000
309,375
2,051,275
12,017,652
( 84,009)
( 90,732)
14,203,561
Comprehensive income:
Net income
1,486,254
1,486,254
Change in unrealized gain on
investment securities available
for sale, net of tax of $ 10,992
21,337
21,337
Total comprehensive income
1,507,591
Issuance of treasury stock
( 25 shares)
( 169)
1,006
837
Cash dividends ($ .95 per share)
0
0
( 468,110)
0
0
( 468,110)
Balance, December 31, 2001
$ 309,375
$ 2,051,106
$ 13,035,796
($ 62,672)
($ 89,726)
$ 15,243,879
The Notes to Consolidated Financial Statements are an integral part of these statements.
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999
2001
2000
1999
(As Restated)
(As Restated)
Cash flows from operating activities:
Net income
$ 1,486,254
$ 1,439,771
$ 1,437,160
Adjustments to reconcile net income to net
cash provided by operating activities:
Compensation via treasury stock issued
837
1,800
0
Depreciation and amortization
325,065
431,813
381,093
Provision for loan losses
15,000
45,000
195,000
Deferred income taxes
( 82,580)
( 47,409)
(114,841)
Life insurance death benefit income
0
0
(113,577)
(Increase) decrease in CSV - life insurance
( 218,143)
( 164,274)
(132,237)
(Gain) on sale of investment securities
( 57,330)
(5,905)
(5,918)
(Increase) in other assets
( 17,375)
(49,780)
(26,521)
(Increase) decrease in interest receivable
62,578
( 234,755)
2,643
Increase (decrease) in interest payable
( 77,655)
81,005
29,153
Increase in other liabilities
180,119
124,987
180,802
Net cash provided by operating activities
1,616,770
1,622,253
1,832,757
Cash flows from investing activities:
Sales of investment securities available for sale
2,750,981
1,155,569
3,906,168
Maturities of investment securities available for sale
16,059,038
1,476,328
3,171,671
Purchases of investment securities available for sale
( 26,087,480)
( 1,690,544)
( 3,193,591)
Net (increase) in loans
( 1,612,142)
( 11,108,857)
( 10,975,268)
Purchases of property and equipment
( 388,392)
( 187,876)
( 1,379,978)
Purchases of FRB, ACBB and FHLB stock
( 270,000)
( 382,500)
( 292,800)
Redemptions of FRB, ACBB and FHLB stock
421,300
0
0
Purchases of officers' life insurance
0
( 1,020,000)
0
Purchases of other real estate
0
0
( 89,878)
Insurance benefits received
0
0
383,285
Net cash (used) by investing activities
( 9,126,695)
( 1,757,880)
( 8,470,391)
Cash flows from financing activities:
Net increase in deposits
11,906,739
1,821,115
3,969,449
Dividends paid
( 468,110)
( 424,601)
( 425,700)
Net (decrease) in federal funds purchased
0
0
( 2,100,000)
Proceeds from long-term borrowings
0
5,000,000
5,000,000
Net increase (decrease) in line-of-credit borrowings
( 2,675,000)
3,525,000
1,475,000
Purchases of treasury stock
0
( 92,532)
0
Net cash provided by financing activities
8,763,629
9,828,982
7,918,749
Net increase (decrease) in cash and cash equivalents
1,253,704
(306,645)
1,281,115
Cash and cash equivalents at beginning of year
4,275,716
4,582,361
3,301,246
Cash and cash equivalents at end of year
$ 5,529,420
$ 4,275,716
$ 4,582,361
The Notes to Consolidated Financial Statements are an integral part of these statements.
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 2001, 2000 and 1999
2001
2000
1999
(As Restated)
(As Restated)
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest
$5,509,953
$5,128,808
$4,295,695
Income taxes
471,000
505,575
511,000
Supplemental schedule of noncash investing and
financing activities:
Unrealized holding gain (loss), net of tax
$21,337
$525,856
($736,790)
Other real estate owned transferred to
premises and equipment
$0
$140,000
$0
Treasury stock issued as compensation
$837
$1,800
$0
The Notes to Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of Operations
Fulton Bancshares Corporation's primary activity consists of owning and supervising its subsidiaries:
? Fulton County National Bank and Trust Company ("Bank"), which is engaged in providing banking and
bank related services, principally in Fulton, southern Huntingdon and western Franklin Counties. Its six
branches are located in McConnellsburg (2), Warfordsburg, Hustontown, Orbisonia and St. Thomas.
? Fulton County Community Development Corporation, which was formed on June 7, 1996 to support
efforts of the local downtown business revitalization project by making low interest loans to eligible
small businesses for the purpose of facade improvement. Future projects are expected to include
small business marketing, new business creation, small business education, and housing for low-to-
moderate income individuals.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries,
the Fulton County National Bank and Trust Company and the Fulton County Community Development
Corporation (collectively referred to as the "Corporation"). All significant intercompany transactions and
accounts have been eliminated.
See Note 13 for parent company financial statements.
Basis of Accounting
The Corporation uses the accrual basis of accounting.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the
allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or
in satisfaction of loans. In connection with the determination of the allowances for losses on loans and
foreclosed real estate, management obtains independent appraisals for significant properties.
While management uses available information to recognize losses on loans and foreclosed real estate,
future additions to the allowances may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their examination process, periodically review the
Corporation's allowances for losses on loans and foreclosed real estate. Such agencies may require the
Corporation to recognize additions to the allowances based on their judgments about information available
to them at the time of their examination. Because of these factors, management's estimate of credit losses
inherent in the loan portfolio and the related allowance may change in the near term.
Note 1. Significant Accounting Policies (Continued)
Investment Securities
Under SFAS 115, the Corporation's investments in securities are classified in three categories and
accounted for as follows:
? Trading Securities. Securities held principally for resale in the near term are classified as
trading securities and recorded at their fair values. Unrealized gains and losses on trading
securities are included in other income. The Corporation had no trading securities in 2001 or
2000.
? Securities to be Held to Maturity. Bonds and notes for which the Corporation has the positive
intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums
and accretion of discounts, which are recognized in interest income using the interest method
over the period to maturity.
? Securities Available for Sale. Securities available for sale consist of equity securities, bonds
and notes not classified as trading securities nor as securities to be held to maturity, and FNMA
and FHLMC preferred stock. These are securities that management intends to use as a part of
its asset and liability management strategy and may be sold in response to changes in interest
rates, resultant prepayment risk and other related factors.
Purchase premiums and discounts are amortized to earnings by the interest method from purchase
date to maturity date. Unrealized holding gains and losses, net of tax, on securities available for
sale are reported as a net amount in other comprehensive income. Gains and losses on the sale of
securities available for sale are determined using the specific-identification method. Fair values for
investment securities are based on quoted market prices.
The Corporation has classified all of its investment securities as "available for sale" at
December 31, 2001 and 2000.
Loans and Reserve for Possible Loan Losses
Loans are stated at the amount of unpaid principal, reduced by a reserve for loan losses and increased or
decreased by net deferred loan origination fees and costs. Interest on loans is calculated by using the simple
interest method on daily balances of the principal amount outstanding. The reserve for loan losses is
established through a provision for loan losses charged to expense. Loans are charged against the reserve for
loan losses when management believes that the collectibility of the principal is unlikely. Subsequent
recoveries, if any, are credited to the reserve. The reserve is an amount that management believes will be
adequate to absorb possible losses on existing loans that may become uncollectible, based on evaluations of
the collectibility of loans and prior loan loss experience. The evaluations are performed regularly and take
into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that may affect the borrowers'
ability to pay. This evaluation is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
The reserve consists of specific, general and unallocated loss components. The specific loss component
relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are
also classified as impaired, an allowance is established when the discounted cash flows (or collateral value
or observable market price) of the impaired loan is lower than the carrying value of that loan. The general
component covers non-classified loans and is based on historical loss experience adjusted for qualitative
factors. An unallocated component is maintained to cover uncertainties that could affect management's
estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision
inherent in the underlying assumptions used in the methodologies for estimating specific and general losses
in the portfolio.
Note 1. Significant Accounting Policies (Continued)
Nonaccrual/Impaired Loans
The accrual of interest income on loans, including impaired loans, ceases when principal or interest is
past due 90 days or more and collateral is inadequate to cover principal and interest or immediately if,
in the opinion of management, full collection is unlikely. Interest accrued but not collected as of the
date of placement on nonaccrual status is reversed and charged against current income unless fully
collateralized. Subsequent payments received either are applied to the outstanding principal balance
or recorded as interest income, depending on management's assessment of the ultimate collectibility
of principal.
A loan is considered impaired when, based on current information and events, it is probable that the
Corporation will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Impairment is measured on a loan by loan
basis by either the present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
Consumer loans, comprised of smaller balance homogeneous loans, are collectively evaluated for
impairment.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation. Depreciation is calculated
on both straight-line and accelerated methods over the estimated useful lives of the various assets as
follows:
Years
Computer software 3 - 5
Premises 5 - 50
Equipment and vehicles 3 - 25
Repairs and maintenance are charged to operations as incurred.
Real Estate Owned Other Than Premises
Other real estate owned includes foreclosed properties for which the institution has taken physical
possession in connection with loan foreclosure proceedings. Assets received in foreclosure are
recorded at the lower of the outstanding principal balance of the related loans or the estimated fair
value of collateral held, less estimated costs to sell. Any adjustment required to write down the
property to net realizable value is charged to the allowance for loan losses. Costs of holding and
maintaining the property and subsequent adjustments to the carrying amount of the property are
charged to expense when incurred.
Earnings per Share
Earnings per common share were computed based on weighted averages of 492,747, 494,054, and
495,000 shares of common stock outstanding in 2001, 2000, and 1999, respectively.
Note 1. Significant Accounting Policies (Continued)
Federal Income Taxes
As a result of certain timing differences between financial statement and federal income tax reporting,
including depreciation, loan losses, and deferred compensation, deferred income taxes are provided
in the financial statements. Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the period in which the deferred tax
assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. See
Note 9 for further details.
Statements of Cash Flows
For purposes of the Statements of Cash Flows, cash and cash equivalents include those amounts in the
balance sheet captions "cash and due from banks" and "federal funds sold". As permitted by
Statement of Financial Accounting Standards No. 104, the Corporation has elected to present the net
change in interest bearing deposits with banks, deposits, and loans in the Statements of Cash Flows.
Fair values of financial instruments
Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial
Instruments, requires disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and estimates of future
cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate settlement of the
instruments. Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating fair values of
financial instruments as disclosed herein:
Cash and Cash Equivalents. The carrying amounts of cash and short-term instruments
approximate their fair value.
Securities to be Held to Maturity and Securities Available for Sale. Fair values for investment
securities are based on quoted market prices.
Loans Receivable. For variable-rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans
are estimated using discounted cash flow analyses, using interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality. Fair values for impaired
loans are estimated using discounted cash flow analyses or underlying collateral values, where
applicable.
Deposit Liabilities. The fair values disclosed for demand deposits are, by definition, equal to
the amount payable on demand at the reporting date (that is, their carrying amounts). The
carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit
approximate their fair values at the reporting date. Fair values for fixed-rate certificates of
deposits and IRA's are estimated using a discounted cash flow calculation that applies interest
rates currently being offered to a schedule of aggregated expected monthly maturities on time
deposits.
Note 1. Significant Accounting Policies (Continued)
Short-Term Borrowings. The carrying amounts of federal funds purchased and other short-
term borrowings maturing within 90 days approximate their fair values. Fair values of other
short-term borrowings are estimated using discounted cash flow analyses based on the
Corporation's current incremental borrowing rates for similar types of borrowing arrangements.
Long-Term Borrowings. The fair values of the Corporation's long-term borrowings are
estimated using discounted cash flow analyses based on the Corporation's current incremental
borrowing rates for similar types of borrowing arrangements.
Accrued Interest. The carrying amounts of accrued interest approximate their fair values.
Off-Balance-Sheet Instruments. The Corporation generally does not charge commitment fees.
Fees for standby letters of credit and their off-balance-sheet instruments are not significant.
Advertising
The Corporation expenses advertising costs as incurred. Advertising expenses for the years ended
December 31, 2001, 2000 and 1999 were $ 85,169, $ 102,434, and $ 81,904, respectively.
Comprehensive income
The Corporation has adopted Statement of Financial Accounting Standards (SFAS) No. 130 -
Reporting Comprehensive Income. Under SFAS No. 130, comprehensive income is defined as the
change in equity from transactions and other events from nonowner sources. It includes all changes
in equity except those resulting from investments by stockholders and distributions to stockholders.
Comprehensive income includes net income and certain elements of "other comprehensive income"
such as foreign currency transactions; accounting for futures contracts; employers accounting for
pensions; and accounting for certain investments in debt and equity securities.
The Corporation has elected to report its comprehensive income in the statement of stockholders'
equity. The only element of "other comprehensive income" that the Corporation has is the unrealized
gain or loss on available for sale securities.
The components of the change in net unrealized gains (losses) on securities were as follows:
2001
2000
1999
Gross unrealized holding gains/(losses) arising during the
year
$ 89,658
$ 802,657
($ 1,110,430)
Reclassification adjustment for (gains)/losses realized in net
income
( 57,329)
( 5,905)
( 5,918)
Net unrealized holding gains/(losses) before taxes
32,329
796,752
( 1,116,348)
Tax effect
( 10,992)
( 270,896)
379,558
Net change
$ 21,337
$ 525,856
($ 736,790)
Note 2. Investments
The amortized cost and fair value of investment securities available for sale at December 31 were:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
2001
Obligations of U. S. Government
corporations and agencies
$ 14,000,000
$ 104,122
$ 42,406
$ 14,061,716
Obligations of states and political
subdivisions
2,286,825
20,854
104,915
2,202,764
Mortgage-backed securities
4,035,252
20,413
18,643
4,037,022
Corporate bonds
996,950
50,050
0
1,047,000
FNMA and FHLMC preferred stock
9,442,578
9,298
126,431
9,325,445
Other stocks
132,000
3,700
11,000
124,700
Totals
$ 30,893,605
$ 208,437
$303,395
$ 30,798,647
2000
Obligations of U. S. Government
corporations and agencies
$ 9,750,245
$ 11,290
$ 38,808
$ 9,722,727
Obligations of states and political
subdivisions
3,659,558
30,780
76,421
3,613,917
Mortgage-backed securities
4,145,519
4,872
48,751
4,101,640
Corporate bonds
499,285
23,485
0
522,770
FNMA and FHLMC preferred stock
5,331,550
161,609
195,344
5,297,815
Other stocks
132,000
0
0
132,000
Totals
$ 23,518,157
$ 232,036
$ 359,324
$ 23,390,869
The amortized cost and fair value of investment securities available for sale at December 31, 2001, by
contractual maturity, are shown below. Contractual maturities will differ from expected maturities because
borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized
Cost
Fair
Value
Due in one year or less
$ 0
$ 0
Due after one year through five years
7,809,419
7,889,051
Due after five years through ten years
8,821,739
8,868,723
Due after ten years
652,617
553,706
Mortgage-backed securities
4,035,252
7,037,022
FNMA and FHLMC preferred stock
9,442,578
9,325,445
Other stocks
132,000
124,700
$ 30,893,605
$ 30,798,647
Proceeds from sales of securities available for sale during 2001 were $ 2,750,981. Gross gains and
losses on those sales were $ 57,329 and $ 0, respectively. Proceeds from maturities of investment
securities during 2001 were $ 16,059,038, resulting in no gains or losses. Included in stockholders'
equity at December 31, 2001 is $ 62,672 of unrealized holding losses on securities available for sale,
net of $ 32,286 in deferred taxes.
Note 2. Investments
Proceeds from sales of securities available for sale during 2000 were $ 1,155,569. Gross gains and
losses on those sales were $ 10,400 and $ 4,495, respectively. Proceeds from maturities of investment
securities during 2000 were $ 1,476,328, resulting in no gains or losses. Included in stockholders'
equity at December 31, 2000 is $ 84,009 of unrealized holding losses on securities available for sale,
net of $ 43,277 in deferred taxes.
Proceeds from sales of securities available for sale during 1999 were $ 3,906,168. Gross gains and
losses on those sales were $ 8,989 and $ 3,071, respectively. Proceeds from maturities of investment
securities during 1999 were $ 3,171,671, resulting in no gains or losses. Included in stockholders'
equity at December 31, 1999 is $ 609,865 of unrealized holding losses on securities available for sale,
net of $ 352,089 in deferred taxes.
The Corporation is required to maintain minimum investments in certain stocks, which are recorded at
cost since they are not actively traded and therefore, have no readily determinable market value.
Consequently, the Corporation owns the following equity securities at December 31:
2001
2000
Federal Home Loan Bank
$ 1,020,000
$ 1,171,300
Atlantic Central Bankers Bank
10,000
10,000
Federal Reserve Bank
70,850
70,850
$ 1,100,850
$ 1,252,150
Securities with a cost basis of $14,000,000 (fair value of $ 14,061,716) and $ 8,750,000 (fair value of
$ 8,752,838) at December 31, 2001 and 2000, respectively, were pledged to secure public funds and
for other purposes as required or permitted by law.
Note 3. Loans
Loans consist of the following at December 31 (in thousands):
2001
2000
Real estate loans:
Secured by farmland
$ 15,030
$ 16,257
Secured by 1-4 family residential
43,203
42,075
Secured by multifamily (5 or more) residential properties
362
373
Secured by nonfarm nonresidential
19,650
21,287
Loans to finance agricultural production:
Loans to farmers
5,455
3,814
Commercial and industrial loans
11,963
8,902
Loans to individuals for household, family and other
personal expenditures
8,247
9,765
Obligations of states and political subdivisions in the U. S.
551
381
All other loans
40
51
104,501
102,905
Less: reserve for loan losses
( 845)
( 847)
$ 103,656
$ 102,058
Note 3. Loans (Continued)
Loans 90 days or more past due (still accruing interest) and those on nonaccrual status were as follows
at December 31 (in thousands):
90 Days or More
Nonacrual
- - - - - - - Past Due - - - - - -
- - - - - - - - - Status - - - - - - - -
2001
2000
1999
2001
2000
1999
Loans secured by real estate
$ 567
$ 479
$ 168
$ 269
$ 0
$ 0
Personal loans
48
29
0
0
0
0
Commercial and other loans
307
41
0
20
0
0
Total
$ 922
$ 549
$ 168
$ 289
$ 0
$ 0
The foregone revenue on nonaccrual loans totaled $ 20,284, $ 0, and $ 0 at December 31, 2001, 2000,
and 1999, respectively. In January 2002, the Corporation foreclosed on property securing one of
these nonaccrual loans with a balance of $ 268,595.
At December 31, 2001, 2000, and 1999, the total recorded investment in impaired loans was $ 0.
Note 4. Reserve for Loan Losses
Activity in the reserve for loan losses is summarized as follows:
2001
2000
1999
Balance at beginning of period
$ 847,121
$ 800,267
$ 580,694
Recoveries
16,830
34,093
72,416
Current year provision charged to income
15,000
45,000
195,000
Total
878,951
879,360
848,110
Losses
33,906
32,239
47,843
Balance at end of period
$ 845,045
$ 847,121
$ 800,267
Note 5. Loans to Related Parties
The Corporation has granted loans to its officers and directors and to their associates. Related party
loans are made on substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and do not involve more
than normal risk of collectibility. The aggregate dollar amount of these loans was $ 1,246,000 and
$ 1,195,000 at December 31, 2001 and 2000, respectively. During 2001, $ 661,000 of new loans
were made and repayments totaled $ 610,000. During 2000, $ 508,000 of new loans were made and
repayments totaled $ 354,000.
Outstanding loans to employees totaled $ 842,000 and $ 815,000 at December 31, 2001 and 2000,
respectively.
Note 6. Premises and Equipment
A summary of premises and equipment is as follows:
Description
Cost
Accumulated
Depreciation
Depreciated
Cost
2001
Premises and improvements (including land $ 441,101)
$ 3,445,509
$ 714,755
$ 2,730,254
Equipment, furniture and fixtures
2,507,136
1,890,950
616,186
Vehicles
92,602
35,870
56,732
Construction in progress
270,074
0
270,074
$ 6,315,321
$ 2,641,575
$ 3,673,746
2000
Premises and improvements (including land $ 441,101)
$ 3,373,575
$ 628,335
$ 2,745,240
Equipment, furniture and fixtures
2,454,542
1,633,959
820,583
Vehicles
92,602
17,349
75,253
Construction in progress
6,211
0
6,211
$ 5,926,930
$ 2,279,643
$ 3,647,287
Included in construction in progress at December 31, 2001 are costs associated with the purchase of a
branch office in Breezewood, PA. The branch began operations on February 11, 2002.
Depreciation and amortization expense on property and equipment and other real estate owned
amounted to $ 365,201 in 2001, $ 394,242 in 2000, and $ 336,727 in 1999.
Note 7. Financial Instruments With Off-Balance-Sheet Risk/Commitments
The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of
business to meet the financial needs of its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the balance sheets. The contract amounts of those instruments
reflect the extent of involvement the corporation has in particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and standby letters of credit and financial
guarantees written is represented by the contractual amounts of those instruments. The Corporation
uses the same credit policies in making commitments and conditional obligations as it does for on-
balance-sheet instruments.
Contract or Notional
Amount
2001
2000
Financial instruments whose contract amounts represent credit risk at
December 31:
Commitments to extend credit
$ 12,909,132
$ 14,847,246
Standby letters of credit and financial guarantees written
266,000
594,000
Note 7. Financial Instruments With Off-Balance-Sheet Risk/Commitments (Continued)
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Corporation evaluates each customer's credit worthiness on a case-by-
case basis. The amount of collateral obtained if deemed necessary by the Corporation upon extension
of credit is based on management's credit evaluation of the customer. Collateral held varies but may
include accounts receivable, inventory, real estate, equipment, and income-producing commercial
properties.
Standby letters of credit and financial guarantees written are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending loans to customers. The
corporation holds collateral supporting those commitments when deemed necessary by management.
During 2001, the Corporation entered into a contract to build an addition to the Warfordsburg branch.
The total contract amount is $ 68,403 of which $ 60,213 had been paid at December 31, 2001.
Note 8. Retirement Plan
The Corporation maintains a 401-K profit-sharing plan covering substantially all full-time employees.
The plan allows contributions of up to 15% of eligible compensation by employees. Additional
contributions can be made at the discretion of the board of directors. The Corporation contributions
made to the plan were $ 66,000 for 2001, $ 72,000 for 2000, and $ 60,000 for 1999.
Note 9. Federal Income Taxes
The components of federal income tax expense are summarized as follows:
2001
2000
1999
Current year provision
$ 503,104
$ 495,186
$ 492,860
Deferred income taxes (benefits)
( 82,580)
( 47,409)
( 114,841)
Income tax effect of securities transactions
19,492
2,008
2,012
Applicable income taxes
$ 440,016
$ 449,785
$ 380,031
Federal income taxes were computed after reducing pretax accounting income for nontaxable interest
and dividend income in the amount of $ 464,229, $ 433,970, and $ 516,446 for 2001, 2000, and 1999,
respectively.
A reconciliation of the effective income tax rate to the federal statutory rate is as follows:
2001
2000
1999
Applicable federal income tax rate
34.0%
34.0%
34.0%
Reductions resulting from:
Nontaxable investment income and other items, net of
nondeductible expenses
( 11.2%)
(10.2%)
(13.1%)
Effective income tax rate
22.8%
23.8%
20.9%
Note 9. Federal Income Taxes (Continued)
Deferred tax liabilities have been provided for taxable temporary differences related to accumulated
depreciation. Deferred tax assets have been provided for deductible temporary differences related to
the allowance for loan losses, deferred compensation, and unrealized losses on available for sale
securities. The net deferred tax assets (liabilities) included in other assets (other liabilities) in the
accompanying consolidated balance sheets include the following components:
2001
2000
1999
Total deferred tax assets
$ 502,166
$ 490,170
$ 684,995
Total deferred tax liabilities
( 137,646)
( 143,588)
( 130,661)
Net deferred tax asset
$ 364,520
$ 346,582
$ 554,334
The Corporation has not recorded a valuation allowance for the deferred tax assets as management
believes that it is more likely than not that they will be ultimately realized.
Note 10. Leases
The Corporation is party to real estate leases with base monthly rental charges of $ 3,323. These
charges are to be adjusted on specified dates and by agreed upon amounts or by the net change in the
consumer price index. The leases expire on January 7, 2011 (as extended) and December 31, 2005,
respectively. Each lease contains a provision for renewal under various terms at the Corporation's
option. In addition, the Corporation leases certain equipment on a 54 month lease which expired in
2001. Total rental expense charged to operations for the years ended December 31, 2001, 2000, and
1999 was $ 62,937, $ 58,413, and $ 59,573, respectively.
Based on the current monthly rent, future minimum rental payments for the next five years are as
follows:
2002
$ 62,545
2003
62,545
2004
58,767
2005
39,874
2006
39,874
Note 11. Other Assets
Other assets include the following at December 31:
2001
2000
Net deferred tax asset
$ 364,520
$ 346,582
Prepaid expenses
214,483
186,874
Other
100,514
57,618
$ 679,517
$ 591,074
Note 12. Deposits
Included in interest-bearing deposits at December 31 are NOW and Money Market Account balances
totaling $ 15,800,762 and $ 14,765,334 for 2001 and 2000, respectively.
Time deposits of $ 100,000 and over aggregated $ 25,234,850 and $ 13,111,812 at December 31,
2001 and 2000, respectively. Interest expense on time deposits of $ 100,000 and over was
$ 1,064,000, $ 717,000, and $ 624,000 for 2001, 2000, and 1999, respectively.
Note 12. Deposits (Continued)
The amount of time deposits maturing over the next 5 years is as follows:
2002
$ 62,513,547
2003
7,785,200
2004
1,835,469
2005
619,151
2006
1,568,966
$ 74,322,333
The Corporation accepts deposits of the officers and directors of the Corporation and its subsidiaries
on the same terms, including interest rates, as those prevailing at the time for comparable transactions
with unrelated persons. The aggregate dollar amount of deposits of officers and directors totaled
$ 2,926,759 and $ 3,872,958 at December 31, 2001 and 2000, respectively.
Overdrafts of $ 17,142 and $ 22,506 at December 31, 2001 and 2000, respectively, were reclassified
as loans for financial reporting purposes.
Note 13. Fulton Bancshares Corporation (Parent Company Only) Financial Information
The following are the condensed balance sheets, income statements and statements of cash flows for
the parent company as of and for the periods ended December 31:
Balance Sheets
Assets
2001
2000
(As restated)
Cash
$ 8,788
$ 8,172
Investment in Fulton County National Bank & Trust Company
15,065,732
14,017,147
Investment in the Fulton County Community Development
Corporation
42,177
46,242
Securities available for sale
124,700
132,000
Deferred taxes
2,482
0
Total assets
$ 15,243,879
$ 14,203,561
Stockholders' Equity
Common stock, par value $ .625 per share, 4,000,000 shares
authorized; shares issued and outstanding - 2001 - 492,770;
2000 - 492,745
309,375
309,375
Additional paid-in capital
2,051,106
2,051,275
Retained earnings
13,035,796
12,017,652
Accumulated other comprehensive (loss)
( 62,672)
( 84,009)
Treasury stock; shares at cost - 2001 - 2,230; 2000 - 2,255
( 89,726)
( 90,732)
Total stockholders' equity
15,243,879
14,203,561
Total liabilities and stockholders' equity
$ 15,243,879
$ 14,203,561
Note 13. Fulton Bancshares Corporation (Parent Company Only) Financial Information (Continued)
2001
2000
1999
(As restated)
(As restated)
Statements of Income
Years Ended December 31
Cash dividends from wholly-owned subsidiary
$ 512,000
$ 510,050
$ 534,000
Investment income
1,200
1,090
840
Equity in undistributed income of subsidiaries
1,018,365
970,574
942,346
Printing, supplies, amortization and other
expenses
( 45,311)
( 41,943)
( 40,026)
Net income
$ 1,486,254
$ 1,439,771
$ 1,437,160
Statements of Cash Flows
Years Ended December 31
Cash flows from operating activities:
Net income
$ 1,486,254
$ 1,439,771
$ 1,437,160
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed income of
subsidiary
( 1,018,365)
( 970,574)
( 942,346)
Compensation - treasury stock issued
837
1,800
0
Increase (decrease) in accounts payable
0
( 27)
27
Net cash provided by operating activities
468,726
470,970
494,841
Cash flows from investing activities:
Investment in subsidiary
0
0
( 15,000)
Net cash (used) by investing activities
0
0
( 15,000)
Cash flows from financing activities:
Dividends paid
( 468,110)
( 424,601)
( 425,700)
Purchases of treasury stock
0
( 92,532)
0
Net cash provided (used) by financing activities
( 468,110)
( 517,133)
( 425,700)
Net change in cash
616
( 46,163)
54,141
Beginning cash
8,172
54,335
194
Ending cash
$ 8,788
$ 8,172
$ 54,335
Note 14. Compensating Balances
The Corporation is required to maintain certain compensating balances with its correspondent banks
to cover processing costs and service charges. The balances with these correspondent banks may
exceed federally insured limits, which management considers to be a normal business risk. Required
compensating balances were $ 125,000 at December 31, 2001 and 2000.
Note 15. Regulatory Matters
Dividends paid by Fulton Bancshares Corporation are generally provided from the Fulton County
National Bank and Trust Company's dividends to it. The Federal Reserve Board, which regulates
bank holding companies, establishes guidelines which indicate that cash dividends should be covered
by current year earnings and the debt to equity ratio of the holding company must be below thirty
percent.
Note 15. Regulatory Matters (Continued)
Fulton County National Bank and Trust Company, as a National Bank, is subject to the dividend
restrictions set forth by the Comptroller of the Currency. Retained earnings available for the payment
of dividends without approval of the Comptroller amounted to $ 3,207,341, $ 3,198,758, and
$ 3,150,211 at December 31, 2001, 2000, and 1999, respectively. The Corporation is also subject to
various regulatory capital requirements administered by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material effect on the Corporation's
financial statements. Under capital adequacy guidelines, the Corporation is required to maintain
minimum capital ratios. The "leverage ratio", which compares capital to adjusted total balance sheet
assets is required to be at least 3%. "Tier I" and "Tier II" capital ratios compare capital to risk-
weighted assets and off-balance sheet activity. The Tier I ratio is required to be at least 4%. The
combined Tier I and Tier II ratio is required to be at least 8%.
At December 31 the Corporation's actual ratios and required levels were as follows:
- - - - - Actual - - - -
Required
2001
2000
Leverage (total capital/total assets)
3.0%
10.6%
10.2%
Tier 1 (Tier 1 core capital/risk weighted assets)
4.0%
14.0%
13.8%
Total capital (total capital plus allowance for
loan losses/risk weighted assets)
8.0%
14.8%
14.6%
As of December 31, 2001, the most recent notification from the Comptroller of the Currency
categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management believes have changed the
Bank's category.
Note 16. Liabilities for Borrowed Money
At December 31, 2001 and 2000, the Corporation had an outstanding $ 15,000,000 ten year loan with
Federal Home Loan Bank of Pittsburgh. The interest rate can increase quarterly depending on market
rates based on the 3 month LIBOR plus .1%, but any change is at the discretion of the FHLB. The
rate is currently fixed at 5.93% at December 31, 2001 and 2000 and is payable monthly. The loan
matures on July 12, 2010.
The Corporation has established credit at Federal Home Loan Bank (FHLB) of Pittsburgh to improve
liquidity. The Corporation may borrow up to approximately $ 41 million from FHLB under the terms
of certain commitment agreements, less any borrowings outstanding. The rates and terms of the
commitments are flexible and are not fixed until the funds are withdrawn, but funds may not be
borrowed for more than one year. Borrowings were $ 2,325,000 and $ 5,000,000 at December 31,
2001 and 2000, respectively. The variable interest rate was 2.10% and 6.64% at December 31, 2001
and 2000, respectively, and can change daily based on FHLB's cost of funds. Collateral for the
borrowings consists of certain investments and mortgages approximating $ 42 million at December
31, 2001.
Note 17. Real Estate Owned Other Than Premises
Real estate owned other than premises consisted of a rental property in St. Thomas, PA which was
carried at depreciated cost of $ 83,341 and $ 86,610 at December 31, 2001 and 2000, respectively.
The rental property was originally purchased for expansion purposes, but the Bank entered into a
sales contract in January 2002 to sell the property.
Note 18. Fair Value of Financial Instruments
The estimated fair values of the Corporation's financial instruments under Statement on Financial
Accounting Standards (SFAS) No. 107, Disclosure About Fair Value of Financial Instruments were
as follows at December 31, 2001 and 2000:
Carrying Amount
Fair Value
(000 Omitted)
2001
2000
2001
2000
FINANCIAL ASSETS
Cash and due from banks
$ 5,529
$ 4,276
$ 5,529
$ 4,276
Securities available for sale
30,799
23,391
30,799
23,391
Other bank stock
1,101
1,252
1,101
1,252
Loans receivable (net)
103,656
102,058
103,875
101,361
Accrued interest receivable
903
965
903
965
FINANCIAL LIABILITIES
Time certificates
74,322
64,747
70,020
65,022
Other deposits
42,716
40,385
42,716
40,385
Accrued interest payable
425
502
425
502
Other borrowed funds
17,325
20,000
18,250
20,000
Note 19. Deferred Compensation and Other Benefit Programs
The Bank has adopted several benefit programs, some of which result in the deferral of payments for
services rendered:
(1) The Supplemental Executive Retirement Plan - This Plan is funded by single premium life
insurance on the CEO and certain other Corporation executives, with the Corporation as
beneficiary. Actual payments to the executives will not begin until their retirement.
(2) The Director Emeritus Program - This plan, funded by life insurance, will allow the Corporation
to reward its directors for longevity of service to the Board. Directors who qualify would be
eligible at age 75 to receive $ 4,000 annually for up to 10 years under this program.
(3) The Director Deferred Compensation Plan - This plan, also funded by life insurance, will allow
directors to defer up to 100% of directors fees annually. The amounts deferred will be paid out
over a period of up to 10 years beginning when the director reaches the age of 75.
(4) The Officer Supplemental Life Insurance Plan provides for officer life insurance coverage of
generally double their current salary level, and is also funded by single premium life insurance.
As a result of these plans, the following items are recognized in the financial statements:
2001
2000
1999
Asset
Cash surrender value of life insurance
$ 4,430,903
$ 4,212,760
$ 3,028,486
Liabilities
Supplemental executive retirement plan
501,946
352,031
258,920
Deferred directors fees liability
219,808
171,344
126,055
Income
Earnings on cash surrender value of life
insurance
249,418
197,110
160,185
Death benefits received from insurance policies
0
0
113,576
Note 19. Deferred Compensation and Other Benefit Programs (Continued)
2001
2000
1999
Expenses
Life insurance expense
$ 31,276
$ 32,836
$ 27,948
Supplemental executive retirement expense
149,915
93,111
85,827
Deferred directors fees
50,148
46,974
43,047
Director emeritus fees
12,000
12,000
12,003
Death benefits paid to beneficiaries
1,685
857
12,099
Note 20. Concentrations of Credit Risk
The Corporation grants agribusiness, commercial and residential loans to customers primarily in
Fulton County, Pennsylvania and adjoining counties in Pennsylvania and Maryland. Although the
Corporation has a diversified loan portfolio, a significant portion of its customers' ability to honor
their contracts is dependent upon the agribusiness economic sector (approximately 20% of loan
portfolio).
Management evaluates each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary upon the extension of credit, is based on management's credit
evaluation of the customer. Collateral held varies but generally includes equipment and real estate.
The corporation maintains deposit balances at correspondent banks, which provide check collection
and item processing services to the corporation. At times, the balances with these correspondent
banks may exceed federally insured limits, which management considers to be a normal business risk.
Note 21. Prior Period Adjustments
During the year ended December 31, 2001, changes were made to the Corporation's retained earnings
to correct errors in the accounting of the amortization and accretion of premiums and discounts on
certain investments purchased from 1997 to 2000. The changes had no effect on reported
investments, total assets, or total stockholders' equity. The prior year financial statements have been
restated as follows to reflect the effects of the amortization on each year:
As originally
reported
Change
As restated
Retained earnings:
12/31/98
$ 10,035,342
($ 44,320)
$ 9,991,022
12/31/99
11,076,084
( 73,602)
11,002,482
12/31/00
12,121,797
( 104,145)
12,017,652
Accumulated other comprehensive income (loss)
12/31/98
82,605
44,320
126,925
12/31/99
( 683,467)
73,602
( 609,865)
12/31/00
( 188,154)
104,145
( 84,009)
Interest and dividends on preferred stock:
1999
294,715
( 44,366)
250,349
2000
313,952
( 46,278)
267,674
Income taxes:
1999
395,115
( 15,084)
380,031
2000
465,520
( 15,735)
449,785
Net Income
1999
1,466,442
( 29,282)
1,437,160
2000
1,470,314
( 30,543)
1,439,771
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
SELECTED FIVE-YEAR FINANCIAL DATA
2001
2000
1999
1998
1997
Income (000 omitted)
Interest income
$ 10,184
$ 9,992
$ 8,759
$ 8,148
$ 7,875
Interest expense
5,432
5,210
4,325
4,151
4,036
Provision for loan losses
15
45
195
185
20
Net interest income after provision
for loan losses
4,737
4,737
4,239
3,812
3,819
Securities gains (losses)
57
6
6
4
3
Other operating income
582
516
583
718
470
Other operating expenses
3,450
3,370
3,011
2,745
2,626
Income before income taxes
1,926
1,889
1,817
1,789
1,666
Applicable income tax
440
450
380
391
376
Net income
$ 1,486
$ 1,439
$ 1,437
$ 1,398
$ 1,290
Per share amounts are based on following weighted averages:
2001 - 492,747
1999 - 495,000
1997 - 495,000
2000 - 494,054
1998 - 495,000
Income before income taxes
$ 3.91
$ 3.82
$ 3.67
$ 3.61
$ 3.37
Applicable income taxes
.89
.91
.77
.79
.76
Net income
3.02
2.91
2.90
2.82
2.61
Cash dividend paid
.95
.86
.86
.72
.70
Book value
30.94
28.75
25.76
25.21
23.04
Year-End Balance Sheet Figures (000 omitted)
Total assets
$ 150,855
$ 140,480
$ 128,478
$ 119,649
$
105,770
Net loans
103,656
102,058
90,995
80,214
70,416
Total investment securities
31,899
24,643
24,436
29,183
25,922
Deposits-noninterest bearing
13,486
13,025
12,354
11,553
8,159
Deposits-interest bearing
103,552
92,107
90,957
87,788
82,062
Total deposits
117,038
105,132
103,311
99,341
90,221
Liabilities for borrowed money
17,325
20,000
11,475
7,100
3,470
Total stockholders' equity
15,244
14,204
12,753
12,479
11,407
Ratios (includes net unrealized gain/loss on AFS securities)
Average equity/average assets
10.17%
9.82%
10.36%
10.60%
10.29%
Return on average equity
10.12%
10.94%
11.19%
11.88%
11.84%
Return on average assets
1.03%
1.07%
1.16%
1.26%
1.22%
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CHANGES IN INCOME AND EXPENSE - 2001 AND 2000
The schedule below reflects comparative changes in income and expense included in the Consolidated
Statements of Income for 2001 and 2000 together with changes in asset and liability volumes associated with
these income and expense items.
2001 Compared to 2000
2000 Compared to 1999
Average
Volumes
Income/Expense
Average
Volumes
Income/Expense
($ 000 omitted)
$
%
$
%
$
%
$
%
Loans
6,976
7.1
79
.9
10,150
11.5
1,183
16.1
Investment securities
708
2.8
63
4.3
( 882)
( 3.4)
47
3.2
Other investments
1,441
1974.0
50
1200.5
55
305.6
3
418.6
Total
9,125
7.4
192
1.9
9,323
8.2
1,233
14.1
Interest/borrowed funds
476
3.0
4
.4
4,109
34.8
374
64.2
Interest bearing demand
deposits
788
7.7
( 18)
( 8.3)
482
5.0
19
9.4
Savings deposits
(1,727)
( 9.3)
( 119)
( 24.7)
( 2,445)
( 11.6)
( 71)
( 12.8)
Time deposits
9,103
14.5
355
10.0
6,428
11.4
563
18.8
Total
8,640
8.9
222
4.1
8,574
8.7
885
20.5
Net interest income
( 30)
( .6)
348
7.8
Provision for loan losses
( 30)
5.4
( 150)
( 76.9)
Net interest income after
provision for loan
losses
0
0.0
498
11.7
Security transactions
51
850.0
0
0.0
Other operating income
66
12.8
( 66)
( 11.4)
Income before operating
expense
117
2.2
432
8.9
Salaries & employee
benefits
51
3.4
195
14.8
Occupancy & equipment
expense
1
.1
81
12.5
FDIC insurance premiums
( 1)
( 4.8)
10
84.9
Other operating expenses
29
2.6
74
7.1
Total operating
expenses
80
2.4
360
11.9
Income before income
taxes
37
2.0
72
4.0
Applicable income taxes
( 10)
( 2.2)
70
17.8
Net income
47
3.3
2
.1
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the years ended December 31, 2001 and 2000 are
as follows:
2001
2000
($ 000 omitted except
per share)
Quarter Ended
Quarter Ended
Mar. 31
June 30
Sept. 30
Dec. 31
Mar. 31
June 30
Sept. 30
Dec. 31
Interest income
$ 2,565
$ 2,552
$ 2,565
$ 2,502
$ 2,344
$ 2,457
$ 2,573
$ 2,618
Interest expense
1,385
1,373
1,376
1,298
1,165
1,240
1,377
1,428
Net interest income
1,180
1,179
1,189
1,204
1,179
1,217
1,196
1,190
Provision for loan losses
15
0
0
0
15
15
15
0
Net interest income after
provision for loan
losses
1,165
1,179
1,189
1,204
1,164
1,202
1,181
1,190
Securities gains (losses)
9
17
0
31
0
5
2
( 1)
Other income
130
142
136
174
107
119
124
166
Other expenses
858
854
871
867
850
803
866
851
Operating income
before income taxes
446
484
454
542
421
523
441
504
Applicable income taxes
113
108
95
124
96
136
102
116
Net income
$ 333
$ 376
$ 359
$ 418
$ 325
$ 387
$ 339
$ 388
Net income applicable to
common stock
Per share data:
Net income
$ .68
$ .76
$ .73
$ .85
$ .65
$ .78
$ .69
$ .79
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES
($ 000 omitted)
2001
2000
1999
1998
1997
LOANS
Lines of credit
$ 3,301
$ 3,024
$ 2,921
$ 3,332
$ 3,290
Tax free
1,039
785
846
1,281
2,201
Commercial
23,363
21,292
18,413
14,203
13,966
Mortgage
60,964
54,534
48,070
40,916
35,415
Consumer
16,361
18,417
17,652
15,878
13,299
Total loans
105,028
98,052
87,902
75,610
68,171
INVESTMENT SECURITIES
(at amortized cost)
U.S. Government
0
0
0
0
0
U.S. Government agencies
10,156
10,210
8,465
5,863
6,931
State & municipal
2,817
3,997
5,903
5,793
5,090
Mortgage-backed securities
3,751
4,532
5,988
9,324
13,861
FNMA & FHLMC preferred stock
7,309
5,204
4,932
4,701
2,432
Corporate bonds
814
262
0
0
0
Other
1,067
1,001
800
577
392
Total investment securities
25,914
25,206
26,088
26,258
28,706
OTHER SHORT-TERM INVESTMENTS
Federal funds sold
1,514
73
18
343
255
TOTAL EARNING ASSETS
132,456
123,331
114,008
102,211
97,132
TOTAL ASSETS
$ 144,384
$ 134,004
$ 123,985
$ 111,002
$ 105,864
Percent increase - earning assets
7.4%
8.2%
11.5%
5.3%
4.8%
DEPOSITS
Interest-bearing demand (NOW)
$ 10,992
$ 10,204
$ 16,951
$ 16,779
$ 15,528
Savings (MMA & sav.)
16,891
18,618
13,834
13,616
13,816
Time
71,974
62,871
56,443
54,621
53,738
Total interest-bearing deposits
99,857
91,693
87,228
85,016
83,082
OTHER BORROWINGS
Federal funds purchased
108
118
70
622
276
Liabilities for borrowed money
16,281
15,795
11,734
3,804
1,838
16,389
15,913
11,804
4,426
2,114
TOTAL INTEREST-BEARING
LIABILITIES
116,246
107,606
99,032
89,442
85,196
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES (CONTINUED)
2001
2000
1999
1998
1997
AVERAGE RATES EARNED
%
%
%
%
%
Loans
Commercial
7.28
9.21
8.32
9.23
9.11
Mortgage
8.19
8.24
8.01
8.61
8.67
Consumer
9.07
8.97
8.74
8.77
8.89
Tax free
5.54
5.48
5.53
5.82
5.62
Lines of credit
7.87
9.55
8.35
8.81
9.19
Total
8.17
8.60
8.37
8.72
8.73
Investment Securities
U.S. Government
0.00
0.00
0.00
0.00
0.00
U.S. Government agencies
5.79
6.22
6.05
5.95
6.17
State & municipal
4.79
4.99
4.94
4.93
5.00
Mortgage-backed securities
6.09
6.34
5.44
5.50
6.46
Corporate bonds
7.12
7.51
0.00
0.00
0.00
Other
6.38
5.82
5.34
5.31
6.52
Total
5.96
5.88
5.50
5.43
6.14
Other Short-Term Investments
Federal funds sold
3.54
5.59
4.43
5.49
5.51
Total earning assets
7.69
8.04
7.68
7.86
8.11
AVERAGE RATES PAID
Time & savings deposits
4.48
4.64
4.29
4.60
4.71
Federal funds purchased
2.43
4.87
5.05
5.57
5.61
Liabilities for borrowed money
5.89
6.03
4.91
5.32
5.68
Total interest-bearing liabilities
4.67
4.84
4.37
4.64
4.74
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the selected supplementary
financial information presented in this report.
OPERATING RESULTS
Net income was $ 1,486,000 for 2001, compared to $ 1,439,000 for 2000, representing an increase of
$ 47,000, or 3.3%. Net income on an adjusted per share basis for 2001 was $ 3.02, up $ .11 from the $ 2.91 per
share realized during 2000.
Interest income for 2001 was $ 10,184,000, up $ 192,000, or 1.9% more than 2000. The increase was
due primarily to higher average balances of loans in 2001, which typically produce higher yields than
investments, compared to 2000.
Average earning assets increased 7.4% and 8.2% in 2001 and 2000, respectively. Average loans,
which typically produce higher yields than investments, increased 7.1% in 2001. Net loans at December 31,
2001 stood at $ 103,656,000 compared to $ 102,058,000 as of December 31, 2000, an increase of 1.6%.
Average investment securities increased 2.8% in 2001, with the increase concentrated in FNMA/FHLMC
preferred stock and corporate bonds, while mortgage-backed securities, obligations of state and political
subdivisions, and U.S. Government Agency securities decreased.
Total interest expense was $ 5,432,000 for 2001, an increase of $ 222,000, or 4.3% from the
$ 5,210,000 for 2000. Average time deposits, which pay higher yields, increased 14.5% in 2001. Interest-
bearing deposits stood at $ 103,552,000 at December 31, 2001 compared with $ 92,107,000 as of December 31,
2000, an increase of 12.4%. Average interest-bearing demand deposits increased 7.7%, while average savings
deposits decreased 9.3%. Average borrowed funds increased 3.0%.
Net interest income is the difference between total interest income and total interest expense. Interest
income is generated through earning assets, which include loans, deposits with other banks, and investments.
Interest income is dependent on many factors including the volume of earning assets, the level of interest rates
and the changes in interest rates, and volumes of nonperforming loans. The cost of funds varies with the volume
of funds necessary to support earning assets, the rates paid to maintain deposits, rates paid on borrowed funds,
and the level of interest-free deposits.
Net interest income for 2001 totaled $ 4,752,000, down 0.6% from 2000. Management continuously
monitors liquidity and interest rate risk through its Asset-Liability Committee reporting and reprices products to
maintain a desired net interest margin.
Other income represents service charges on deposit accounts, commissions on loan insurance, fees for
travelers' checks and other services, safe deposit box rents, fees for trust services, securities gains (losses), gains
(losses) on sales of other real estate owned, and earnings on cash surrender value of directors and officers life
insurance.
Other income increased $ 117,000 from 2000 to 2001. The increase in 2001 resulted primarily from a
$ 52,000 increase in earnings on cash surrender value of directors and officers life insurance and a $ 51,000
increase in securities gains .
The noninterest expenses are classified into four main categories: salaries, fees and employee
benefits; occupancy expenses and furniture and equipment expenses that include depreciation, maintenance,
utilities, taxes, insurance and rents; FDIC insurance premiums; and other operating expenses that include all
other expenses incurred in daily operations.
Employee related expenses increased 3.4% and 14.8% for 2001 and 2000, respectively, primarily due
to the addition of personnel to staff two branch offices opened in July and November 1999, and merit pay
increases. Occupancy and furniture and equipment expenses increased 0.1% and 12.5% in 2001 and 2000,
respectively. The increases in 2000 were due primarily to increased depreciation and building maintenance
costs and expense associated with the addition of two new full-service banking facilities during 1999. Other
operating expenses increased 2.5% and 7.9%, respectively in 2001 and 2000, respectively, primarily due to
increases in advertising, printing and supplies, shares tax and other overhead expenses.
Applicable income taxes changed between 1999, 2000 and 2001 because of changes in pretax
accounting income and taxable income. The effective income tax rate for 2001 was 22.8% compared to 23.8%
and 20.9% for 2000 and 1999, respectively. The decrease in the effective income tax rate for 2001 was due
primarily to increases in the dividends received deduction for FNMA and FHLMC preferred stock and
nontaxable income related to the increase in the cash surrender value of directors and officers life insurance
benefit which was partially offset by a decrease in tax exempt interest on obligations of state and political
subdivisions. The 2000 increase was due primarily to a decrease in tax-exempt interest on obligations of state
and political subdivisions, and the 1999 non-recurring receipt of nontaxable director life insurance benefits.
FINANCIAL CONDITION
Total assets at December 31, 2001 were $ 150,855,000, a 7.4% increase over December 31, 2000. Net
loans at December 31, 2001 totaled $ 103,656,000, an increase of 1.6% over December 31, 2000.
The provision for loan losses was $ 15,000 in 2001 compared to $ 45,000 in 2000. The provisions
were based on management's evaluation of the adequacy of the reserve balance and represent amounts
necessary to maintain the reserve at the appropriate level based on the quality of the loan portfolio and economic
conditions. The Corporation's history of net charge-offs has traditionally been better than peer group
performance with an average rate of less than .10% of average loans outstanding over the past five years.
Though this trend is expected to continue, management intends to maintain the reserve at appropriate levels
based on an ongoing evaluation of the loan portfolio.
Loans 90 days or more past due (still accruing interest) and those on nonaccrual status were as follows
at December 31 (in thousands):
90 Days or More
Nonaccrual Status
Past Due
2001
2000
2001
2000
Loans secured by real estate
$ 567
$ 479
$ 269
$ 0
Personal loans
48
29
0
0
Commercial and other loans
307
41
20
0
Total
$ 922
$ 549
$ 289
$ 0
Total deposits increased to $ 117,038,000 at December 31, 2001 compared with $ 105,132,000 at
December 31, 2000. Noninterest bearing deposits and interest-bearing deposits increased 3.5% and 12.4%,
respectively.
Stockholders' equity reached $ 15,244,000 at December 31, 2001 for a 7.3% increase over the prior
year. Accumulated earnings for 2001 were partially offset by dividends declared and paid of $ 468,000. Total
stockholders' equity represented 10.1% of total assets at the end of 2001 and 2000. Cash dividends of $ .95 and
$ .86 per share were paid in 2001 and 2000, respectively. It is the intention of management and the Board of
Directors to continue to pay a fair return on the stockholders' investment while retaining adequate earnings to
allow for continued growth.
LIQUIDITY
Liquidity and interest rate sensitivity are related to, but distinctly different from, one another.
Liquidity involves the bank's ability to meet cash withdrawal needs of customers and their credit
needs in the form of loans. Liquidity is provided by cash on hand and transaction balances held at correspondent
banks. Adequate liquidity to meet credit demands and/or adverse deposit flows is also made available from
sales or maturities of short-term assets. Additional sources of funds to meet credit needs is provided by access
to the marketplace to obtain interest-bearing deposits and other borrowings, including special programs available
through Federal Home Loan Bank.
Interest rate sensitivity is the matching or mismatching of the maturity and rate structure of the
interest-bearing assets and liabilities. It is the objective of management to control the difference in the timing of
the rate changes for these assets and liabilities to preserve a satisfactory net interest margin. The following
table approximately reflects the matching of assets and liabilities maturing within one year and thereafter,
which management feels is adequate to meet customer cash and credit needs while maintaining a desired
interest rate spread.
Due
0 - 30 Days
Due
31 - 90
Days
Due
91 - 180
Days
Due
181 - 360
Days
Due
After
1 Year
Total
Rate Sensitive Assets
Investment securities
$ 4,530
$ 0
$ 4,628
$ 2,992
$ 18,744
$ 30,894
Real estate, commercial and
consumer loans
7,186
9,850
13,471
14,392
59,602
104,501
$ 11,716
$ 9,850
$ 18,099
$ 17,384
$ 78,346
$ 135,395
Rate Sensitive Liabilities
Short-term borrowings
$ 2,325
$ 0
$ 0
$ 0
$ 0
$ 2,325
Long-term borrowings
0
0
0
3,750
11,250
15,000
Certificates of deposit over
$ 100,000
7,818
4,871
2,669
7,623
2,254
25,235
Other certificates of deposit
9,880
4,681
10,199
14,773
9,554
49,087
Money market deposit accounts
392
588
980
980
980
3,920
Other interest-bearing deposits
1,264
3,797
3,797
3,797
12,655
25,310
$ 21,679
$ 13,937
$ 17,645
$ 30,923
$ 36,693
$ 120,877
Cumulative GAP
($ 9,963)
($ 14,050)
($ 13,596)
($ 27,135)
$ 14,518
Loan rates have significantly decreased over the past twelve months. Based on current economic
indicators and predictions, management anticipates that interest rates will increase slightly over the first half of
2002 and will continue to slowly increase over the remainder of the year. As a result, management has assessed
probabilities to each time period and proportionately included variable rate loans in rate sensitive assets of one
year or less.
LIQUIDITY (CONTINUED)
In monitoring and evaluating liquidity, management generally does not consider regular savings or
interest-bearing checking accounts to be particularly rate sensitive since it is highly improbable that 100% of
these deposits will be withdrawn within the next 360 days. Therefore, management has assessed probabilities to
each time period and proportionately included these funds in rate sensitive liabilities of one year or less.
CAPITAL FUNDS
Internal capital generation has been the primary method utilized by Fulton Bancshares Corporation to
increase its capital stock. Stockholders' equity exceeded $ 15.2 million at December 31, 2001. Regulatory
authorities have established capital guidelines in the form of the "leverage" and "risk-based capital" ratios. The
leverage ratio compares capital to total balance sheet assets, while the risk-based ratios compare capital to risk-
weighted assets and off-balance-sheet activity in order to make capital levels more sensitive to risk profiles of
individual banks. A comparison of Fulton Bancshares Corporation's capital ratios to regulatory minimums at
December 31 is as follows:
Fulton Bancshares
Corporation
Regulatory
Minimum
Requirements
2001
2000
Leverage ratio
10.6%
10.2%
3%
Risk-based capital ratio
Tier I (core capital)
14.0%
13.8%
4%
Combined Tier I and Tier II
(core capital plus allowance
for loan losses)
14.8%
14.6%
8%
Fulton Bancshares Corporation has traditionally been well above required levels and expects equity
capital to continue to exceed regulatory guidelines and industry averages. Certain ratios are useful in measuring
the ability of a company to generate capital internally.
The following chart indicates the growth in equity capital for the past three years.
2001
2000
1999
Equity capital at December 31
($ 000 omitted)
$ 15,244
$ 14,204
$ 12,753
Equity capital as a percent of assets
at December 31
10.10%
10.11%
9.93%
Return on average assets
1.03%
1.07%
1.16%
Return on average equity
10.12%
10.94%
11.19%
Cash dividend payout ratio
31.50%
29.45%
29.62%
MARKET RISK MANAGEMENT
The Bank has risk management policies to monitor and limit exposure to market risk, and works
diligently to take advantage of profit opportunities available in interest rate movements.
Management continuously monitors liquidity and interest rate risk through its Asset-Liability
Committee reporting, and reprices products in order to maintain desired net interest margins. Management
expects to continue to direct its marketing efforts toward attracting more low cost retail deposits while
competitively pricing its time deposits in order to maintain favorable interest spreads, while minimizing
structural interest rate risk.
MARKET RISK MANAGEMENT (CONTINUED)
The following table sets forth the projected maturities and average rates for all rate sensitive assets and
liabilities based on the following assumptions. All fixed and variable rate loans were based on original maturities
since the bank has not experienced, and does not expect, a significant rewriting of loans. Investments are based on
maturity date except certain long-term agencies, which are classified by call date. The bank has historically
experienced very little deposit runoff and has generally had net gains in deposits over the years. Based on this
experience, it was estimated that maximum runoff of noninterest-bearing checking, NOW checking and other
savings would be 10%, and maximum runoff of money market deposits would be 33%. It was estimated that
maximum runoff of time deposits would be 25% and these deposits are classified by original maturity date.
- - - - - - - - - - - - - - - - - - Principal/Notional Amount Maturing In - - - - - - - - - -
(In millions)
Rate sensitive assets
2002
2003
2004
2005
2006
Thereafter
Total
Fair
Value
Fixed rate loans
$ 7,051
$ 4,966
$ 4,051
$ 3,393
$ 2,739
$ 22,192
$ 44,392
$ 44,611
Average interest rates
8.82%
8.98%
8.99%
8.74%
8.61%
8.41%
8.65%
Variable rate loans
18,521
2,199
2,091
2,164
4,551
30,583
60,109
60,109
Average interest rates
5.51%
6.80%
7.03%
7.06%
7.37%
7.25%
6.73%
Fixed rate securities
9,756
5,721
500
3,499
3,300
4,656
27,432
27,336
Average interest rates
6.00%
5.26%
5.50%
4.87%
5.39%
5.16%
5.48%
Variable rate securities
570
364
250
185
140
3,055
4,564
4,564
Average interest rates
5.09%
5.09%
5.09%
5.09%
5.09%
5.14%
5.12%
Rate sensitive liabilities
Noninterest-bearing
checking
1,349
1,214
1,092
983
885
7,963
13,486
13,486
Average interest rates
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Savings and interest- bearing
checking
3,825
3,145
2,631
2,234
1,920
15,475
29,230
29,230
Average interest rates
1.13%
1.13%
1.13%
1.13%
1.13%
1.13%
1.13%
Time deposits
15,629
13,658
10,712
8,187
6,534
19,602
74,322
70,020
Average interest rates
4.31%
5.04%
4.72%
5.35%
4.57%
4.57%
4.41%
Variable rate borrowings
2,325
15,000
17,325
18,250
Average interest rates
2.10%
5.93%
5.41%
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board (FASB) issued Statement No. 133 as amended by SFAS
No. 138, Accounting For Derivative Instruments and Hedging Activities, effective for fiscal years
beginning after June 15, 2000. This Statement establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative instruments embedded in other
contracts, and requires that an entity recognize all derivatives as assets or liabilities in the balance sheet and
measure them at fair value. If certain conditions are met, an entity may elect to designate a derivative as
follows: (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of exposure to variable cash flows of a forecasted transaction,
or (c) a hedge of the foreign currency exposure of an unrecognized firm commitment, an available-for-sale
security, a foreign currency denominated forecasted transaction, or a net investment in a foreign operation.
The Statement generally provides for matching the timing of the recognition of the gain or loss on
derivatives designated as hedging instruments with the recognition of the changes in fair value of the item
being hedged. Depending on the type of hedge, such recognition will be either net income or other
comprehensive income. For a derivative not designated as a hedging instrument, changes in fair value will
be recognized in net income in the period of change. Management has evaluated the impact of adopting
this Statement on the consolidated financial statements, and does not anticipate that it will have a material
impact.
In September 2000, the FASB issued Statement No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." This Statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of liabilities. It replaces
previously issued statement No. 125. Statement No. 140 revises accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures, but otherwise carries over most
of Statement No. 125's provisions without reconsideration. Statement No. 140 is effective for transfers,
servicing and extinguishments occurring after March 31, 2001. Management has evaluated the impact of
this statement, and does not anticipate that it will have material impact.
Financial Accounting Standards Board (FASB) Standard 142, which is effective for years
beginning after December 15, 2001, addresses the financial accounting reporting for acquired goodwill and
other intangible assets. It does not address intangibles acquired as part of business combinations which is
addressed by FASB 141. This statement also addresses how goodwill and intangibles are accounted for after
they have been initially recognized. Management is currently evaluating the impact this statement would
have on the consolidated financial statements when adopted, but does not anticipate that it will have a
material impact.
STOCK MARKET ANALYSIS AND DIVIDENDS
The Corporation's common stock is traded inactively in the over-the-counter market. As of
December 31, 2001 the approximate number of shareholders of record was 525.
Market
Price
Cash
Dividend
Market
Price
Cash
Dividend
2001
2000
First Quarter
$ 31.00
.20
$ 51.00
$ .18
Second Quarter
33.00
.20
40.00
.18
Third Quarter
33.00
.25
37.00
.23
Fourth Quarter
33.50
.30
34.125
.27
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
1. Fulton County National Bank and Trust, Pennsylvania; a
national bank organized February 24, 1887 under the
Pennsylvania Banking Code.
It converted to a national banking association on September
5, 1933.
2. Fulton County Community Development Corporation, which was
formed on June 7, 1996 under the Pennsylvania Business
Corporation Law of 1988, as amended.
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
Board of Directors and Shareholders
Fulton Bancshares Corporation
We consent to the incorporation by reference in registration
statements (Form SB-2 No. 33-85626) of Fulton Bancshares
Corporation of our report dated February 11, 2002, appearing in
this annual report on Form 10-K of Fulton Bancshares Corporation
for the year ended December 31, 2001.
/S/SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, PA
March 20, 2002
EX-27
9
12-MOS
DEC-31, 2001
DEC-31, 2001
5,529
0
0
0
0
30,799
30,799
104,501
845
150,855
117,038
2,325
1,248
15,000
0
0
309
14,935
150,855
8,585
1,546
54
10,185
4,471
5,433
4,752
57
3,451
1,926
1,486
1,486
3.02
3.02
3.59
289
922
0
0
847
34
17
845
845
0
0
14
44
46
5
7
- - 8 -
- - 33 -