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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, 2002
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Commission file number: 33-85626
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FULTON BANCSHARES CORPORATION
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(Exact name of registrant as specified in its charter)
Commonwealth of Pennsylvania 25-1598464
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Lincoln Way East
McConnellsburg, Pennsylvania 17233
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (717) 485-3144
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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
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (229.405 of this
chapter) is not contained herein and will not be contained,
to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
X
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Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Act).
Yes No X
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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, 2003
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(Common stock, .625 par value) 492,810
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders' report for the year
ended December 31, 2002 are incorporated by reference into
Parts I and II. Portions of the Proxy Statement for the
Annual Meeting of Security Holders to be held April 21, 2003
are incorporated by reference in Part III of this Form 10-K.
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FULTON BANCSHARES CORPORATION
FORM 10-K
INDEX
Page
Part I
Item 1. Business 4 - 15
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security
Holders 16
Part II
Item 5. Market for Registrant's Common Equity and
Related
Stockholder Matters 17
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of
Financial
Condition and Results of Operations 17
Item 8. Financial Statements and Supplementary Data 17 - 26
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 26
Part III
Item 10. Directors and Executive Officers of the
Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management 27
Item 13. Certain Relationships and Related Transactions 27
Item 14. Controls and Procedures 28
Part IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 29 - 30
Signatures 31
Certification of Chief Executive Officer required by
Form 10-K 32
Certification of Chief Financial Officer required by
Form 10-K 33
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PART I
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 2002, 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.
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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
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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 has been
permitted since 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.
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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 offers trust services
through its affiliation with Sentry Trust Company. The
Bank's primary service area is located in Fulton County,
Pennsylvania. Specifically, the main office
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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.
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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 80%
other nonresidential
1 to 4-family residential 85%
Improved property 85%
Owner-occupied 1 to 4 family and 90%
home equity
The Bank does not assume undue risk on any loan within the
loan portfolio, and takes appropriate steps to secure all
loans as necessary.
Loan Loss Reserve
The provision for loan losses was $ 255,000 in
2002 compared to $ 15,000 in 2001. 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 and management is not aware of any problem loans
that are indicative of trends, events, or uncertainties that
would significantly impact operations, liquidity, or
capital. 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
2002 2001 2002 2001
Loans secured by real $ 59 $ 567 $ 1,525 $ 269
estate
Personal loans 11 48 0 0
Commercial and other loans 0 307 71 20
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Total loans $ 70 $ 922 $ 1,596 $ 289
==== ===== ======= =====
There were no restructured loans for any of the
time periods set forth above.
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The Corporation utilizes a comprehensive,
systematic review of its loan portfolio on a quarterly basis
in order to determine the adequacy of the allowance for loan
losses. Each quarter, the loan portfolio is categorized
into various pools as follows:
Pool #1 Specific allowances for any individually
identified problem
loans
Pool #2 Commercial
Pool #3 Residential Real Estate
Pool #4 Consumer Demand and Installment
Pool #5 Farm Loans
Business lines of credit and commercial loans with
balances of $250,000 and over are individually reviewed.
Also, loans that are 90 days or more past due or have been
previously classified as substandard are individually
reviewed. Allocations to the allowance for loan losses are
based upon classifications assigned to those specific loans.
Loan classifications utilized are based on past
experience and are as follows:
Allowance Factors
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Loss Charge-off
Doubtful 50%
Substandard 3%
Special Mention 1%
The remaining portion of the pools are evaluated
as groups with allocations made to the allowance based on
historical loss experience, current and anticipated trends
in delinquencies, trends in volume and terms of loans,
concentrations of credit and general economic conditions
within the Corporation's trading area.
The reasons for the increase in the provision for
loan losses for 2002 compared to 2001 are significant
increases in nonaccrual and classified loans. Nonaccrual
loans have increased more than 450% over the past four
quarters and represent 1.5% of total loans. At December 31,
2002, ninety-one percent of loans on nonaccrual status were
fully-secured farm loans. Classified loans on December 31,
2002 were $ 4,264,000 compared to $ 2,040,000 on December
31, 2001, an increase of 109%.
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, 2002, the Bank has forty-seven
(47) full-time equivalent employees.
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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.
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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.
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FDICIA
Capital Categories
In December of 1991 the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") became law.
Under FDICIA, institutions must be classified, based on
their risk-based capital ratios into one of five defined
categories, as illustrated below:
Total Tier 1 Tier 1 Under a
Risk- Risk- Leverag Capital
Based Based e Ratio Order or
Ratio Ratio 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.
- 13 -
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. Furthermore, 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
- 14 -
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.
- 15 -
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 Breezewood, 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
- 16 -
PART II
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, 2002, the approximate number of shareholders of
record was 525. Market prices at the end of each quarter
are based on the latest sales prices.
The stock market analysis and dividends for 2002
and 2001 on page 35 of the annual shareholders report for
the year ended December 31, 2002 is incorporated herein by
reference.
Dividend restrictions are detailed in Note 14 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 2002, 40 shares of treasury stock were
reissued, covering compensation of $ 1,800. In 2001, 25
shares of treasury stock were reissued, covering $ 837 in
compensation.
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, 2002 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 35 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, 2002 and are incorporated herein by
reference. Additional schedules required in addition to
those included in the annual shareholders' report are
submitted herewith as follows:
Description of Statistical Information
Page
Distribution of assets, liabilities,
and stockholders' equity - Interest
rates and interest differential tax
equivalent yields 18
Changes in net interest income tax equivalent yields 19
Investment portfolio 20
Loan portfolio 21
Summary of loan loss experience 22
Nonaccrual and delinquent loans 23
Allocation of allowances for loan losses 24
Deposits/return on equity and assets 25
Consolidated summary of operations 26
- 17 -
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 2002 2001 2000
(000 omitted) Average Interest Rate Average Interest Rate Average Interest Rate
Balance Balance Balance
Investment
securities:
Taxable interest $ 34,783 $ 2,102 6.0% $ 23,097 $ 1,410 6.1% $ 21,209 $ 1,282 6.0%
income
Nontaxable interest 2,240 102 4.6 2,817 135 4.8 3,997 200 5.0
income
--------- -------- ---- --------- -------- ---- --------- -------- ----
Total investment 37,023 2,204 6.0 25,914 1,545 6.0 25,206 1,482 5.9
securities
Loans (net of 105,219 7,621 7.2 105,028 8,585 8.2 98,052 8,506 8.7
unearned discounts)
Other short-term 723 12 1.6 1,514 54 3.6 73 4 5.5
investments
--------- -------- ---- --------- -------- ---- --------- -------- ----
Total interest 142,965 $ 7,837 6.9% 132,456 $ 10,184 7.7% 123,331 $ 9,992 8.1%
earning assets
Allowance for loan ( 920) ( 863) ( 815)
losses
Cash and due from 3,667 3,601 3,495
banks
Bank premises and 3,861 3,572 3,624
equipment
Other assets 5,990 5,618 4,369
--------- -------- ---- --------- -------- ---- --------- -------- ----
Total assets $ 155,563 $ 144,384 $ 134,004
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing $ 11,431 $ 85 .7% $ 10,992 $ 199 1.8% $ 10,204 $ 218 2.1%
demand deposits
Savings deposits 18,438 237 1.3 16,891 363 2.1 18,618 482 2.6
Time deposits 74,238 2,967 4.0 71,974 3,908 5.4 62,871 3,553 5.7
Short-term borrowings 19,464 982 5.0 16,389 962 5.9 15,913 957 6.0
--------- -------- ---- --------- -------- ---- --------- -------- ----
Total interest 123,571 $ 4,271 3.5% 116,246 $ 5,432 4.7% 107,606 $ 5,210 4.8%
bearing liabilities
Demand deposits 15,237 12,534 12,368
Other liabilities 905 921 866
--------- -------- ---- --------- -------- ---- --------- -------- ----
Total liabilities 139,713 129,701 120,840
Stockholders' equity 15,850 14,683 13,164
--------- -------- ---- --------- -------- ---- --------- -------- ----
Total liabilities & $ 155,563 $ 144,384 $ 134,004
stockholders' equity
========= ========= =========
Net interest $ 5,566 3.9% $ 4,752 3.6% $ 4,782 3.9%
income/net yield on
average earning
assets
======== ==== ======== ==== ======== ====
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 2002, 2001, and 2000.
- 18 -
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
CHANGES IN NET INTEREST INCOME TAX EQUIVALENT YIELDS
2002 Versus 2001 2001 Versus 2000
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
Average Average Total Average Average Total
Volume Rate Increase Volume Rate Increase
(Decrease) (Decrease)
(000 omitted)
Interest Income
Loans (net of unearned $ 15 ($ 1,007) ($ 992) $ 631 ($ 552) $ 79
discounts)
Taxable investment 740 ( 20) 720 104 24 128
securities
Nontaxable investment ( 27) ( 6) ( 33) ( 59) ( 6) ( 65)
securities
Other short-term ( 28) ( 14) ( 42) 79 ( 29) 50
investments
------- --------- --------- ------ ------- ------
Total interest income 700 ( 1,047) ( 347) 755 ( 563) 192
------- --------- --------- ------ ------- ------
Interest Expense
Interest bearing 6 ( 121) ( 115) 13 ( 32) ( 19)
demand
Savings deposits 24 ( 150) ( 126) ( 43) ( 76) ( 119)
Time deposits 101 ( 1,042) ( 941) 550 ( 195) 355
Short-term borrowings 187 ( 166) 21 26 ( 21) 5
------- --------- --------- ------ ------- ------
Total interest expense 318 ( 1,479) ( 1,161) 546 ( 324) 222
------- --------- --------- ------ ------- ------
Net interest income $ 814 ($ 30)
======= =======
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.
- 19 -
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
INVESTMENT PORTFOLIO
The following table shows the maturities of
investment securities at book value as of December 31, 2002,
and weighted average yields of such securities. Yields are
shown on a tax equivalent basis, assuming a 34% federal
income tax rate.
Within After 1 After 5 After 10 Total
1 year year but years years
within 5 but
years within
10 years
(000 omitted)
Bonds:
Corporate
Book value $ 0 $ 499 $ 498 $ 0 $ 997
Yield 0% 5.62% 4.83% 0% 5.22%
U. S. Government
agencies
Book value 0 11,589 2,649 0 14,238
Yield 0% 2.77% 2.81% 0% 2.78%
State and municipal
Book value 0 310 1,320 456 2,086
Yield 0% 6.06% 7.01% 7.20% 6.96%
Mortgage-Backed
Book value 0 0 0 4,644 4,644
Yield 0% 0% 0% 2.67% 2.67%
------ -------- ------- ------- --------
Total book value $ 0 $ 12,398 $ 4,467 $ 5,100 $ 21,965
======= ========= ======== ======== =========
Yield 0% 2.97% 4.28% 3.08% 3.26%
======= ========= ======== ======== =========
Other Debt
Securities:
FHLMC/FNMA non-
cumulative
preferred stock
Book value $ 15,390
=========
Yield 7.71%
=========
Equity Securities:
Total Equity $ 1,904
Securities
=========
Yield 2.40%
=========
Total Investment $ 39,259
Securities
=========
Yield 4.96%
=========
- 20 -
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) 2002 2001 2000 1999 1998
Commercial, $ 15,171 $ 17,418 $ 13,097 $ 12,294 $ 11,401
financial and
agricultural
Real estate - 0 0 0 0 0
Construction
Real estate - 82,098 78,796 80,020 69,273 58,915
Mortgage
Installment and 10,998 8,287 9,788 10,228 10,478
other personal
loans (net of
unearned discount)
--------- --------- --------- -------- --------
Total loans $ 108,267 $ 104,501 $ 102,905 $ 91,795 $ 80,794
========= ========= ========= ======== ========
Presented below are the approximate maturities of
the loan portfolio (excluding real estate mortgages and
installments) at December 31, 2002:
Under One One to Over Total
Year Five Five
Years Years
(000 omitted)
Commercial, financial and $ 11,378 $ 3,034 $ 759 $ 15,171
agricultural
Real estate - Construction 0 0 0 0
-------- ------- ----- --------
Total $ 11,378 $ 3,034 $ 759 $ 15,171
======== ======= ===== ========
The following table presents the approximate
amount of fixed rate loans and variable rate loans due as of
December 31, 2002:
Fixed Rate Variable
Loans Rate Loans
(000 omitted)
Due within one year $ 9,281 $ 20,568
Due after one but within five years 11,814 9,644
Due after five years 19,791 37,169
-------- --------
Total $ 40,886 $ 67,381
======== ========
- 21 -
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31
2002 2001 2000 1999 1998
(000 omitted)
Average total loans $ 105,219 $ 105,028 $ 98,052 $ 87,902 $ 75,610
outstanding (net of unearned
income)
========= ========= ======== ======== ========
Allowance for loan losses, $ 845 $ 847 $ 800 $ 580 $ 487
beginning of period
Additions to provision for 255 15 45 195 185
loan losses charged to
operations
Loans charged off during the
year
Commercial 3 20 3 14 67
Installment 73 14 29 34 47
-------- ------- ------- -------- -------
Total charge-off's 76 34 32 48 114
-------- ------- ------- -------- -------
Recoveries of loans
previously charged off:
Commercial 1 2 24 63 16
Installment 6 15 10 10 6
-------- ------- ------- -------- -------
Total recoveries 7 17 34 73 22
-------- ------- ------- -------- -------
Net loans charged off 69 17 ( 2) ( 25) 92
-------- ------- ------- -------- -------
Allowance for loan losses, $ 1,031 $ 845 $ 847 $ 800 $ 580
========= ========= ======== ======== ========
Ratio of net loans charged off .06% .02% ( .01)% .12% ( .03)%
to average loans outstanding
========= ========= ======== ======== ========
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.
- 22 -
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
NONACCRUAL AND DELINQUENT 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.
2002 2001 2000 1999 1998
(000 omitted)
Nonaccrual loans $ 1,596 $ 289 $ 0 $ 0 $ 0
======= ======= ======= ======= =======
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $ 0
30 through 89 days past due 3,692 4,121 1,787 1,084 1,458
90 days or more past due 70 922 549 168 442
------- ------- ------- ------- -------
Total accrual loans $ 3,762 $ 5,043 $ 2,336 $ 1,252 $ 1,900
======= ======= ======= ======= =======
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.
- 23 -
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
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
2002 2001
Allowance Percentage Allowance Percentage
Amount of Loans Amount of Loans
to Total to Total
Loans Loans
(000 omitted)
Commercial, financial and $ 561 54.41% $ 141 16.67%
agricultural
Real estate - Construction 0 0.00 0 0.0
Real estate - Mortgage 333 32.30 637 75.40
Installment 137 13.29 67 7.93
----- ------ ----- ------
Total 1,031 100.00% $ 845 100.00%
===== ====== ===== ======
Years Ended December 31
2000 1999
Allowance Percentage Allowance Percentage
Amount of Loans Amount of Loans
to Total to Total
Loans Loans
(000 omitted)
Commercial, financial and $ 108 12.73% $ 107 13.37%
agricultural
Real estate - Construction 0 0.00 0 0.00
Real estate - Mortgage 659 77.76 609 76.13
Installment 80 9.51 84 10.50
----- ------ ----- ------
Total 1,031 100.00% $ 845 100.00%
===== ====== ===== ======
Years Ended December 31
1998
Allowance Percentage of Loans
Amount to Total Loans
(000 omitted)
Commercial, financial and $ 82 14.11%
agricultural
Real estate - Construction 0 0.00
Real estate - Mortgage 423 72.92
Installment 75 12.97
----- -------
Total $ 580 100.00%
===== =======
- 24 -
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
DEPOSITS
The average amounts of deposits are summarized
below:
Years Ended December 31
2002 2001 2000
(000 omitted)
Demand deposits $ 15,237 $ 12,534 $ 12,368
Interest bearing demand deposits 11,431 10,992 10,204
Savings deposits 18,438 16,891 18,618
Time deposits 74,238 71,974 62,871
--------- --------- ---------
Total deposits $ 119,344 $ 112,391 $ 104,061
========= ========= =========
The following is a breakdown of maturities of time
deposits of $ 100,000 or more as of December 31, 2002:
Maturity (000
omitted)
Certificates of Deposit
Three months or less $ 10,465
Over three months through six months 2,098
Over six months through twelve months 2,940
Over twelve months 2,834
--------
$ 18,337
========
RETURN ON EQUITY AND ASSETS (APPLYING DAILY AVERAGE
BALANCES)
The following table presents a summary of
significant earnings and capital ratios:
2002 2001 2000
Assets $ 155,563 $ 144,384 $ 134,004
Net income $ 1,730 $ 1,486 $ 1,439
Equity $ 15,850 $ 14,683 $ 13,164
Cash dividends paid $ 503 $ 468 $ 425
Return on assets 1.11% 1.03% 1.07%
Return on equity 10.91% 10.12% 10.94%
Dividend payout ratio 29.06% 31.50% 29.49%
Equity to asset ratio 10.19% 10.17% 9.82%
- 25 -
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December 31
2002 2001 2000 1999 1998
(000 omitted)
Interest income $ 9,837 $ 10,185 $ 9,992 $ 8,759 $ 8,148
Interest expense 4,271 5,432 5,210 4,325 4,151
-------- -------- -------- ------- -------
Net interest income 5,566 4,753 4,782 4,434 3,997
Provision for loan losses 255 15 45 195 185
-------- -------- -------- ------- -------
Net interest income after 5,311 4,738 4,737 4,239 3,812
provision for loan losses
Other income:
Trust 22 19 18 12 97
Service charges - Deposits 208 189 177 160 140
Other service charges, 165 125 124 127 123
collection and exchange,
charges, commission fees
Other operating income 279 306 203 290 362
-------- -------- -------- ------- -------
Total other income 674 639 522 589 722
-------- -------- -------- ------- -------
Income before operating
expense 5,985 5,377 5,259 4,828 4,534
Operating expenses:
Salaries and employees benefits 1,728 1,560 1,509 1,314 1,242
Occupancy and equipment expense 746 729 728 647 569
Other operating expenses 1,304 1,162 1,133 1,050 934
-------- -------- -------- ------- -------
Total operating expenses 3,778 3,451 3,370 3,011 2,745
-------- -------- -------- ------- -------
Income before income taxes 2,207 1,926 1,889 1,817 1,789
Income tax 477 440 449 380 391
-------- -------- -------- ------- -------
Net income applicable to common $ 1,730 $ 1,486 $ 1,440 $ 1,437 $ 1,398
stock
======== ======== ======= ======= =======
Per share data:
Earnings per common share $ 3.51 $ 3.02 $ 2.91 $ 2.90 $ 2.82
Cash dividend - Common 1.02 .95 .86 .86 .72
Weighted average number of 492,772 492,747 494,054 495,000 495,000
common shares
Item 9. Disagreements on Accounting and Financial
Disclosures.
Not applicable.
- 26 -
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 2003 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,
2002, 2001, and 2000 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 Year Salary Bonus Other Annual Restricted Options/SA LTIP All Other
Principal ($) ($) Compensation($ Stock RS Payouts($) Compensation
Position ) Award(s) (#) ($)
($)
Annual Compensation Long-Term Compensation
Clyde H. 2002 140,666 $ 0 $ 0 $ 0 $ 0 $ 0 $ 128,855
Bookheimer,
President & CEO
2001 130,008 0 0 0 0 0 163,903
2000 124,708 0 0 0 0 0 86,814
Footnotes:
(1) All other compensation includes the following:
Directors Fringe Retirement Supplemental Deferred
Benefits Plan Executive Directors
(Personal Retirement Fees
Use of Plan
Bank Owned
Vehicle)
2002 $ 0 $ 1,015 $ 16,270 $ 111,570 $ 0
2001 0 1,232 13,890 148,781 0
2000 0 1,356 10,641 74,817 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, 2002, the cash surrender value of the
policies was $ 1,301,320.
- 27 -
Item 14. Controls and Procedures
The Company's Chief Executive Officer and Chief
Financial Officer have evaluated the effectiveness of the
Company's disclosure controls and procedures (as such term
is defined in Rules 13a-14(c) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) as of a date
within 90 days prior to the filing date of this annual
report (the "Evaluation Date"). Based on such evaluation,
such officers have concluded that, as of the Evaluation
Date, the Company's disclosure controls and procedures are
effective in alerting them on a timely basis to material
information relating to the Company (including its
consolidated subsidiaries) required to be included in the
Company's periodic filings under the Exchange Act.
Changes in Internal Controls
Since the Evaluation Date, there have not been any
significant changes in the Company's internal controls or in
other factors that could significantly affect such controls.
- 28 -
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports of Form 8-K.
(a) (1) - List of Financial Statements
The following consolidated financial
statements of Fulton
Bancshares Corporation and its
subsidiaries, included in
the annual report of the registrant to
its shareholders
for the year ended December 31, 2002,
are incorporated by
reference in Item 8:
Consolidated balance sheets -
December 31, 2002 and 2001
Consolidated statements of income -
Years ended December 31,
2002, 2001, and 2000
Consolidated statements of stockholders'
equity - Years ended December 31, 2002,
2001, and 2000
Consolidated statements of cash flows -
Years ended December 31, 2002, 2001, and
2000
Notes to consolidated financial
statements - December 31, 2002
(2) List of Financial Statement Schedules
All financial statement schedules for
which provision is made in the
applicable accounting regulations of the
Securities and Exchange Commission are
not required under the related
instructions or are inapplicable and
therefore have been omitted.
(3) Listing of Exhibits
Exhibit (3) (i) Articles of
incorporation
Exhibit (3) (ii) Bylaws
Exhibit (4) Instruments defining the
rights of security
holders including indentures
Exhibit (10) Material contracts
Exhibit (13) Annual report to security
holders
Exhibit (21) Subsidiaries of the
registrant
Exhibit (23) Consent of independent
auditors
Exhibit (99.1) Certification pursuant to
18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit (99.2) Certification pursuant to
18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
All other exhibits for which provision
is made in the applicable accounting
regulations of the Securities and
Exchange Commission are not required
under the related instructions or are
inapplicable and therefore have been
omitted.
(b) Reports on Form 8-K filed
None.
(c) Exhibits
(3) (i) Articles of incorporation.
Incorporated by reference
to Exhibit 3A to the Registrant's
Registration Statement
on Form SB-2, Registration No. 33-
85626.
(ii) 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
- 29 -
(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).
(10) Material contracts. Copies of the Salary
Continuation Agreements for the Chief
Executive Officer and Principal
Financial and Accounting Officer, as well
as the Director Deferred Compensation Plan
Agreement and Director Emeritus
Retirement Agreement are filed herewith.
(13) Annual report to security holders. Filed
herewith.
(21) Subsidiaries of the registrant. Filed
herewith.
(23) Consent of independent auditors. Filed
herewith.
(99) Additional exhibits.
Exhibit (99.1) Certification of Chief
Executive Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002 - filed herewith.
Exhibit (99.2) Certification of Chief
Financial Officer pursuant
to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 - filed
herewith.
(d) Financial statement schedules. None.
- 30 -
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 26, 2003
- ----------------------- CEO
Clyde H. Bookheimer
/S/ David L. Seiders Director & Vice
- ----------------------- Chairman March 26, 2003
David L. Seiders
/S/ Cecil B. Mellott Director & Vice March 26, 2003
- ----------------------- Chairman
Cecil B. Mellott
/S/ Robert C. Snyder Director March 26, 2003
- -----------------------
Robert C. Snyder
/S/ Ellis L. Yingling Director & March 26, 2003
- ----------------------- Chairman
Ellis L. Yingling
/S/ Clair R. Miller Director March 26, 2003
- -----------------------
Clair R. Miller
/s/ Martin R. Brown Director March 26, 2003
- -----------------------
Martin R. Brown
/s/Robert L. Thomas Director March 26, 2003
- -----------------------
Robert L. Thomas
- 31 -
CERTIFICATION
I, Clyde H. Bookheimer, certify that:
1. I have reviewed this annual report on Form 10-K of
Fulton Bancshares Corporation;
2. Based on my knowledge, the annual report does not
contain any untrue statement of a material fact or
omit to state a material fact necessary to make
the statements made, in light of the circumstances
under which such statements were made, not
misleading with respect to the period covered by
this annual report.
3. Based on my knowledge, the financial statements,
and other financial information included in this
annual report, fairly present in all material
respects the financial condition, results of
operations and cash flows of the registrant as of,
and for, the periods presented in this annual
report.
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining
disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
(a) designed such disclosure controls and
procedures to ensure that material
information relating to the registrant,
including its consolidated subsidiary, is
made known to us by others within those
entities, particularly during the period in
which this annual report is being prepared;
(b) evaluated the effectiveness of the
registrant's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this annual report (the
"Evaluation Date"); and
(c) presented in this annual report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I
have disclosed, based on our most recent
evaluation, to the registrant's auditors and the
audit committee of registrant's board of
directors:
(a) all significant deficiencies in the design or
operation of the internal controls which
could adversely affect the registrant's
ability to record, process, summarize and
report financial data and have identified for
the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls.
6. The registrant's other certifying officer and I
have indicated in this annual report whether or
not there were significant changes in internal
controls or in other factors that could
significantly affect the internal controls
subsequent to the date of our most recent
evaluation, including any corrective actions with
regard to significant deficiencies and material
weaknesses.
Date: March 26, 2003
----------------------
By: /s/Clyde H. Bookheimer
----------------------
Clyde H. Bookheimer
President and Chief
Executive Officer,
Director
- 32 -
CERTIFICATION
I, Doriann Hoffman, certify, that:
1. I have reviewed this annual report on Form 10-K of
Fulton Bancshares Corporation;
2. Based on my knowledge, the annual report does not
contain any untrue statement of a material fact or
omit to state a material fact necessary to make the
statements made, in light of the circumstances
under which such statements were made, not
misleading with respect to the period covered by
this annual report.
3. Based on my knowledge, the financial statements,
and other financial information included in this
annual report, fairly present in all material
respects the financial condition, results of
operations and cash flows of the registrant as of,
and for, the periods presented in this annual
report.
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining
disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
(a) designed such disclosure controls and
procedures to ensure that material information
relating to the registrant, including its
consolidated subsidiary, is made known to us by
others within those entities, particularly
during the period in which this annual report is
being prepared;
(b) evaluated the effectiveness of the
registrant's disclosure controls and procedures
as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation
Date"); and
(c) presented in this annual report our
conclusions about the effectiveness of the
disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I
have disclosed, based on our most recent evaluation,
to the registrant's auditors and the audit committee
of registrant's board of directors:
(a) all significant deficiencies in the design or
operation of the internal controls which could
adversely affect the registrant's ability to
record, process, summarize and report financial
data and have identified for the registrant's
auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that
involves management or other employees who have
a significant role in the registrant's internal
controls.
6. The registrant's other certifying officer and I
have indicated in this annual report whether or not
there were significant changes in internal controls
or in other factors that could significantly affect
the internal controls subsequent to the date of our
most recent evaluation, including any corrective
actions with regard to significant deficiencies and
material weaknesses.
Date: March 26, 2003
---------------------
By: /s/Doriann Hoffman
---------------------
Doriann Hoffman
Vice President and
Treasurer
(Principal Financial
and
Accounting Officer)
- 33 -
Exhibit Index
Exhibit No.
10.1 Salary Continuation Agreement and Second
Amendment - Chief Executive Officer
10.2 First Amendment to Salary Continuation
Agreement - Principal Financial and
Accounting Officer
10.3 Director Deferred Compensation Plan
10.4 Director Emeritus Retirement Agreement
13 Annual report to shareholders
21 Subsidiaries of the Registrant
23.1 Independent Auditor's Consent
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
Exhibit 10.1
THE FULTON COUNTY NATIONAL BANK & TRUST COMPANY
MCCONNELLSBURG, PA
SALARY CONTINUATION AGREEMENT
THIS AGREEMENT is made this 1st day of September, 1995 by and
between The Fulton County National Bank & Trust Company,
McConnellsburg, Pennsylvania ("Company") and Clyde H. Bookheimer
(the "Executive")
INTRODUCTION
To encourage the Executive to remain an employee of the Company,
the Company is willing to provide salary continuation benefits
to the Executive. The Company will pay the benefits from its
general assets.
AGREEMENT
The Executive and the Company agree as follows:
Article 1
Definitions
1.1Definitions. Whenever used in this Agreement, the
following words and phrases shall have the meanings
specified:
1.1.1. "Change of Control" means the transfer of 51% or
more of the Company's outstanding voting common
stock followed within twelve (12) months by
replacement of fifty percent (50%) or more of the
members of the Company's Board of Directors (for
reasons other than death or disability).
1.1.2. "Code" means the Internal Revenue Code of 1986,
as amended. References to a Code Section shall
be deemed to be to the section as it now exists
and to any successor provision.
1.1.3. "Company" means The Fulton County National Bank
& Trust Company, and any successor thereto.
1.1.4. "Normal Retirement Date" means the Executive
attaining age 65, or his actual retirement date
if after age 65.
1.1.5. "Termination of Employment" means the
Executive's ceasing to be
employed by the Company for any reason
whatsoever, voluntary or
involuntary, other than by reason of an
approved leave of absence.
1.1.6. "Plan Year" means each twelve-month period from
the effective date of this Agreement.
Article 2
Retirement Benefits
2.1. Normal Retirement Benefit. If the Executive terminates
employment on or after the Normal Retirement Date for
reasons other than death, the Company shall pay to the
Executive the benefit described in this Section
2.1.1. Amount of Benefit. The benefit under this Section
2.1 is $ 5,125. Said amount shall be increased
each month between the date the Executive reaches
age 65 and the Executive's Normal Retirement
Date by .67% per month until retirement.
2.1.2. Payment of Benefit. The Company shall pay the
benefit to the Executive on the first day of each
month commencing with the month following the
Executive's Normal Retirement Date and
continuing for 179 additional months.
2.2. Early Retirement Benefit. If the Executive terminates
employment before the Normal Retirement Date, and for
reasons other than death or following
a Change of Control, the Company shall pay to the
Executive the benefit
described in this Section 2.2.
2.2.1. Amount of Benefit. The benefit under this Section
2.2 is the benefit determined under Schedule A
based on the date of the Executive's Termination
of Employment.
2.2.2. Payment of Benefit. The Company shall pay the
benefit to the Executive on the first day of each
month commencing with the month following the
Executive's Normal Retirement Date and
continuing for 179 additional months.
2.3. Change of Control Benefit. If Executive is in active
service at the time of a Change of Control, the Executive
shall be entitled to the Normal Retirement Benefit
described in Section 2.1, whether or not
Termination of Service occurs prior to Normal Retirement
Date.
Article 3
Survivor Benefits
3.1. Death During Active Service. If the Executive dies while
in the active service of the Company, the Company shall
pay to the Executive's beneficiary the benefit described
in this Section 3.1.
3.1.1. Amount of Benefit. The benefit under Section 3.1
is the lifetime benefit that would have been paid
to the Executive under Section 2.1 calculated as
if the date of the Executive's death were the
Normal Retirement Date.
3.1.2. Payment of Benefit. The Company shall pay the
benefit to the Beneficiary on the first day of
each month commencing with the month following the
Executive's death and continuing for 179
additional months.
3.2. Death During Benefit Period. If the Executive dies after
benefit payments have commenced under this Agreement but
before receiving all such payments, the Company shall pay
the remaining benefits to the Executive's beneficiary at
the same time and in the same amounts they would have been
paid to the Executive had the Executive survived.
3.3. Death Following Active Service Before Benefits Commence.
If the Executive is entitled to benefit payments under
this Agreement, but dies prior to receiving said benefit
payments, the Company shall pay the Executive's
beneficiary the benefit described in this Section 3.3.
3.3.1. Amount of Benefit. The benefit under Section 3.3
is the vested benefit that would have been paid to
the Executive pursuant to Schedule A.
3.3.2. Payment of Benefit. The Company shall pay the
benefit to the Beneficiary on the first day of
each month commencing with the month following the
Executive's death and continuing for 179
additional months.
3.4. "Death After Change of Control". If Executive dies
following a Change of Control, provided Executive was in
active service at the time of the Change of Control, the
Company shall pay the Executive's beneficiary
the benefit described in this Section 3.4.
3.4.1. Amount of Benefit. The benefit under Section 3.4
is the lifetime benefit that would have been paid
to the Executive under Section 2.1 calculated as
if the date of the Executive's death were the
Normal Retirement Date.
3.4.2. Payment of Benefit. The Company shall pay the
benefit to the Beneficiary on the first day of
each month commencing with the month following the
Executive's death and continuing for 179
additional months.
Article 4
Beneficiaries
4.1. Beneficiary Designations. The Executive shall
designate a beneficiary by filing a written
designation with the Company. The Executive may
revoke or modify the designation at any time by
filing a new designation. However, designations will
only be effective if signed by the Executive and
accepted by the Company during the Executive's
lifetime. The Executive's beneficiary designation
shall be deemed automatically revoked if the
beneficiary predeceases the Executive, or
if the Executive names a spouse as beneficiary and
the marriage is subsequently dissolved. If the
Executive dies without a valid beneficiary
designation, all payments shall be made to the
Executive's surviving spouse, if any, and if none, to
the Executive's surviving children and the
descendants of any deceased child by right of
representation, and if no children or descendants
survive, the Executive's estate.
4.2. Facility of Payment. If a benefit is payable to a
minor, to a person declared incompetent, or to a
person incapable of handling the disposition of his
or her property, the Company may pay such benefit
to the guardian, legal representative or person
having the care or custody of such minor, incompetent
person or incapable person. The Company may require
proof of incompetence, minority or guardianship
as it may deem appropriate prior to distribution of
the benefit. Such distribution shall completely
discharge the Company from all liability with respect
to such benefit.
Article 5
General Limitations
Notwithstanding any provision of this Agreement to the
contrary, the Company shall not pay any benefit under this
Agreement:
5.1. Excess Parachute Payment. To the extent the benefit
would be an excess parachute payment under Section
280G of the Code.
5.2. Termination for Cause. If the Company terminates the
Executive's employment for:
5.2.1. Gross negligence or gross neglect of duties;
5.2.2. Commission of a felony or of a gross
misdemeanor involving moral turpitude; or
5.2.3. Fraud, disloyalty, dishonesty or willful
violation of any law or significant Company
policy committed in connection with the
Executive's employment and resulting in an
Adverse effect on the Company.
5.3. Competition After Termination of Employment. No
benefits shall be payable, except for benefits paid
due to a Change of Control, if the Executive, without
the prior written consent of the Company, engages
in, becomes interested in, directly or indirectly, as
a sole proprietor, as a partner in a partnership, or
as a substantial shareholder in a corporation, or
becomes associated with, in the capacity of employee,
director, officer, principal, agent, trustee or
in any other capacity whatsoever, any enterprise
conducted in the trading area (a 25 mile radius) of
the business of the Company which enterprise is, or
may deemed to be, competitive with any business
carried on by the Company as of the date of
termination of the Executive's employment or his
retirement.
5.4. Suicide. No benefits shall be payable if the
Executive commits suicide within two years after the
date of this Agreement, or if the Executive
has made any material misstatement of fact on any
application for life insurance purchased by the
Company.
Article 6
Claims and Review Procedures
6.1. Claims Procedure. The Company shall notify the
Executive's beneficiary in writing, within ninety
(90) days of his or her written application
for benefits, of his or her eligibility or
noneligibility for benefits under the Agreement. If
the Company determines that the beneficiary is
not eligible for benefits or full benefits, the
notice shall set forth (1) the specific reasons for
such denial, (2) a specific reference to
the provisions of the Agreement on which the denial
is based, (3) a description of any additional
information or material necessary for the
claimant to perfect his or her claim, and a
description of why it is needed, and (4) an
explanation of the Agreement's claims review
procedure and other appropriate information as to the
steps to be taken if the beneficiary wishes to have
the claim reviewed. If the Company determines that
there are special circumstances requiring additional
time to make a decision, the Company shall notify the
beneficiary of the special circumstances and the date
by which a decision is expected to be made, and may
extend the time for up to an additional ninety-day
period.
6.2. Review Procedure. If the beneficiary is determined
by the Company not to be eligible for benefits, or if
the beneficiary believes that he or she is entitled
to greater or different benefits, beneficiary shall
have the opportunity to have such claim reviewed by
the Company by filing a petition for review with the
Company within sixty (60) days after receipt of the
notice issued by the Company. Said petition shall
state the specific reasons which the beneficiary
believes entitle him or her to benefits or to greater
or different benefits. Within sixty (60) days after
receipt by the Company of the petition, the Company
shall afford the beneficiary (and counsel, if any) an
opportunity to present his or her position to the
Company orally or in writing, and the beneficiary (or
counsel) shall have the right to review the
pertinent documents. The Company shall notify the
beneficiary of its decision in writing within the
sixty-day period, stating specifically
the basis of its decision, written in a manner
calculated to be understood by the beneficiary and
the specific provisions of the Agreement on which the
decision is based. If, because of the need for
a hearing, the sixty-day period is not sufficient,
the decision may be deferred for up to another sixty-
day period at the election of the Company, but notice
of this deferral shall be given to the beneficiary.
Article 7
Amendments and Termination
This Agreement may be amended or terminated only by a
written agreement signed by the Company and the Executive.
Article 8
Miscellaneous
8.1. Binding Effect. This Agreement shall bind the
Executive and the Company, and their beneficiaries,
survivors, executors, successors, administrators and
transferees.
8.2. No Guaranty of Employment. This Agreement is not an
employment policy or contract. It does not give the
Executive the right to remain an employee of the
Company, nor does it interfere with the Company's
right to discharge the Executive. It also does not
require the Executive to remain an employee nor
interfere with the Executive's right to
terminate employment at any time.
8.3. Non-Transferability. Benefits under this Agreement
cannot be sold, transferred, assigned, pledged,
attached or encumbered in any manner.
8.4. Tax Withholding. The Company shall withhold any
taxes that are required to be withheld from the
benefits provided under this Agreement.
8.5. Applicable Law. The Agreement and all rights
hereunder shall be governed by the laws of
Pennsylvania, except to the extent preempted by
the laws of the United States of America.
8.6. Unfunded Arrangement. The Executive and beneficiary
are general unsecured creditors of the Company for
the payment of benefits under this Agreement. The
benefits represent the mere promise by the Company
to pay such benefits. The rights to benefits are not
subject in any manner to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance,
attachment, or garnishment by creditors. Any
insurance on the Executive's life is a general asset
of the Company to which the Executive and beneficiary
have no preferred or secured claim.
8.7. Recovery of Estate Taxes. If the Executive's gross
estate for federal estate tax purposes includes any
amount determined by reference to and
on account of this Agreement, and if the beneficiary
is other than the Executive's estate, then the
Executive's estate shall be entitled to recover from
the beneficiary receiving such benefit under the
terms of the Agreement, an amount by which the total
estate tax due by Executive's estate, exceeds the
total estate tax which would have been payable if the
value of such benefit had not been included in the
Executive's gross estate. If there is more than one
person receiving such benefit, the right of recovery
shall be against each such person. In the event the
beneficiary has a liability hereunder, the
beneficiary may petition the Company for a lump sum
payment in an amount not to exceed the beneficiary's
liability hereunder.
IN WITNESS WHEREOF, The Executive and a duly authorized
Company officer have signed this Agreement.
EXECUTIVE: COMPANY:
The Fulton County
National Bank
and Trust Company
/s/Clyde H. Bookheimer By /s/Gregory Gordon
- ----------------------- --------------------------
Clyde H. Bookheimer Title Senior Vice President
-----------------------
CLYDE H. BOOKHEIMER
SCHEDULE A
Plan Year Early Early
Retirement Retirement
Monthly Annual Benefit
Benefit
1 $ 780 $ 9,364
2 1,497 17,967
3 2,156 25,871
4 2,761 33,133
5 3,317 39,806
6 3,828 45,937
7 4,298 51,570
8 4,729 56,745
9 5,125 61,500
SECOND AMENDMENT
TO THE
THE FULTON COUNTY NATIONAL BANK AND TRUST COMPANY
SALARY CONTINUATION AGREEMENT
DATED SEPTEMBER 1, 1995
FOR
CLYDE H. BOOKHEIMER
THIS AMENDMENT executed on this 4th day of August, 2000, by
and between THE FULTON COUNTY NATIONAL BANK AND TRUST
COMPANY, a Pennsylvania corporation, located in
McConnellsburg, Pennsylvania (the "Corporation") and CLYDE
H. BOOKHEIMER (the "Executive").
On September 1, 1995, the Company and the Executive executed
THE FULTON COUNTY NATIONAL BANK AND TRUST COMPANY
MCCONNELLSBURG, PA SALARY CONTINUATION AGREEMENT and on
October 15, 1996 the Corporation and the Executive executed
the FIRST AMENDMENT TO THE FULTON COUNTY NATIONAL BANK AND
TRUST COMPANY MCCONNELLSBURG, PA SALARY CONTINUATION
AGREEMENT DATED SEPTEMBER 1, 1995 (the "Agreement").
Pursuant to the power of amendment reserved by Article 7 of
the Agreement, the undersigned hereby amends, in part, said
Agreement to increase the Executive's Normal Retirement
Benefit from $6,083.33 (Six Thousand Eighty-Three Thousand
Dollars and Thirty-Three Cents) per month to $8,000 (Eight
Thousand Dollars) per month for 15 years; and to explain how
the Early Termination Benefit is calculated. This change
will also increase the accruals in Schedule A attached to
said Agreement. Therefore, the following revisions shall be
made:
Article 2.1.1 of the Agreement shall be deleted in its
entirety and replaced by Article 2.1.1 below.
2.1.1 Amount of Benefit. The benefit under this Section
2.1 is $8,000 (Eight Thousand Dollars). Said amount
shall be increased each month between the date the
Executive reaches age 65 and the Executive's
Normal Retirement Date by .67% per month until
retirement.
Article 2.2.1 of the Agreement shall be deleted in its
entirety and replaced by Article 2.2.1 below.
2.2.1 Amount of Benefit. The annual benefit under Section
2.2 as set forth under Schedule A is the future value
of the current year liability amount, in which Early
Termination occurs, using an 8.5% discount rate
compounded monthly, and payable as set forth in
Section 2.2.2 herein. The annual benefit shall be 0%
vested prior to age 55.
Schedule A of the Agreement shall be deleted in its
entirety and replaced by the attached Second Amended
Schedule A.
Article 6.1 of the Agreement shall be deleted in its
entirety and replaced by Article 6.1 below.
6.1 Claims Procedure. The Company shall notify the
Executive or the Executive's beneficiary in writing,
within ninety (90) days of his her written application
for benefits, of his or her eligibility or
ineligibility for benefits under the Agreement. If
the Company determines that the Executive or the
Executive's beneficiary is not eligible for benefits
or full benefits, the notice shall set forth (1)
the specific reasons for such denial, (2) a specific
reference to the provisions of the Agreement on which
the denial is based, (3) a description of any
additional information or material necessary for the
claimant to perfect his or her claim, and a
description of why it is needed, and (4) an
explanation of the Agreement's claims review
procedure and other appropriate information as to the
steps to be taken if the Executive or the Executive's
beneficiary wishes to have the claims reviewed. If
the Company determines that there are special
circumstances requiring additional time to make a
decision, the Company shall notify the Executive or
the Executive's beneficiary of the special
circumstances and the date by which a decision is
expected to be made, and may extend the time for up to
an additional ninety-day period.
Article 6.2 of the Agreement shall be deleted in its
entirety and replaced by Article 6.2 below.
6.2 Review Procedure. If the Executive or the Executive's
beneficiary is determined by the Company not to be
eligible for benefits, or if the Executive or the
Executive's beneficiary believes that he or she is
entitled to greater or different benefits, the
Executive or the Executive's beneficiary shall have
the opportunity to have such claim reviewed by the
Company by filing a petition for review with the
Company within sixty (60) days after receipt of the
notice issued by the Company. Said petition shall
state the specific reasons which the Executive or the
Executive's beneficiary believes entitle him or her to
benefits or to greater or different benefits. Within
sixty (60) days after receipt by the Company of the
petition, the Company shall afford the Executive or
the Executive's beneficiary (and counsel, if any) an
opportunity to present his or her position to the
Company orally or in writing, and the Executive or the
Executive's beneficiary (or counsel) shall have the
right to review the pertinent documents. The Company
shall notify the Executive or the Executive's
beneficiary of its decision, in writing within the
sixty-day period, stating specifically
the basis of its decision, written in a manner
calculated to be understood by the Executive or the
Executive's beneficiary and the specific provisions of
the Agreement on which the decision is based.
If, because of the need for a hearing, the sixty-day
period is not sufficient, the decision may be deferred
for up to another sixty-day period at the election of
the Company, but notice of this deferral shall
be given to the Executive or the Executive's
beneficiary.
Article 8.8 shall be added in its entirety to the Agreement
as below.
8.8 Entire Agreement. This Agreement constitutes the
entire agreement between the Company and the Executive
as to the subject matter hereof. No rights are
granted to the Executive by virtue of this Agreement
other than those specifically set forth herein.
Article 8.9 shall be added in its entirety to the Agreement
as below.
8.9 Administration. The Company shall have powers which
are necessary to administer this Agreement, including
but not limited to:
8.9.1 Interpreting the provisions of the Agreement;
8.9.2 Establishing and revising the method of
accounting for the Agreement;
8.9.3 Maintaining a record of benefit payments; and
8.9.4..Establishing rules and prescribing any forms
necessary or desirable to administer the
Agreement.
IN WITNESS OF THE ABOVE, the Executive and the Company have
agreed to this Second Amendment.
Executive: Corporation:
THE FULTON COUNTY
NATIONAL BANK AND TRUST
COMPANY
/s/Clyde H. Bookheimer By /s/Alice G. Clark
- ------------------------- ---------------------
Clyde Bookheimer
Title Sr. Vice President
------------------
FIRST AMENDED SCHEDULE A
TO THE
THE FULTON COUNTY NATIONAL BANK AND TRUST COMPANY
SALARY CONTINUATION AGREEMENT
CLYDE H. BOOKHEIMER
Early Early
Termination Termination
Plan Monthly Annual
Year Benefit Benefit
5 $5,057 $60,685
6 $5,889 $70,665
7 $6,653 $79,834
8 $7,355 $88,259
9 $8,000 $96,000
Exhibit 10.2
FIRST AMENDMENT
TO THE
THE FULTON COUNTY NATIONAL BANK AND TRUST COMPANY
SALARY CONTINUATION AGREEMENT
DATED DECEMBER 23, 1996
FOR
DORIANN F. HOFFMAN
THIS AMENDMENT executed on this 4th day of August, 2000, by
and between THE FULTON COUNTY NATIONAL BANK AND TRUST
COMPANY, a national banking association, located in
McConnellsburg, Pennsylvania (the "Company") and DORIANN F.
HOFFMAN (the "Executive").
On December 23, 1996, the Company and the Executive executed
THE FULTON COUNTY NATIONAL BANK AND TRUST COMPANY SALARY
CONTINUATION AGREEMENT (the "Agreement").
Pursuant to the power of amendment reserved by Article 7 of
the Agreement, the undersigned hereby amends, in part, said
Agreement to increase the Executive's Normal Retirement
Benefit from $ 24,000 (Twenty Four Thousand Dollars) per
year to $ 44,000 (Forty Four Thousand Dollars) per year for
15 years; and to explain how the Early Termination Benefit
is calculated. This change will also increase the accruals
in Schedule A attached to said Agreement. Therefore, the
following revisions shall be made:
Article 2.1.1 of the Agreement shall be deleted in its
entirety and replaced by Article 2.1.1 below.
2.1.1 Amount of Benefit. The benefit under this Section
2.1 is $ 44,000 (Forty Four Thousand Dollars). If
the Executive works past Normal Retirement Age, this
amount shall be increased each month by .67%
From the Executive's Normal Retirement Age to the
Executive's Normal Retirement Date.
Article 2.2.1 of the Agreement shall be deleted in its
entirety and replaced by Article 2.2.1 below.
2.2.1 Amount of Benefit. The annual benefit under Section
2.2 as set forth under Schedule A is the future value
of the current year liability amount, in which Early
Termination occurs, using an 8.5% discount rate
compounded monthly, and payable as set forth in
Section 2.2.2 herein. The annual benefit shall be 0%
vested prior to age 55.
Schedule A of the Agreement shall be deleted in its
entirety and replaced by the attached First Amended
Schedule A.
Article 4.1 of the Agreement shall be deleted in its
entirety and replaced by Article 4.1 below.
4.1 Beneficiary Designations. The Executive shall
designate a beneficiary by filing a written
designation with the Company. The Executive may
revoke or modify the designation at any time by filing
a new designation. However, designations will only be
effective if signed by the Executive and accepted by
the Company during the Executive's lifetime. The
Executive's beneficiary designation shall be deemed
automatically revoked if the beneficiary predeceases
the Executive, of if the Executive names a spouse as
beneficiary and the marriage is subsequently
dissolved. If the Executive dies without a valid
beneficiary designation, all payments shall be made to
the Executive's surviving spouse, if any, and if none,
to the Executive's surviving children and the
descendants of any deceased child by right of
representation, and if no children or descendants
survive, to the Executive's estate.
IN WITNESS OF THE ABOVE, the Executive and the Company have
agreed to this Second Amendment.
Executive: Corporation:
THE FULTON COUNTY
NATIONAL BANK AND TRUST
COMPANY
/s/DoriAnn Hoffman By /s/Clyde H. Bookheimer
- ------------------------ ----------------------
DoriAnn Hoffman
Title President
-------------------
FIRST AMENDED SCHEDULE A
TO THE
THE FULTON COUNTY NATIONAL BANK AND TRUST COMPANY
SALARY CONTINUATION AGREEMENT
DORIANN HOFFMAN
Early Early
Termination Termination
Plan Monthly Annual
Year Benefit Benefit
1 $ 0 $ 0
2 0 0
3 0 0
4 0 0
5 0 0
6 0 0
7 0 0
8 0 0
9 0 0
10 0 0
11 0 0
12 0 0
13 0 0
14 0 0
15 0 0
16 3,029 36,344
17 3,126 37,509
18 3,215 38,580
19 3,297 39,564
20 3,372 40,468
21 3,442 41,299
22 3,505 42,062
23 35,64 42,764
24 3,617 43,408
25 3,667 44,000
Exhibit 10.3
THE FULTON COUNTY NATIONAL BANK & TRUST COMPANY
MCCONNELLSBURG, PA
BOARD RESOLUTION
ADOPTING DEFERRED FEE AGREEMENT
The Board desires to retain David Seiders ("Director") as a
member of the Company`s Board of Directors. To encourage such
retention, the Board desires to enter into the Deferred Fee
Agreement attached to these minutes. Under the Agreement, the
Company promises to pay deferred fees to the Director (or to the
Director's designated beneficiary if the Director dies while
employed) based on elective deferrals of current fees, and on an
interest rate as specified in said Agreement.
THEREFORE, IT IS RESOLVED that the Deferred Fee Agreement is
adopted by the Company effective as of March 25, 1996.
RESOLVED FURTHER, that the Interest Rate for deferrals shall
be 9.0%.
THE FULTON COUNTY NATIONAL BANK & TRUST COMPANY
MCCONNELLSBURG, PA
DEFERRED FEE AGREEMENT
THIS AGREEMENT is made this 25th day of March, 1996 by and
between Fulton County National Bank & Trust Company (the
"Company"), and David L. Seiders (the "Director").
INTRODUCTION
To encourage the Director to remain a member of the
Company's Board of Directors, the Company is willing to
provide to the Director a deferred fee opportunity. The
Company will pay the benefits from its general assets.
AGREEMENT
The Director and the Company agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the
following words and phrases shall have the meanings
specified:
1.1.1 "Code" means the Internal Revenue Code of 1986,
as amended. References to a Code section shall
be deemed to be to that section as it now
exists and to any successor provision.
1.1.2 "Election Form" means the Form attached as
Exhibit 1.
1.1.3 "Fees" means the total directors fees payable
to the Director.
1.1.4 "Normal Termination Date" means the Director
attaining age 75.
1.1.5 "Termination of Service" means the Director's
ceasing to be a member of the Company's Board
of Directors for any reason whatsoever.
Article 2
Deferral Election
2.1 Initial Election. The Director shall make an initial
deferral election under this Agreement by filing with
the Company a signed Election Form within 30 days
after the date of this Agreement. The Election Form
shall set forth the amount of Fees to be deferred.
The Election Form shall be effective to defer only
Fees earned after the date the Election Form is
received by the Company.
2.2 Election Changes
2.2.1 Generally. The Director may modify the amount
of Fees to be deferred by filing a subsequent
signed Election Form with the Company. The
modified deferral shall not be effective until
the calendar year following the year in which
the subsequent Election Form is received by the
Company.
2.2.2 Hardship. If an unforeseeable financial
emergency arising from the death of a family
member, divorce, disability, sickness,
injury, catastrophe or similar event outside
the control of the Director occurs, the
Director, by written instructions to the
Company may reduce future deferrals under this
Agreement.
Article 3
Deferral Account
3.1 Establishing and Crediting. The Company shall
establish a Deferral Account on its books for the
Director, and shall credit to the Deferral Account the
following amounts:
3.1.1 Deferrals. The Fees deferred by the Director
as of the time the Fees would have otherwise
been paid to the Director.
3.1.2 Interest. On each anniversary of the date of
this Agreement and immediately prior to the
payment of any benefits, interest on
the account balance since the preceding credit
under this Section 3.1.2, if any, at an annual
rate, compounded monthly, equal to 9%.
3.2 Statement of Accounts. The Company shall provide to
the Director, within one hundred twenty (120) days
after each anniversary of this Agreement, a statement
setting forth the Deferral Account balance.
3.3 Accounting Device Only. The Deferral Account is
solely a device for measuring amounts to be paid under
this Agreement. The Deferral Account is not a trust
fund of any kind. The Director is a general unsecured
creditor of the Company for the payment of benefits.
The benefits represent the mere Company promise to pay
such benefits. The Director's rights are not subject
in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, attachment,
or garnishment by the Director's creditors.
Article 4
Lifetime Benefits
4.1 Normal Termination Benefit. Upon the Director's
Termination of Service on or after the Normal
Termination Date, the Company shall pay to the
Director the benefit described in this Section 4.1.
4.1.1 Amount of Benefit. The benefit under this
Section 4.1 is the Deferral Account balance at
the Director's Termination of Service.
4.1.2 Payment of Benefit. The Company shall pay the
benefit to the Director in 120 equal monthly
installments including interest at
9.0%, commencing on the first day of the month
following the Director's Termination of
Service.
4.2 Early Termination Benefit. If the Director terminates
service as a director before the Normal Termination
Date, and for reasons other than death or Hardship,
the Company shall pay to the Director the benefit
described in this Section 4.2.
4.2.1 Amount of Benefit. The benefit under this
Section 4.2 is the Deferral Account balance at
the Director's Termination of Service.
4.2.2 Payment of Benefit. The Company shall pay the
benefit to the Director in 120 equal monthly
installments including interest at 7.0%,
commencing on the first day of the month
following the Director's Normal Termination
Date.
4.3 Hardship Distribution. Upon the Company's
determination (following petition by the Director)
that the Director has suffered an
unforeseeable financial emergency as described in
Section 2.2.2, the Company shall distribute to the
Director all or a portion of the Deferral Account
balance as determined by the Company, but in no event
shall the distribution be greater than is necessary to
relieve the financial hardship.
Article 5
Death Benefits
5.1 Death During Active Service. If the Director dies
while in the active service of the Company, the
Company shall pay to the Director's beneficiary the
benefit described in this Section 5.1.
5.1.1 Amount of Benefit. The benefit under Section
5.1 shall be the greater of (A) or (B):
(A). $ 144,562
or
(B). The Director's Deferral Account balance
on the day before the Director's death
5.1.2 Payment of Benefit. The Company shall pay the
benefit to the Beneficiary in 120 equal monthly
installments including interest at 9.0%,
commencing on the first day of the month
following written notification of the
Director's Death.
5.2 Death During Benefit Period. If the Director dies
after benefit payments have commenced under this
Agreement but before receiving all such payments, the
Company shall pay the remaining benefits to the
Director's beneficiary at the same time and in the
same amounts they would have been paid to the Director
had the Director survived.
5.3 Death After Early Retirement. If the Director
dies after terminating employment for Early
Termination under Section 4.2 but prior to
commencement of benefit payments under this Agreement,
the Company shall pay to the Director's beneficiary
the benefit described in this Section 5.3.
5.3.1 Amount of Benefit. The benefit under Section
5.3 is the Early Termination Benefit that would
have been paid to the Director under Section
4.2, had the Director survived.
5.3.2 Payment of Benefit. The Company shall pay the
benefit to the Beneficiary in 120 equal monthly
installments including interest at 7.0%,
commencing on the first day of the month
following written notification of the
Director's Death.
5.4 Additional Death Benefit - Burial Expense. In
addition to the benefits described herein, upon the
Director's death, the Director's beneficiary
shall be entitled to receive a one-time lump sum death
benefit in the amount of Five Thousand ($5,000)
Dollars. This benefit shall be provided specifically
for the purpose of providing payment for burial
and/or funeral expenses of the Director. The lump sum
payment shall be made within thirty (30) days of
written notification of the Director's
death. This lump sum death benefit shall not be
payable in the event the Director is terminated for
cause at any time, as specified in Section 7.1.
Article 6
Beneficiaries
6.1 Beneficiary Designations. The Director shall
designate a beneficiary by filing a written
designation with the Company. The Director may revoke
or modify the designation at any time by filing a new
designation. However, designations will only be
effective if signed by the Director and accepted by
the Company during the Director's lifetime. The
Director's beneficiary designation shall be deemed
automatically revoked if the beneficiary predeceases
the Director, or if the Director names a spouse as
beneficiary and the marriage is subsequently
dissolved. If the Director dies without a valid
beneficiary designation, all payments shall be made to
the Director's surviving spouse, if any, and if none,
to the Director's surviving children and the
descendants of any deceased child by right of
representation, and if no children or descendants
survive, to the Director's estate.
6.2 Facility of Payment. If a benefit is payable to a
minor, to a person declared incompetent, or to a
person incapable of handling the disposition of his or
her property, the Company may pay such benefit to
the guardian, legal representative or person having
the care or custody of such minor, incompetent person
or incapable person. The Company may require proof of
incompetency, minority or guardianship as it may deem
appropriate prior to distribution of the benefit.
Such distribution shall completely discharge the
Company from all liability with respect
to such benefit.
Article 7
General Limitations
Notwithstanding any provision of this Agreement to the
contrary, the Company shall not pay any benefit under this
Agreement that is attributable to the interest earned on
such contributions:
7.1 Termination for Cause. If the Company terminates the
Director's service as a director for:
7.1.1 Gross negligence or gross neglect of duties;
7.1.2 Commission of a felony or of a gross
misdemeanor involving moral turpitude; or
7.1.3 Fraud, disloyalty, dishonesty or willful
violation of any law or significant Company
policy committed in connection with the
Director's service and resulting in an adverse
financial effect on the Company.
7.2 Suicide. If the Director commits suicide within
twenty six months after the date of this
Agreement, or if the Director has made any
material misstatement of fact on any
application for life insurance purchased by
the Company.
Article 8
Claims and Review Procedures
8.1 Claims Procedure. The Company shall notify the
Director's beneficiary in writing, within ninety (90)
days of his or her written application for benefits,
of his or her eligibility or noneligibility for
benefits under the Agreement. If the Company
determines that the beneficiary is not eligible for
benefits or full benefits, the notice shall set forth
(1) the specific reasons for such denial, (2) a
specific reference to the provisions of the Agreement
on which the denial is based, (3) a description of any
additional information or material necessary for the
claimant to perfect his or her claim, and a
description of why it is needed, and (4) an
explanation of the Agreement's claims review procedure
and other appropriate information as to the steps to
be taken if the beneficiary wishes to have the claim
reviewed. If the Company determines that there are
special circumstances requiring additional time to
make a decision, the Company shall notify the
beneficiary of the special circumstances and the date
by which a decision is expected to be made, and may
extend the time for up to an additional ninety-day
period.
8.2 Review Procedure. If the beneficiary is determined by
the Company not to be eligible for benefits, or if the
beneficiary believes that he or she is entitled to
greater or different benefits, the beneficiary shall
have the opportunity to have such claim reviewed by
the Company by filing a petition for review with the
Company within sixty (60) days after receipt of the
notice issued by the Company. Said petition shall
state the specific reasons which the beneficiary
believes entitle him or her to benefits or to greater
or different benefits. Within sixty (60)
days after receipt by the Company of the petition, the
Company shall afford the beneficiary (and counsel, if
any) an opportunity to present his or her position to
the Company orally or in writing, and the beneficiary
(or counsel) shall have the right to review the
pertinent documents. The Company shall notify the
beneficiary of its decision in writing within the
sixty-day period, stating specifically the basis of
its decision, written in a manner calculated to be
understood by the beneficiary and the specific
provisions of the Agreement on which the
decision is based. If, because of the need for a
hearing, the sixty-day period is not sufficient, the
decision may be deferred for up to another sixty-day
period at the election of the Company, but notice of
this deferral shall be given to the beneficiary.
Article 9
Amendments and Termination
This Agreement may be amended or terminated only by a
written agreement signed by the Company and the Director.
Article 10
Miscellaneous
10.1 Binding Effect. This Agreement shall bind the
Director and the Company, and their beneficiaries,
survivors, executors, administrators and transferees.
10.2 No Guaranty of Service. This Agreement is not a
contract for services. It does not give the Director
the right to remain a director of the Company, nor
does it interfere with the shareholders' rights to
replace the Director. It also does not require the
Director to remain a director nor interfere with the
Director's right to terminate services at any time.
10.3 Non-Transferability. Benefits under this Agreement
cannot be sold, transferred, assigned, pledged,
attached or encumbered in any manner.
10.4 Tax Withholding. The Company shall withhold any
taxes that are required to be withheld from the
benefits provided under this Agreement.
10.5 Applicable Law. The Agreement and all rights
hereunder shall be governed by the laws of the State
of Pennsylvania, except to the extent preempted
by the laws of the United States of America.
10.6 Unfunded Arrangement. The Director and beneficiary
are general unsecured creditors of the Company for
the payment of benefits under this Agreement. The
benefits represent the mere promise by the Company to
pay such benefits. The rights to benefits are not
subject in any manner to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance,
attachment, or garnishment by creditors. Any
insurance on the Director's life is a general asset
of the Company to which the Director and beneficiary
have no preferred or secured claim.
IN WITNESS WHEREOF, the Director and a duly authorized
Company officer have signed this Agreement.
DIRECTOR: COMPANY:
The Fulton County
National
Bank & Trust Company
/s/David L. Seiders By /s/Clyde H. Bookheimer
- ------------------------- -------------------------
David L. Seiders Title President
----------------------
EXHIBIT 1
TO
DEFERRED FEE AGREEMENT
Deferral Election
I elect to defer compensation under my Deferred Fee
Agreement with the Company, as follows:
Amount of Deferral Frequency of Durration
Deferral
[Initial and Complete one] [Initial One] [Initial One]
I elect to defer Beginning of This Year only
____% of Director Year
Fees
---
Each pay
period
--- --- ---
DLS I elect to defer Monthly For ___
$ 250.00 of [Insert
Director Fees Number] Years
---
DLS Quarterly
--- --- ---
I elect not to Semi-Annually DLS Until the
defer Director Normal
Fees Termination
Date
---
End of Year
--- --- ---
Until the
Normal
Termination
Date
---
I understand that I may change the amount, frequency and
duration of my deferrals by filing a new election form with
the Company; provided, however, that any subsequent election
will not be effective until the calendar year following the
year in which the new election is received by the Company.
Beneficiary Designation
I designate the following as beneficiary of benefits under
the Deferred Fee Agreement payable following my death:
Primary: /s/David M. Seiders
----------------------
Contingent:
--------------------------
Note: To name a trust as beneficiary, please provide the
name of the trustee
and the exact date of the trust agreement.
I understand that I may change these beneficiary
designations by filing a new written designation with the
Company. I further understand that the designations will be
automatically revoked if the beneficiary predeceases me, or,
if I have named my spouse as beneficiary, in the event of
the dissolution of our marriage.
Signature: /s/David L. Seiders
-----------------------
Date: February 9, 1996
----------------------------
Accepted by the Company 9th day of February, 1996.
--- --------------
By: /s/Clyde H. Bookheimer
------------------------------
Title: President
---------------------------
Exhibit 10.4
BOARD RESOLUTION-DIRECTOR EMERITUS PROGRAM
OF THE FULTON COUNTY NATIONAL BANK & TRUST COMPANY
BE IT RESOLVED, by the Board of Directors of the Fulton
County National Bank & Trust Company that any directors of
this Bank ceasing to be directors and who have attained the
age of 65 with 10 years of continuous service may be elected
by the Board of Directors as "Director Emeritus" and such
persons who accept such election shall serve for 10 years as
advisors and consultants to the Board of Directors of this
Bank and, when invited, may sit with the Board of Directors
at regular meetings and discuss any question under
consideration provided, however, that such Directors
Emeritus shall cast no vote.
A Director Emeritus, in consideration of his (i)
availability for advice and consultation, (ii) willingness
to act as "Goodwill Ambassador" for the Bank, and (iii)
agreement not to enter into a competitive agreement which in
contrary to the interest of the bank, shall, whether or not
present at such regular meetings, be paid a monthly fee of
$ 333.33. Should a director who has become eligible for
service as a Director Emeritus die before receiving 10 years
of payments, his beneficiary shall not be entitled to any
remaining payments. If a retiring director who meets the
eligibility requirements chooses not to become a Director
Emeritus, no living benefits or survivor benefits shall be
paid to such director or his beneficiary.
I, Raleigh V. Barnett, a Director of The Fulton County
National Bank & Trust Company do hereby state that I intend
on participating in the Director Emeritus Program under the
terms and conditions as described in the above resolution
adopted by the Board of Directors on November 13, 1995.
Signed this 15th day of June, 1998.
---- -----------
Director: Witness:
/s/Raleigh V. Barnett /s/DoriAnn Hoffman
- ----------------------------- --------------------------
[Name of Director] [Witness]
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 - 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 - 27
Management's discussion and analysis of consolidated
financial condition
and results of operations 28 - 35
Stock market analysis and dividends 35
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, 2002 and 2001
and the related consolidated statements of income, changes
in stockholders' equity, and cash flows for each of the
three years ended December 31, 2002. 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, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years
ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of
America.
/S/Smith Elliott Kearns & Company, LLC
Chambersburg, Pennsylvania
February 20, 2003
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
2002 2001
ASSETS
Cash and due from banks $ 5,213,690 $ 5,529,420
Investment securities available for sale 37,674,900 30,798,647
Federal Reserve, Atlantic Central Bankers Bank
and Federal Home Loan Bank stocks 1,771,950 1,100,850
Loans, net of reserve for loan losses
2002 - $ 1,030,713; 2001 - $ 845,045 107,236,147 103,655,616
Premises and equipment 3,938,272 3,673,746
Cash surrender value of life insurance 4,657,795 4,430,903
Accrued interest receivable 939,089 902,805
Real estate owned other than premises 0 83,341
Other assets 850,560 679,517
--------------- ---------------
Total assets $ 162,282,403 $ 150,854,845
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing $ 16,155,636 $ 13,486,097
Interest bearing 96,869,814 103,552,356
---------------- ----------------
113,025,450 117,038,453
Other borrowed funds 31,250,000 17,325,000
Accrued interest payable 313,724 424,743
Other liabilities 1,033,949 822,770
---------------- ----------------
Total liabilities 145,623,123 135,610,966
---------------- ----------------
Stockholders' Equity
Common stock: par value $.625 per share; 4,000,000
shares authorized; shares issued and outstanding -
2002 - 492,810; 2001 - 492,770 309,375 309,375
Additional paid-in capital 2,051,294 2,051,106
Retained earnings 14,262,722 13,035,796
Accumulated other comprehensive income (loss) 124,003 ( 62,672)
Treasury stock, shares at cost -
2002 - 2,190; 2001 - 2,230 ( 88,114) ( 89,726)
---------------- ----------------
Total stockholders' equity 16,659,280 15,243,879
---------------- ----------------
Total liabilities and stockholders' equity $ 162,282,403 $ 150,854,845
=============== ===============
The Notes to Consolidated Financial Statements
are an integral part of these statements.
-3-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
Interest Income
Interest and fees on loans $ 7,593,348 $ 8,584,709 $ 8,505,771
Interest and dividends on investment securities:
Other U. S. Government agencies 708,802 587,996 635,046
Mortgage-backed securities 197,870 228,320 287,347
Obligations of state and political subdivisions 102,247 135,056 199,461
FNMA and FHLMC preferred stock 1,102,811 463,856 267,674
Other interest and dividends 119,954 130,407 92,949
Interest on federal funds sold 11,976 54,335 4,107
----------- ----------- -----------
Total interest income 9,837,008 10,184,679 9,992,355
----------- ----------- -----------
Interest Expense
Interest on deposits 3,289,201 4,470,576 4,252,368
Interest on federal funds purchased 31,380 2,632 5,760
Interest on other borrowed money 950,426 959,091 951,684
----------- ----------- -----------
Total interest expense 4,271,007 5,432,299 5,209,812
----------- ----------- -----------
Net interest income before provision for loan losses 5,566,001 4,752,380 4,782,543
----------- ----------- -----------
Provision for Loan Losses 255,000 15,000 45,000
----------- ----------- -----------
Net interest income after provision for loan losses 5,311,001 4,737,380 4,737,543
----------- ----------- -----------
Other Income
Service charges on deposit accounts 208,084 189,186 177,226
Other service charges and fees 165,311 108,567 111,181
Earnings - Cash surrender value of life insurance 258,203 249,418 197,110
Trust services 22,277 19,002 18,390
Gain on sale of investment securities 705 57,329 5,905
Gain on sale of OREO property 8,516 0 0
Other income 10,544 15,975 12,647
----------- ----------- -----------
Total other income 673,640 522,459
639,477
----------- ----------- -----------
Other Expenses
Salaries, fees and employee benefits 1,727,652 1,559,673 1,508,929
Net occupancy expense of bank premises and
furniture and equipment expense 746,394 729,435 727,963
FDIC insurance premiums 20,386 19,754 20,811
Other expenses 1,283,779 1,141,725 1,112,743
----------- ----------- -----------
Total other expenses 3,778,211 3,450,587 3,370,446
----------- ----------- -----------
Income before income taxes 2,206,430 1,926,270 1,889,556
Applicable income tax 476,878 440,016 449,785
----------- ----------- -----------
Net income $ 1,729,552 $ 1,486,254 $ 1,439,771
=========== =========== ===========
Earnings per common share $ 3.51 $ 3.02 $ 2.91
=========== =========== ===========
The Notes to Consolidated Financial Statements
are an integral part of these statements.
-3-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2002, 2001 and 2000
Accumulated
Other
Additional Comprehensive Total
Common Paid-In Retained Income Treasury Stockholders'
Stock Capital Earnings (Loss) Stock Equity
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) ( 424,601) ( 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) ( 468,110) ( 468,110)
---------- ------------ ------------ ------------- ---------- -------------
Balance, December 31, 2001 309,375 2,051,106 13,035,796 ( 62,672) ( 89,726) 15,243,879
Comprehensive income:
Net income 1,729,552 1,729,552
Change in unrealized gain on
investment securities available
for sale, net of tax of $ 96,166 186,675 186,675
-------------
Total comprehensive income 1,916,227
Issuance of treasury stock
( 40 shares) 188 1,612 1,800
Cash dividends ($ 1.02 per share) ( 502,626) ( 502,626)
---------- ------------ ------------ ------------- ---------- -------------
Balance, December 31, 2002 $ 309,375 $ 2,051,294 $ 14,262,722 $ 124,003 ($ 88,114) $ 16,659,280
========== ============ ============ ============= ========== =============
The Notes to Consolidated Financial Statements
are an integral part of these statements.
-4-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
Cash flows from operating activities:
Net income $ 1,729,552 $ 1,486,254 $ 1,439,771
Adjustments to reconcile net income to net
cash provided by operating activities:
Compensation via treasury stock issued 1,800 837 1,800
Depreciation and amortization 333,070 365,722 394,762
Investment amortization (accretion) ( 362,634) ( 40,657) 37,051
Provision for loan losses 255,000 15,000 45,000
Deferred income taxes ( 78,685) ( 82,580) ( 47,409)
(Increase) decrease in CSV - life ( 226,892) ( 218,143) ( 164,274)
insurance
(Gain) on sale of investment securities ( 705) ( 57,330) ( 5,905)
(Gain) on sale of OREO property ( 8,516) 0 0
(Increase) in other assets ( 188,524) ( 17,375) ( 49,780)
(Increase) decrease in interest receivable ( 36,284) 62,578 ( 234,755)
Increase (decrease) in interest payable ( 111,019) ( 77,655) 81,005
Increase in other liabilities 211,180 180,119 124,987
Net cash provided by operating activities 1,517,343 1,616,770 1,622,253
Cash flows from investing activities:
Sales of investment securities available 825,158 2,750,981 1,155,569
for sale
Maturities of investment securities available 20,021,820 16,059,038 1,476,328
for sale
( 27,077,051) ( 26,087,480) ( 1,690,544)
Net (increase) in loans ( 4,077,176) ( 1,612,142) ( 11,108,857)
Purchases of property and equipment ( 596,779) ( 388,392) ( 187,876)
Purchases of FRB, ACBB and FHLB stock ( 1,123,600) ( 270,000) ( 382,500)
Redemptions of FRB, ACBB and FHLB stock 452,500 421,300 0
Purchases of officers' life insurance 0 0 ( 1,020,000)
Proceeds from the sale of OREO property 332,684 0 0
------------ ------------ ------------
Net cash (used) by investing activities ( 11,242,444) ( 9,126,695) ( 11,757,880)
------------ ------------ ------------
Cash flows from financing activities:
Net increase (decrease) in deposits ( 4,013,003) 11,906,739 1,821,115
Dividends paid ( 502,626) ( 468,110) ( 424,601)
Proceeds from long-term borrowings 0 0 5,000,000
Net increase (decrease) in line-of-credit 13,925,000 2,675,000) 3,525,000
borrowings
Purchases of treasury stock 0 0 92,532)
------------ ------------ ------------
Net cash provided by financing activities 9,409,371 8,763,629 9,828,982
------------ ------------ ------------
Net increase (decrease) in cash and cash ( 315,730) 1,253,704 ( 306,645)
equivalents
Cash and cash equivalents at beginning of year 5,529,420 4,275,716 4,582,361
------------ ------------ ------------
Cash and cash equivalents at end of year $ 5,213,690 $ 5,529,420 $ 4,275,716
============ ============ ============
The Notes to Consolidated Financial Statements
are an integral part of these statements.
-5-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
Supplemental disclosure of cash flows
information:
Cash paid during the year for:
Interest $ 4,382,026 $ 5,509,953 $ 5,128,808
Income taxes 645,000 471,000 505,575
Supplemental schedule of noncash investing and
financing activities:
Unrealized holding gain, net of tax $ 186,675 $ 21,337 $ 525,856
Other real estate owned transferred to
premises and equipment $ 0 $ 0 $ 140,000
Treasury stock issued as compensation $ 1,800 $ 837 $ 1,800
Other real estate acquired in settlement of $ 241,645 $ 0 $ 0
loans
The Notes to Consolidated Financial Statements
are an integral part of these statements.
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of Operations
Fulton Bancshares Corporation's primary activity consists
of owning and supervising its subsidiaries:
The Fulton County National Bank and Trust Company
("Bank"), which is engaged in providing banking and
bank related services, principally in Fulton, southern
Huntingdon, Bedford, and western Franklin Counties.
Its seven branches are located in McConnellsburg (2),
Warfordsburg, Hustontown, Orbisonia, St. Thomas and
Breezewood.
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 12 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.
-7-
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 2002 or 2001.
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,
2002 and 2001, and during the years then ended.
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.
-8-
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 primarily the straight-line method over the
estimated useful lives of the various assets as
follows:
Years
Computer software 3 - 5
Premises 15 - 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 492,772, 492,747, and 494,054
shares of common stock outstanding in 2002, 2001, and
2000, respectively.
-9-
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 Available for Sale. Fair values for
investment securities are based on quoted market
prices.
Federal Reserve, Atlantic Central Banker's Bank,
and Federal Home Loan Bank Stocks. The carrying
amount for these stocks approximates their fair
value since they are not actively traded and have
no readily determinable market value.
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 deposit 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.
-10-
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, 2002, 2001, and 2000 were $ 93,217,
$ 85,169, and $ 102,434, respectively.
Comprehensive income
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:
2002 2001 2000
Gross unrealized holding $ 283,546 $ 89,658 $ 802,657
gains arising during
the year
Reclassification ( 705) ( 57,329) ( 5,905)
adjustment for gains
realized in net income
--------- --------- ---------
Net unrealized holding 282,841 32,329 796,752
gains before taxes
Tax effect ( 96,166) ( 10,992) ( 270,896)
--------- --------- ---------
Net change $ 186,675 $ 21,337 $ 525,856
========= ========= =========
Reclassifications
Certain reclassifications have been made to the 2001
financial statements in order to conform to the 2002
presentation.
-11-
Note 2. Investments
The amortized cost and fair value of investment
securities available for sale at December 31 were:
Amortized Cost Gross Unrealized Gross Unrealized Fair Value
Gains Losses
2002
Obligations of U. S. Government
corporations and agencies $ 14,237,861 $ 144,583 $ 0 $ 14,382,444
Obligations of states and
political
subdivisions 2,086,473 61,497 29,185 2,118,785
Mortgage-backed securities 4,643,691 55,270 831 4,698,130
Corporate bonds 997,416 114,574 0 1,111,990
FNMA and FHLMC preferred stock 15,389,576 160,500 306,725 15,243,351
Other stocks 132,000 2,300 14,100 120,200
--------------- -------------- --------------- ---------------
Totals $ 37,487,017 $ 538,724 $ 350,841 $ 37,674,900
=============== ============== =============== ===============
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
=============== ============== =============== ===============
The amortized cost and fair value of investment
securities available for sale at December 31, 2002, 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 12,398,053 12,568,602
Due after five years through ten years 4,467,361 4,617,466
Due after ten years 456,336 427,151
Mortgage-backed securities 4,643,691 4,698,130
FNMA and FHLMC preferred stock 15,389,576 15,243,351
Other stocks 132,000 120,200
-------------- --------------
$ 37,487,017 $ 37,674,900
============== ==============
Proceeds from sales of securities available for sale
during 2002 were $ 825,158. Gross gains and losses
on those sales were $ 705 and $ 0, respectively.
Proceeds from maturities of investment securities
during 2002 were $ 20,021,820, resulting in no gains
or losses. Included in stockholders' equity at
December 31, 2002 is $ 124,003 of unrealized holding
gains on securities available for sale, net of
$ 63,880 in deferred taxes.
-12-
Note 2. Investments
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.
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.
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:
2002 2001
Federal Home Loan Bank $ 1,691,100 $ 1,020,000
Atlantic Central Bankers Bank 10,000 10,000
Federal Reserve Bank
70,850 70,850
----------- -----------
$ 1,771,950 $ 1,100,850
=========== ===========
Securities with a cost basis of $ 14,237,861 (fair
value of $ 14,382,444) and $ 14,000,000 (fair value
of $ 14,061,716) at December 31, 2002 and 2001,
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):
2002 2001
Real estate loans:
Secured by farmland $ 15,179 $ 15,030
Secured by 1-4 family residential 52,444 43,203
Secured by multifamily (5 or more) 314 362
residential properties
Secured by nonfarm nonresidential 13,705 19,650
Loans to finance agricultural production:
Loans to farmers 6,104 5,455
Commercial and industrial loans 9,067 11,963
Loans to individuals for household, family and
other personal expenditures 10,959 8,247
Obligations of states and political 456 551
subdivisions in the U.S.
All other loans
39 40
108,267 104,501
Less: reserve for loan losses ( 1,031) ( 845)
------------- --------------
$ 107,236 $ 103,656
============= ==============
-13-
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 Nonaccrual
- - - Past Due - - - - - - Status - - -
2002 2001 2000 2002 2001 2000
Loans secured by real estate $ 59 $ 567 $ 479 $ 1,525 $ 269 $ 0
Personal loans 11 48 29 0 0 0
Commercial and other loans 0 307 41 71 20 0
----- ------ ----- ------- ----- -----
Total $ 70 $ 922 $ 549 $ 1,596 $ 289 $ 0
===== ====== ===== ======= ===== =====
The foregone revenue on nonaccrual loans totaled
$ 6,503, $ 20,284, and $ 0 at December 31, 2002,
2001, and 2000, respectively. During 2002, the
Corporation foreclosed on property with a cost of
$ 241,645, which was sold in 2002 for $ 154,471.
Proceeds of $ 87,173 were also received from an
insurance company to satisfy the balance due from the
foreclosure.
At December 31, 2002, 2001, and 2000, 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:
2002 2001 2000
Balance at beginning of period $ 845,045 $ 847,121 $ 800,267
Recoveries 7,441 16,830 34,093
Current year provision charged to income 255,000 15,000 45,000
------------ --------- ---------
Total 1,107,486 878,951 879,360
Losses 76,773 33,906 32,239
------------ --------- ---------
Balance at end of period $ 1,030,713 $ 845,045 $ 847,121
============ ========= =========
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 $ 1,231,000 and $ 1,246,000
at December 31, 2002 and 2001, respectively. During
2002, $ 1,258,000 of new loans were made and
repayments totaled $ 1,273,000. During 2001,
$ 661,000 of new loans were made and repayments
totaled $ 610,000.
Outstanding loans to employees totaled $ 781,000 and
$ 842,000 at December 31, 2002 and 2001, res
pectively.
-14-
Note 6. Premises and Equipment
A summary of premises and equipment is as follows:
Description Cost Accumulated Depreciated Cost
Depreciation
2002
Premises and improvements $ 3,770,477 $ 788,538 $ 2,981,939
(including land $ 482,257)
Equipment, furniture and fixtures 2,127,273
3,007,411 880,138
Vehicles
111,505 35,310 76,195
---------------- ---------------- ----------------
$ 6,889,393 $ 2,951,121 $ 3,938,272
================ ================ ================
2001
Premises and improvements $ 3,445,509 $ 714,755 $ 2,730,254
(including land $ 441,101)
Equipment, furniture and fixtures 1,890,950
2,507,136 616,186
Vehicles
92,602 35,870 56,732
Construction in progress
270,074 0 270,074
---------------- ---------------- ----------------
$ 6,315,321 $ 2,641,575 $ 3,673,246
================ ================ ================
Included in construction in progress at December 31,
2001 were 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
$ 332,253 in 2002, $ 365,201 in 2001, and $ 394,242
in 2000.
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 2001
Financial instruments whose
contract amounts represent
credit risk at December 31:
Commitments to extend credit $ 15,502,585 $ 12,909,132
Standby letters of credit 106,000 266,000
and financial guarantees
written
-15-
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.
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 $ 104,206 for 2002, $ 66,000 for 2001, and
$ 72,000 for 2000.
Note 9.Federal Income Taxes
The components of federal income tax expense are
summarized as follows:
2002 2001 2000
Current year provision $ 555,323 $ 503,104 $ 495,186
Deferred income taxes (benefits) ( 78,685) ( 82,580) ( 47,409)
Income tax effect of securities 19,492
transactions 240 2,008
--------- --------- ---------
Applicable income taxes $ 476,878 $ 440,016 $ 449,785
========= ========= =========
Federal income taxes were computed after reducing
pretax accounting income for nontaxable interest and
dividend income in the amount of $ 593,555,
$ 464,229, and $ 433,970, for 2002, 2001, and 2000,
respectively.
A reconciliation of the effective income tax rate to
the federal statutory rate is as follows:
Applicable federal income tax rate 34.0% 34.0% 34.0%
Reductions resulting from:
Nontaxable investment income and ( 12.4%) ( 11.2%) (10.2%)
other items, net of nondeductible
expenses
------- ------- ------
Effective income tax rate 21.6% 22.8% 23.8%
======= ======= ======
-16-
Note 9.Federal Income Taxes (Continued)
Net deferred tax assets are included in other assets
on the balance sheet as follows:
2002 2001
Total deferred tax assets $ 601,482 $ 502,166
Total deferred tax liabilities ( 254,443) ( 137,646)
---------- -----------
Net deferred tax asset $ 347,039 $ 364,520
========== ===========
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.
The tax effects of each type of significant item that
give rise to deferred taxes are:
2002 2001
Net unrealized losses (gains) on ($ 63,880) $ 32,286
securities available for sale
Deferred compensation 312,571 242,589
Allowance for loan losses 286,700 220,394
Depreciation ( 190,563) ( 137,646)
Foregone interest on non-accrual loans 2,211 6,897
----------- -----------
Net deferred tax asset $ 347,039 $ 364,520
=========== ===========
Note 10. Leases
The Corporation is party to real estate leases with
base monthly rental charges of $ 3,370. 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 expires on
October 30, 2004. Total rental expense charged to
operations for the years ended December 31, 2002,
2001, and 2000 was $ 64,195, $ 62,937, and $ 58,413,
respectively.
Based on the current monthly rent, future minimum
rental payments for the next five years are as
follows:
2003 $ 63,110
2004 59,331
2005 40,439
2006 38,939
2007 38,939
Note 11. Deposits
Included in interest-bearing deposits at December 31
are NOW and Money Market Account balances totaling
$ 19,099,495 and $ 15,800,762 for 2002 and 2001,
respectively.
Time deposits of $ 100,000 and over aggregated
$ 18,337,176 and $ 25,234,850 at December 31, 2002
and 2001, respectively. Interest expense on time
deposits of $ 100,000 and over was $ 1,009,000,
$ 1,064,000, and $ 717,000 for 2002, 2001, and 2000,
respectively.
-17-
Note 11. Deposits (Continued)
The amount of time deposits maturing over the next 5
years is as follows:
2003 $ 49,456,004
2004 3,378,485
2005 1,344,080
2006 1,312,979
2007 8,501,084
------------
$ 63,992,632
============
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
$ 3,648,369 and $ 2,926,759 at December 31, 2002 and
2001, respectively.
Overdrafts of $ 34,679 and $ 17,142 at December 31,
2002 and 2001, respectively, were reclassified as
loans for financial reporting purposes.
Note 12. 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:
Assets 2002 2001
Cash $ 14,364 $ 8,788
Investment in Fulton County National Bank & Trust Company 16,483,857 15,065,732
Investment in the Fulton County Community Development Corporation 36,859 42,177
Securities available for sale 120,200 124,700
Deferred taxes 4,012 2,482
------------- -------------
Total assets $ 16,659,292 $ 15,243,879
============= =============
Liabilities
Accounts payable $ 12 $ 0
------------- -------------
Stockholders' Equity
Common stock, par value $ .625 per share, 309,375 309,375
4,000,000 shares authorized; shares issued and
outstanding - 2002 - 492,810; 2001 - 492,770
Additional paid-in capital 2,051,294 2,051,106
Retained earnings 14,262,722 13,035,796
Accumulated other comprehensive income (loss) 124,003 ( 62,672)
Treasury stock; shares at cost - 2002 - 2,190; 2001 - 2,230 ( 88,114) ( 89,726)
------------- -------------
Total stockholders' equity 16,659,280 15,243,879
------------- -------------
Total liabilities and stockholders' equity $ 16,659,292 $ 15,243,879
============ =============
-18-
Note 12. Fulton Bancshares Corporation (Parent Company
Only) Financial Information (Continued)
2002 2001 2000
Statements of Income
Years Ended December 31
Cash dividends from wholly-owned subsidiary $ 555,000 $ 512,000 $ 510,050
Investment income 1,360 1,200 1,090
Equity in undistributed income of subsidiaries 1,223,162 1,018,365 970,574
Printing, supplies, amortization and other expenses ( 49,970) ( 45,311) ( 41,943)
------------ ----------- ------------
Net income $ 1,729,552 $ 1,486,254 $ 1,439,771
============ =========== ============
Statements of Cash Flows
Years Ended December 31
Cash flows from operating activities:
Net income $ 1,729,552 $ 1,486,254 $ 1,439,771
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed income of subsidiary ( 1,223,162) ( 1,018,365) ( 970,574)
Compensation - treasury stock issued 1,800 837 1,800
Increase (decrease) in accounts payable 12 0 ( 27)
------------ ----------- ------------
Net cash provided by operating activities 508,202 468,726 470,970
------------ ----------- ------------
Cash flows from financing activities:
Dividends paid ( 502,626) ( 468,110) ( 424,601)
Purchases of treasury stock 0 0 ( 92,532)
------------ ----------- -------------
Net cash provided (used) by financing activities ( 502,626) ( 468,110) ( 517,133)
------------ ------------ -------------
Net change in cash 5,576 616 ( 46,163)
Beginning cash 8,788 8,172 54,335
------------ ------------ ------------
Ending cash $ 14,364 $ 8,788 $ 8,172
============ =========== ============
Note 13. 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, 2002 and
2001.
Note 14. 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.
-19-
Note 14. 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 $ 3,455,122, $ 3,207,341, and
$ 3,198,758 at December 31, 2002, 2001, and 2000,
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 2002 2001
Leverage (total adjusted 3.0% 10.4% 10.6%
capital/total average
assets)
Tier 1 (Tier 1 core 4.0% 14.5% 14.0%
capital/risk weighted
assets)
Total capital (total 8.0% 15.4% 14.8%
capital plus allowance
for loan losses/risk
weighted assets)
As of December 31, 2002, 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 15. Liabilities for Borrowed Money
At December 31, 2002 and 2001, the Corporation had an
outstanding ten year, $ 15,000,000 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, 2002 and 2001 and is payable
monthly. The loan matures on July 12, 2010. There
are significant penalties for prepayment.
The Corporation has established credit at Federal
Home Loan Bank (FHLB) of Pittsburgh to improve
liquidity. The Corporation may borrow up to
approximately $ 57 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 $ 16,250,000 and
$ 2,325,000 at December 31, 2002 and 2001,
respectively. The variable interest rate was 1.31%
and 2.10% at December 31, 2002 and 2001,
respectively, and can change daily based on FHLB's
cost of funds. Collateral for the borrowings
consists of certain investments and mortgages
approximating $ 60 million at December 31, 2002.
Note 16. Real Estate Owned Other Than Premises
At December 31, 2001, real estate owned other than
premises consisted of a rental property in St.
Thomas, PA which was carried at depreciated cost of
$ 83,341. The rental property was originally
purchased for expansion purposes, but the Bank sold
the property during 2002. Net proceeds from the sale
were $ 91,040, which resulted in a gain of $ 8,516.
-20-
Note 17.Fair Value of Financial Instruments
The estimated fair values of the Corporation's
financial instruments under Statement on Financial
Accounting Standards (SFAS) No. 107, Disclosure About
Fair Value of Financial Instruments were as follows
at December 31, 2002 and 2001:
- - - - - 2002 - - - - - - - - - - 2001- - - - - -
Carrying Fair Carrying Fair
Amount Value Amount Value
(000 Omitted)
FINANCIAL ASSETS
Cash and due from banks $ 5,214 $ 5,214 $ 5,529 $ 5,529
Securities available for sale 37,675 37,675 30,799 30,799
Federal Reserve, Atlantic 1,772 1,772 1,101 1,101
Central Bankers Bank, and
Federal Home Loan Bank stocks
Loans receivable (net) 107,236 108,245 103,656 103,875
Accrued interest receivable 939 939 903 903
FINANCIAL LIABILITIES
Time certificates 63,993 65,429 74,322 70,020
Other deposits 49,032 49,032 42,716 42,716
Accrued interest payable 314 314 425 425
Other borrowed funds 31,250 33,452 17,325 18,250
Note 18. Deferred Compensation and Other Benefit Programs
The Bank has adopted several benefit programs, some
of which result in the deferral of payments for
services rendered:
(1) The Supplemental Executive Retirement Plan - This
Plan is funded by single premium life insurance on
the CEO and certain other 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:
2002 2001 2000
Asset
Cash surrender value of life insurance $ 4,657,795 $ 4,430,903 $ 4,212,760
Liabilities
Supplemental executive retirement plan 653,785 501,946 352,031
Deferred directors fees liability 272,818 219,808 171,344
Income
Earnings on cash surrender value of life 258,203 249,418 197,110
insurance
-21-
Note 18. Deferred Compensation and Other Benefit Programs
(Continued)
2002 2001 2000
Expenses
Life insurance expense $ 31,311 $ 31,276 $ 32,836
Supplemental executive retirement expense 151,839 149,915 93,111
Deferred directors fees 54,695 50,148 46,974
Director emeritus fees 12,000 12,000 12,000
Payments made to retired director 1,685 1,685 857
Note 19. 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.
-22-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
SELECTED FIVE-YEAR FINANCIAL DATA
2002 2001 2000 1999 1998
Income (000 omitted)
Interest income $ 9,837 $ 10,184 $ 9,992 $ 8,759 $ 8,148
Interest expense 4,271 5,432 5,210 4,325 4,151
Provision for loan losses 255 15 45 195 185
---------- ----------- --------- ---------- ----------
Net interest income after provision for 5,311 4,737 4,737 4,239 3,812
loan losses
Securities gains (losses) 1 57 6 6 4
Other operating income 673 582 516 583 718
Other operating expenses 3,778 3,450 3,370 3,011 2,745
---------- ----------- --------- ---------- ----------
Income before income taxes 2,207 1,926 1,889 1,817 1,789
Applicable income tax 477 440 450 380 391
---------- ----------- --------- ---------- ----------
Net income $ 1,730 $ 1,486 $ 1,439 $ 1,437 $ 1,398
========== =========== ========= ========== ==========
Per share amounts are based on following weighted averages:
2002 - 492,772 2000 - 494,054 1998 - 495,000
2001 - 492,747 1999 - 495,000
Income before income taxes $ 4.48 $ 3.91 $ 3.82 $ 3.67 $ 3.61
Applicable income taxes .97 .89 .91 .77 .79
Net income 3.51 3.02 2.91 2.90 2.82
Cash dividend paid 1.02 .95 .86 .86 .72
Book value 33.81 30.94 28.75 25.76 25.21
Year-End Balance Sheet Figures (000 omitted)
Total assets $ 162,282 $ 150,855 $ 140,480 $ 128,478 $ 119,649
Net loans 107,236 103,656 102,058 90,995 80,214
Total investment securities 39,447 31,899 24,643 24,436 29,183
Deposits-noninterest bearing 16,155 13,486 13,025 12,354 11,553
Deposits-interest bearing 96,870 103,552 92,107 90,957 87,788
Total deposits 113,025 117,038 105,132 103,311 99,341
Liabilities for borrowed money 31,250 17,325 20,000 11,475 7,100
Total stockholders' equity 16,659 15,244 14,204 12,753 12,479
Ratios (includes net unrealized gain/loss on AFS
securities)
Average equity/average assets 10.21% 10.17% 9.82% 10.36% 10.60%
Return on average equity 10.64% 10.12% 10.94% 11.19% 11.88%
Return on average assets 1.09% 1.03% 1.07% 1.16% 1.26%
-23-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CHANGES IN INCOME AND EXPENSE - 2002 and 2001
The schedule below reflects comparative changes in
income and expense included in the Consolidated Statements
of Income for 2002 and 2001 together with changes in asset
and liability volumes associated with these income and
expense items.
2002 Compared to 2001 2001 Compared to 2000
Average Volumes Income/Expense Average Volumes Income/Expense
($ 000 omitted) $ % $ % $ % $ %
Loans 191 .2 ( 992) ( 11.6) 6,976 7.1 79 .9
Investment securities 11,109 42.9 687 44.4 708 2.8 63 4.3
Other investments ( 791) ( 52.2) ( 42) ( 77.8) 1,441 1974.0 50 1200.5
-------- -------- --------- -------
Total 10,509 7.9 ( 347) ( 3.4) 9,125 7.4 192 1.9
-------- -------- --------- -------
Interest/borrowed funds 3,075 18.8 21 2.5 476 3.0 4 .4
Interest bearing demand deposits 439 4.0 ( 115) ( 57.5) 788 7.7 ( 18) ( 8.3)
Savings deposits 1,547 9.2 ( 126) ( 34.7) ( 1,727) ( 9.3) ( ( 24.7)
119)
Time deposits 2,264 3.1 ( 941) ( 24.1) 9,103 14.5 355 10.0
-------- -------- --------- -------
Total 7,325 6.3 ( 1,161) ( 21.4) 8,640 8.9 222 4.1
-------- -------- --------- -------
Net interest income 814 17.1 ( 30) ( .6)
Provision for loan losses 240 1600.0 ( 30) 5.4
------- -------
Net interest income after provision 574 12.1 0.0
for loan losses 0
------- -------
Security transactions ( 56) ( 98.2) 51 850.0
Other operating income 91 15.6 66 12.8
------- -------
Income before operating expense 609 11.3 117 2.2
------- -------
Salaries & employee benefits 168 10.8 51 3.4
Occupancy & equipment expense 17 2.3 1 .1
FDIC insurance premiums 1 3.2 ( ( 4.8)
1)
Other operating expenses 142 12.4 29 2.6
------- -------
Total operating expenses 328 9.5 80 2.4
------- -------
Income before income taxes 281 14.6 37 2.0
Applicable income taxes 37 8.4 ( 10) ( 2.2)
------- -------
Net income 244 16.4 47 3.3
======= =======
-24-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the
years ended December 31, 2002 and 2001 are as follows:
2002 2001
($ 000 omitted except per Quarter Ended Quarter Ended
share)
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
Interest income $ 2,443 $ 2,575 $ 2,500 $ 2,319 $ 2,565 $ 2,552 $ 2,565 $ 2,502
Interest expense 1,064 1,132 1,118 957 1,385 1,373 1,376 1,298
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 1,379 1,443 1,382 1,362 1,180 1,179 1,189 1,204
Provision for loan losses 15 110 115 15 15 0 0 0
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after 1,364 1,333 1,267 1,347 1,165 1,179 1,189 1,204
provision for loan losses
Securities gains (losses) 1 0 0 0 9 17 0 31
Other income 156 161 157 199 130 142 136 174
Other expenses 936 933 965 944 858 854 871 867
------- ------- ------- ------- ------- ------- ------- -------
Operating income before income 585 561 459 602 446 484 454 542
taxes
Applicable income taxes 151 122 78 126 113 108 95 124
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 434 $ 439 $ 381 $ 418 $ 333 $ 376 $ 359 $ 418
======= ======= ======= ======= ======= ======= ======= =======
Net income applicable to common
stock
Per share data:
Net income $ .88 $ .89 $ .77 $ .97 $ .68 $ .76 $ .73 $ .85
-25-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES
($ 000 omitted) 2002 2001 2000 1999 1998
LOANS
Lines of credit $ 3,549 $ 3,301 $ 3,024 $ 2,921 $ 3,332
Tax free 690 1,039 785 846 1,281
Commercial 23,950 23,363 21,292 18,413 14,203
Mortgage 64,784 60,964 54,534 48,070 40,916
Consumer 12,246 16,361 18,417 17,652 15,878
---------- --------- --------- ---------- ----------
Total loans 105,219 105,028 98,052 87,902 75,610
---------- --------- --------- ---------- ----------
INVESTMENT SECURITIES
(at amortized cost)
U.S. Government 0 0 0 0 0
U.S. Government agencies 14,960 10,156 10,210 8,465 5,863
State & municipal 2,240 2,817 3,997 5,903 5,793
Mortgage-backed securities 4,697 3,751 4,532 5,988 9,324
FNMA & FHLMC preferred stock 13,023 7,309 5,204 4,932 4,701
Corporate bonds 997 814 262 0 0
Other 1,106 1,067 1,001 800 577
---------- --------- --------- ---------- ----------
Total investment securities 37,023 25,914 25,206 26,088 26,258
---------- --------- --------- ---------- ----------
OTHER SHORT-TERM INVESTMENTS
Federal funds sold 723 1,514 73 18 343
---------- --------- --------- ---------- ----------
TOTAL EARNING ASSETS 142,965 132,456 123,331 114,008 102,211
---------- --------- --------- ---------- ----------
TOTAL ASSETS $ 155,563 $ 144,384 $ 134,004 $ 123,985 $ 111,002
========== ========= ========= ========== ==========
Percent increase - earning assets 7.9% 7.4% 8.2% 11.5% 5.3%
DEPOSITS
Interest-bearing demand (NOW) $ 11,431 $ 10,992 $ 10,204 $ 16,951 $ 16,779
Savings (MMA & sav.) 18,438 16,891 18,618 13,834 13,616
Time 74,238 71,974 62,871 56,443 54,621
---------- --------- --------- ---------- ----------
Total interest-bearing deposits 104,107 99,857 91,693 87,228 85,016
---------- --------- --------- ---------- ----------
OTHER BORROWINGS
Federal funds purchased 239 108 118 70 622
Liabilities for borrowed money 19,225 16,281 15,795 11,734 3,804
---------- --------- --------- ---------- ----------
19,464 16,389 15,913 11,804 4,426
TOTAL INTEREST-BEARING
LIABILITIES 123,571 116,246 107,606 99,032 89,442
---------- --------- --------- ---------- ----------
-26-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES (CONTINUED)
2002 2001 2000 1999 1998
AVERAGE RATES EARNED
% % % % %
Loans
Commercial 5.61 7.28 9.21 8.32 9.23
Mortgage 7.41 8.19 8.24 8.01 8.61
Consumer 8.75 9.07 8.97 8.74 8.77
Tax free 5.08 5.54 5.48 5.53 5.82
Lines of credit 6.61 7.87 9.55 8.35 8.81
---- ---- ---- ---- ----
Total 7.22 8.17 8.60 8.37 8.72
---- ---- ---- ---- ----
Investment Securities
U.S. Government 0.00 0.00 0.00 0.00 0.00
U.S. Government agencies 4.74 5.79 6.22 6.05 5.95
State & municipal 4.56 4.79 4.99 4.94 4.93
Mortgage-backed securities 4.21 6.09 6.34 5.44 5.50
Corporate bonds 7.02 7.12 7.51 0.00 0.00
Other 8.66 6.38 5.82 5.34 5.31
---- ---- ---- ---- ----
Total 6.03 5.96 5.88 5.50 5.43
---- ---- ---- ---- ----
Other Short-Term Investments
Federal funds sold 1.63 3.54 5.59 4.43 5.49
---- ---- ---- ---- ----
Total earning assets 6.89 7.69 8.04 7.68 7.86
==== ==== ==== ==== ====
AVERAGE RATES PAID
Time & savings deposits 3.16 4.48 4.64 4.29 4.60
Federal funds purchased 1.72 2.43 4.87 5.05 5.57
Liabilities for borrowed money 4.94 5.89 6.03 4.91 5.32
---- ---- ---- ---- ----
Total interest-bearing 3.46 4.67 4.84 4.37 4.64
liabilities
==== ==== ==== ==== ====
-27-
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 after tax income was $ 1,730,000 for 2002
compared to $ 1,486,000 for 2001, representing an increase
of $ 244,000, or 16.4%. Net income on an adjusted per share
basis for 2002 was $ 3.51, an increase of $ .49 from the
$ 3.02 per share realized during 2001.
Total interest income for 2002 was $ 9,837,000
compared with $ 10,184,000 earned during 2001, for a
decrease of $ 347,000, or 3.4%. The decrease was due
primarily to a significant decrease in interest rates earned
on loans and investments and a higher average balance of
investments, which typically produce lower yields than
loans, in 2002 compared with the same period in 2001.
Average earning assets increased 7.9% and 7.4% in
2002 and 2001, respectively. Average investments increased
42.9% in 2002, with the increase concentrated in U. S.
Government Agency securities and FNMA/FHLMC preferred
stocks. Average loans, which typically produce higher
yields than investments, increased 0.2% in 2002. Net loans
at December 31, 2002 stood at $ 107,236,000 compared to
$ 103,656,000 as of December 31, 2001, an increase of 3.5%.
Total interest expense was $ 4,271,000 for 2002, a
decrease of $ 1,161,000, or 21.4%, from the $ 5,432,000 for
2001. The decrease was due solely to a significant decrease
in interest rates paid on deposits and short-term
borrowings.
Average interest-bearing liabilities increased
6.3% and 8.0% in 2002 and 2001, respectively. Average
borrowings increased 18.8% and average time deposits, which
typically pay higher yields, increased 3.1% in 2002.
Average interest-bearing demand deposits and savings
deposits increased 4.0% and 9.2%, respectively. Interest-
bearing deposits stood at $ 96,870,000 at December 31, 2002
compared to $ 103,552,000 as of December 31, 2001, a
decrease of 6.5%.
Net interest income is the difference between
total interest income and total interest expense. Interest
income is generated through earning assets, which includes
loans, deposits with other banks, and investments. Interest
income is dependent on many factors including the volume of
earning assets; level of interest rates; changes in interest
rates; and volumes of nonperforming loans. The cost of
funds varies with the volume of funds necessary to support
earning assets; rates paid to maintain deposits; rates paid
on borrowed funds; and level of interest-free deposits.
Net interest income for 2002 totaled $ 5,566,000,
up $ 814,000, or 17.1% from 2001. Liquidity and interest
rate risk are continuously monitored through Asset-Liability
Committee reports. Management plans to protect its net
interest margin by competitively pricing loans and deposits
and by structuring interest-earning assets and liabilities
to maintain a desired net interest margin.
Other income represents service charges on deposit
accounts, commissions on loan insurance, fees for official
checks and other services, safe deposit box rentals, 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 $ 35,000, or 5.5%, from
2001 to 2002. The increase in 2002 resulted primarily from
$ 25,000 earned as a result of instituting ATM surcharges
and a $ 19,000 increase in service charges on deposit
accounts.
-28-
OPERATING RESULTS (Continued)
Noninterest expenses are classified into four main
categories: salaries, fees and employee benefits; occupancy
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 10.8% and 3.4%
for 2002 and 2001, respectively, primarily due to the
addition of personnel to staff a branch office opened in
early February, 2002, and merit pay increases. Occupancy
and furniture and equipment expenses increased 2.3% and 0.1%
for 2002 and 2001, respectively, primarily due to increased
equipment and building maintenance costs and depreciation
associated with the opening of a new branch office in
February, 2002, offset by reduced depreciation expense on
assets that became fully depreciated at the end of 2001.
Other operating expenses increased 12.4% and 2.4% for 2002
and 2001, respectively, primarily due to increases in
advertising costs, OCC assessments, PA shares tax, printing
and supplies, telephone and other overhead expenses.
Applicable income taxes changed between 2002,
2001, and 2000 because of changes in pretax accounting
income and taxable income. The effective tax rate for 2002
was 21.6% compared to 22.8% and 23.8% for 2001 and 2000,
respectively. The decrease in the effective income tax rate
for 2002 was due primarily to increases in the dividends
received deduction for FNMA/FHLMC preferred stock which was
partially offset by a decrease in tax-exempt interest on
obligations of state and political subdivisions. The 2001
decrease was due primarily to increases in the dividends
received deduction for FNMA/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.
FINANCIAL CONDITION
Total assets at December 31, 2002 were
$ 162,282,000, a 7.6% increase over December 31, 2001. Net
loans at December 31, 2002 totaled $ 107,236,000, an
increase of 3.5% over December 31, 2001.
The provision for loan losses was $ 255,000 in
2002 compared to $15,000 in 2001. 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 and management is not aware of any problem loans that
are indicative of trends, events, or uncertainties that
would significantly impact operations, liquidity or capital.
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.
-29-
FINANCIAL CONDITION (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 Nonaccrual Status
Past Due
2002 2001 2002 2001
Loans secured by real estate $ 59 $ 567 $ 1,525 $ 269
Personal loans 11 48 0 0
Commercial and other loans 0 307 71 20
---- ----- ------- -----
Total loans $ 70 $ 922 $ 1,596 $ 289
==== ===== ======= =====
There were no restructured loans for any of the
time periods set forth above.
The Corporation utilizes a comprehensive,
systematic review of its loan portfolio on a quarterly basis
in order to determine the adequacy of the allowance for loan
losses. Each quarter, the loan portfolio is categorized
into various pools as follows:
Pool #1 Specific allowances for any individually
identified problem loans
Pool #2 Commercial
Pool #3 Residential Real Estate
Pool #4 Consumer Demand and Installment
Pool #5 Farm Loans
Pool #6 Off-Balance Sheet Commitments
Business lines of credit and commercial loans with
balances of $250,000 and over are individually reviewed.
Also, loans that are 90 days or more past due or have been
previously classified as substandard are individually
reviewed. Allocations to the allowance for loan losses are
based upon classifications assigned to those specific loans.
Loan classifications utilized are based on past
experience and are as follows:
Allowance Factors
------------------
Loss Charge-off
Doubtful 50%
Substandard 3%
Special Mention 1%
The remaining portion of the pools are evaluated
as groups with allocations made to the allowance based on
historical loss experience, current and anticipated trends
in delinquencies, trends in volume and terms of loans,
concentrations of credit and general economic conditions
within the Corporation's trading area.
The reasons for the increase in the provision for
loan losses for 2002 compared to 2001 are significant
increases in nonaccrual and classified loans. Nonaccrual
loans have increased more than 450% over the past four
quarters and represent 1.5% of total loans. At December 31,
2002, ninety-one percent of loans on nonaccrual status were
fully-secured farm loans. Classified loans on December 31,
2002 were $ 4,264,000 compared to $ 2,040,000 on December
31, 2001, an increase of 109%. The Corporation has
identified farm loans as a concentration of credit. At
December 31, 2002, classified farm loans comprised
$ 3,680,000, or 86.3% of the classified loans.
-30-
FINANCIAL CONDITION (Continued)
Total deposits decreased 3.4% to $ 113,025,000 at
December 31, 2002 compared with $ 117,038,000 at December
31, 2001. Non-interest-bearing demand deposits increased
19.8%, while interest-bearing deposits decreased 6.5%.
Stockholders' equity reached $ 16,659,000 at
December 31, 2002 for a 9.3% increase over the prior year.
Accumulated earnings for 2002 and a $ 187,000 decrease in
net unrealized losses (net of tax effect) were partially
offset by dividends declared and paid of $ 503,000. Total
stockholders' equity represented 10.3% and 10.1% of total
assets at the end of 2002 and 2001, respectively. Cash
dividends of $ 1.02 and $ .95 per share were paid in 2002
and 2001, respectively. On July 20, 2000, the Board of
Directors announced the approval of a plan to purchase, in
open and privately negotiated transactions, up to 2% of its
shares of outstanding common stock. As of September 30,
2002, the company had repurchased 2,190 shares, representing
0.44% of its shares of outstanding common stock. 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.
CRITICAL ACCOUNTING POLICIES
Bank policy related to the allowance for loan
losses is considered to be a critical accounting policy
because the allowance for loan losses represents a
particularly sensitive accounting estimate. The amount of
the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature
of the loan portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, and
economic conditions.
The allowance for loan losses is established
through a provision for loan losses charged to expense.
Loans are charged against the allowance for loan losses when
management believes the collectibility of the principal is
unlikely. The allowance is an amount management believes
will be adequate to absorb possible losses on existing loans
that may become uncollectible, based on evaluations of the
collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrowers'
ability to pay.
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
-31-
LIQUIDITY (Continued)
table approximately reflects the matching of assets and
liabilities maturing within one year and thereafter, which
management feels is adequate to meet customer cash and
credit needs while maintaining a desired interest rate
spread.
Due Due Due Due Due Total
0 - 30 Days 31 - 90 91 - 180 181 - 360 After
Days Days Days 1 Year
Rate Sensitive Assets
Investment securities $ 9,058 $ 8,108 $ 4,043 $ 4,894 $ 11,384 $ 37,487
Real estate, commercial and 18,846 4,293 14,052 11,955 59,121 108,267
consumer loans
--------- --------- --------- --------- --------- ----------
$ 27,904 $ 12,401 $ 18,095 $ 16,849 $ 70,505 $ 145,754
========= ========= ========= ========= ========= ==========
Rate Sensitive
Liabilities
Short-term borrowings $ 16,250 $ 0 $ 0 $ 0 $ $ 16,250
0
Long-term borrowings 0 0 0 0 15,000 15,000
Certificates of deposit 4,757 5,708 2,098 2,940 2,834 18,337
over $ 100,000
Other certificates of 11,462 5,081 6,966 10,441 11,706 45,656
deposit
Money market deposit 0 0 1,996 3,992 1,996 7,984
accounts
Other interest-bearing 2,489 9,957 12,447 24,893
deposits 0 0
---------- ---------- ---------- ---------- --------- -----------
$ 32,469 $ 10,789 $ 13,549 $ 27,330 $ 43,983 $ 128,120
========== ========== ========== ========== ========= ===========
Cumulative GAP ($ 4,565) ($ 2,953) $ 1,593 ($ 8,888) $ 17,634 $ 17,634
========== ========== ========== ========== ========= ===========
Loan rates have significantly decreased over the
past twelve months. Based on current economic indicators
and predictions, management anticipates that interest rates
will remain stagnant over the first half of 2003 and will
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.
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
$ 16.6 million at December 31, 2002. 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
-32-
CAPITAL FUNDS (Continued)
risk profiles of individual banks. A comparison of Fulton
Bancshares Corporation's capital ratios to regulatory
minimums at December 31 is as follows:
Fulton Regulatory
Bancshares Minimum
Corporation Requirement
s
2002 2001
Leverage ratio 10.4% 10.6% 3%
Risk-based capital ratio
Tier I (core capital) 14.5% 14.0% 4%
Combined Tier I and Tier II
(core capital plus
allowance
for loan losses) 15.4% 14.8% 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.
2002 2001 2000
Equity capital at December 31 $ 16,659 $ 15,244 $ 14,204
($ 000 omitted)
Equity capital as a percent of 10.27% 10.10% 10.11%
assets
at December 31
Return on average assets 1.11% 1.03% 1.07%
Return on average equity 10.91% 10.12% 10.94%
Cash dividend payout ratio 29.06% 31.50% 29.45%
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.
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
-33-
MARKET RISK MANAGEMENT (Continued)
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 2003 2004 2005 2006 2007 Thereafter Total Fair
Value
Fixed rate loans $ 9,281 $ 3,689 $ 3,262 $ 2,571 $ 2,291 $ 19,792 $ 40,886 $ 41,895
Average interest 7.42% 9.08% 8.72% 8.40% 8.07% 7.91% 8.01%
rates
Variable rate loans 18,059 2,452 2,548 2,434 2,211 39,677 67,381 67,381
Average interest 5.13% 6.31% 6.34% 6.43% 6.41% 6.42% 6.07%
rates
Fixed rate securities 26,778 0 499 2,800 1,000 1,456 32,533 32,721
Average interest 4.39% 0 7.53% 5.55% 5.38% 5.50% 4.62%
rates
Variable rate 3,215 844 533 379 290 1,465 6,726 6,726
securities
Average interest 3.27% 4.00% 4.01% 4.02% 4.03% 4.08% 3.68%
rates
Rate sensitive
liabilities
Noninterest-bearing 1,616 1,454 1,309 1,178 1,060 9,538 16,155 16,155
checking
Average interest N/A N/A N/A N/A N/A N/A N/A
rates
Savings and interest- 3,288 2,959 2,663 2,397 2,157 19,413 32,877 32,877
bearing checking
Average interest 0.82% 0.82% 0.82% 0.82% 0.82% 0.82% 0.82%
rates
Time deposits 12,364 10,118 7,924 6,272 6,829 20,486 63,993 65,429
Average interest 3.38% 3.70% 4.09% 4.39% 4.19% 4.19% 3.54%
rates
Variable rate 16,250 0 0 0 0 15,000 31,250 33,452
borrowings
Average interest 1.31% 0 0 0 0 5.93% 3.53%
rates
-34-
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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
has evaluated the impact of this statement on the
consolidated financial statements and has determined it is
not material.
Financial Accounting Standards Board (FASB)
Standard 148, Accounting for Stock-Based Compensation-
Transition and Disclosure, an amendment of FASB 123, amends
FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition
for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of
Statement 123 to require prominent disclosure about the
effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee
compensation. Finally, this Statement amends APB Opinion
No. 28, Interim Financial Reporting, to require disclosure
about those effects in interim financial information. The
Corporation does not have any stock option plan, therefore,
SAFS No. 148 will have no affect.
STOCK MARKET ANALYSIS AND DIVIDENDS
The Corporation's common stock is traded
inactively in the over-the-counter market. As of
December 31, 2002 the approximate number of shareholders of
record was 513.
Market Cash Market Cash
Price Dividen Price Dividen
d d
2002 2001
First Quarter $ 35.25 .22 $ 31.00 .20
Second Quarter 35.25 .22 33.00 .20
Third Quarter 37.50 .26 33.00 .25
Fourth Quarter 45.00 .32 33.50 .30
-35-
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 20,
2003, appearing in the 2002 annual report on shareholders
incorporated by reference in this Form 10-K of Fulton
Bancshares Corporation for the year ended December 31, 2002.
/S/SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, PA
March 20, 2003
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OR THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of FULTON BANCSHARES
CORPORATION (the "Company") on Form 10-K for the period
ending December 31, 2002 as filed with the Securities and
Exchange Commission on the date therein specified (the
"Report"), I, Clyde H. Bookheimer, President and Chief
Executive Officer of the Company, certify, pursuant to 18
U.S.C. section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly
presents, in all material respects, the financial
condition and results of operations of the Company as of
and for the period covered by the Report.
By: /s/Clyde H. Bookheimer
Clyde H. Bookheimer
President and Chief
Executive Officer,
Director
Dated: March 26, 2003
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OR THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of FULTON BANCSHARES
CORPORATION (the "Company") on Form 10-K for the period
ending December 31, 2002 as filed with the Securities and
Exchange Commission on the date therein specified (the
"Report"), I, DoriAnne Hoffman, Vice President and
Treasurer, and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly
presents, in all material respects, the financial
condition and results of operations of the Company as of
and for the period covered by the Report.
By: /s/DoriAnn Hoffman
DoriAnn Hoffman
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
Dated: March 26, 2003