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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2003
------------------
Commission file number: 33-850626
---------
FULTON BANCSHARES CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Commonwealth of Pennsylvania 25-1598464
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Lincoln Way East
McConnellsburg, Pennsylvania 17233
- ---------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (717) 485-3144
----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 5, 2003
- ----------------------------- -------------------------------
(Common stock, .625 par value) 492,810
Page 1 of 30
FULTON BANCSHARES CORPORATION
INDEX
Page
PART I - FINANCIAL INFORMATION
Condensed consolidated balance sheets - September 30, 2003
and December 31, 2002 4
Condensed consolidated statements of income - three months
ended September 30, 2003 and 2002 5
Condensed consolidated statements of comprehensive income -
three months ended September 30, 2003 and 2002 6
Condensed consolidated statements of income - nine
months ended September 30, 2003 and 2002 7
Condensed consolidated statements of comprehensive income -
nine months ended September 30, 2003 and 2002 8
Condensed consolidated statements of cash flows- nine
months ended September 30, 2003 and 2002 9
Notes to condensed consolidated financial statements 10 - 12
Management's discussion and analysis of financial
condition and results of operations 13 - 20
PART II - OTHER INFORMATION 22
Signatures 23
Exhibits 24 - 30
Page 2 of 30
PART I - FINANCIAL INFORMATION
Page 3 of 30
FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002
(Unaudited)
(000 Omitted)
ASSETS
Cash and due from banks $ 4,330 $ 5,214
Available-for-sale securities 29,446 37,675
Federal Reserve, Atlantic Central Bankers Bank, Federal
Home Loan Bank, at cost which approximates market 1,744 1,772
Loans, net of allowance for loan losses 103,588 107,236
Bank building, equipment, furniture & fixtures, net 3,820 3,938
Other real estate owned 53 0
Accrued interest/dividends receivable 1,107 939
Cash surrender value of life insurance 5,176 4,658
Other assets 880 850
-------------- -----------
Total assets $ 150,144 $ 162,282
============== ============
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 15,432 $ 16,155
Interest-bearing deposits:
Savings deposits 34,385 32,877
Time deposits 60,370 63,993
-------------- -----------
Total deposits 110,187 113,025
Accrued interest payable 249 314
Other borrowed money 22,175 31,250
Other liabilities 1,175 1,034
-------------- -----------
Total liabilities 133,786 145,623
-------------- -----------
STOCKHOLDERS' EQUITY
Capital stock, common, par value - $ 0.625;
4,000,000 shares authorized; 495,000 shares issued
at September 30, 2003 and December 31, 2002 310 310
Surplus 2,051 2,051
Retained earnings 14,462 14,262
Net unrealized gains/(losses) available - for-sale
securities ( 377) 124
Treasury stock: 2,190 and 2,230 shares,
respectively at cost ( 88) ( 88)
--------------- ----------
Total stockholders' equity 16,358 16,659
-------------- -----------
Total liabilities and
stockholders' equity $ 150,144 $ 162,282
============== ==========
* Condensed from audited financial statements
The accompanying notes are an integral part of these
Condensed financial statements.
Page 4 of 30
FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
September 03, September 03,
2003 2002
(000 Omitted)
Interest & Dividend Income $ 1,773 $ 1,923
Interest & fees on loans
Interest & dividends on investment securities:
U.S. Government securities 175 230
Obligations of state & political
subdivisions 9 27
Interest on federal funds sold 0 7
Other interest & dividend income 158 313
------------- -------------
Total interest & dividend income 2,115 2,500
------------- -------------
Interest Expense
Interest on deposits 522 878
Interest on federal funds purchased 0 2
Interest on other borrowed money 254 238
------------- -------------
Total interest expense 776 1,118
------------- -------------
Net interest income before provision
for loan losses 1,339 1,382
Provision for loan losses 1,030 115
------------- -------------
Net interest income after provision
for loan losses 309 1,267
------------- -------------
Other Income
Service charges on deposit accounts 54 55
Other fee income 59 38
Other non-interest income 70 64
Securities gains (losses) 0 0
------------- -------------
Total other income 183 157
Other Expense
Salaries and employee benefits 438 452
Fixed asset expenses (including depreciation) 198 175
FDIC insurance premiums 4 5
Other noninterest expenses 362 333
------------- -------------
Total other expenses 1,002 965
------------- -------------
Net income (loss) before income taxes ( 510) 459
Applicable income taxes (benefit) ( 280) 78
------------- -------------
Net income (loss) ($ 230) $ 381
============= =============
Weighted average number of shares outstanding $ 492,810 $ 492,770
Net income (loss) per share ($ 0.47) $ 0.77
Cash dividends declared per share $ 0.27 $ 0.26
The accompanying notes are an integral part of these
condensed financial statements.
Page 5 of 30
FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
Net income (loss) ($ 230) $ 381
Other comprehensive income, net of tax
Unrealized gain (loss) on investments
available for sale ( 493) 306
-------- -------
Comprehensive income (loss) ($ 723) $ 687
======== =======
The accompanying notes are an integral part of these
condensed financial statements.
Page 6 of 30
FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
(000 Omitted)
Interest & Dividend Income
Interest & fees on loans $ 5,250 $ 5,773
Interest & dividends on investment securities:
U.S. Government securities 385 717
Obligations of state & political subdivisions 46 79
Interest on federal funds sold 0 12
Other interest & dividend income 774 937
--------- ---------
Total interest & dividend income 6,455 7,518
--------- ---------
Interest Expense
Interest on deposits 1,634 2,617
Interest on federal funds purchased 0 3
Interest on other borrowed money 798 694
--------- ---------
Total interest expense 2,432 3,314
--------- ---------
Net interest income before provision for
loan losses 4,023 4,204
Provision for loan losses 1,265 240
--------- ---------
Net interest income after provision for loan losses 2,758 3,964
--------- ---------
Other Income
Service charges on deposit accounts 166 146
Other fee income 185 120
Other non-interest income 225 208
Securities gains (losses) 150 1
--------- ---------
Total other income 726 475
--------- ---------
Other Expense
Salaries and employee benefits 1,247 1,311
Fixed asset expenses (including depreciation) 602 552
FDIC insurance premiums 13 15
Other noninterest expenses 1,079 956
--------- ---------
Total other expenses 2,941 2,834
--------- ---------
Net income before income taxes 543 1,605
Applicable income taxes (benefit) ( 16) 351
--------- ---------
Net income $ 559 $ 1,254
========= =========
Weighted average number of shares outstanding $ 492,810 $ 492,770
Net income per share $ 1.13 $ 2.54
Cash dividends declared per share $ 0.73 $ 0.70
The accompanying notes are an integral part of these
condensed financial statements.
Page 7 of 30
FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
Net income $ 559 $ 1,254
Unrealized gain (loss) on investments ( 501) 309
available for sale, net of tax
Reclassification adjustment for gains
(losses) included in net income 150 1
-------- -------
Comprehensive income $ 208 $ 1,564
======= =======
The accompanying notes are an integral part of these
condensed financial statements.
Page 8 of 30
FULTON BANCSHARES, CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
Cash flows from operating activities:
Net income $ 559 $ 1,254
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 288 248
Provision for loan losses 1,265 240
Gain on sale - Securities ( 150) ( 1)
Gain on sale - OREO 0 ( 9)
Other - Net ( 29) ( 428)
---------- ----------
Net cash provided by operating activities 1,933 1,304
---------- ----------
Cash flows from investing activities:
Purchase of investment securities - Available-for-sale ( 10,465) ( 21,478)
Purchase (redemption) of Federal Home Loan Bank Stock 28 ( 255)
Sales of available-for-sale securities 1,614 825
Maturities of available-for-sale securities 16,457 14,426
Net (increase) in loans 2,383 ( 2,394)
(Purchase) sale of OREO ( 53) 92
Purchase of directors and officers life insurance ( 353) 0
Purchases of & deposits on bank premises and equipment - net ( 156) ( 493)
---------- ----------
Net cash provided (used) by investing activities 9,455 ( 9,277)
---------- ----------
Cash flows from financing activities:
Net increase (decrease) in deposits ( 2,838) ( 1,559)
Dividends paid ( 359) ( 345)
Net increase (decrease) in other borrowed money ( 9,075) 8,175
---------- ----------
Net cash provided (used) by financing activities ( 12,272) 6,271
---------- ----------
Net increase (decrease) in cash and cash equivalents ( 884) ( 1,702)
Cash and cash equivalents, beginning balance 5,214 5,529
---------- ----------
Cash and cash equivalents, ending balance $ 4,330 $ 3,827
========= =========
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest $ 2,497 $ 3,148
Income taxes 387 572
Supplemental schedule of noncash investing and
financing activities:
Change in net unrealized gain on investments
available for sale (net of deferred taxes) ( 501) 310
The accompanying notes are an integral part of these
condensed financial statements.
Page 9 of 30
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
Review of Interim Financial Statements
The condensed consolidated financial statements as of and for the nine
months ended September 30, 2003 and 2002 have been reviewed by
independent certified public accountants. Their report on the review
is attached as Exhibit 99 to the 10-Q filing.
Note 1. Basis of Presentation
The financial information presented at and for the three and nine
months ended September 30, 2003 and 2002 is unaudited. Information
presented at December 31, 2002 is condensed from audited year-end
financial statements. However, unaudited information reflects all
adjustments (consisting solely of normal recurring adjustments) that
are, in the opinion of management, necessary for a fair presentation
of the financial position, results of operations and cash flows for
the interim period.
Note 2. Principles of Consolidation
The consolidated financial statements include the accounts of the
corporation and its wholly-owned subsidiaries, Fulton County National
Bank & Trust Company and the Fulton County Community Development
Corporation. All significant intercompany transactions and accounts
have been eliminated.
Note 3. Cash Flows
For purposes of the statements of cash flows, the corporation has
defined cash and cash equivalents as those amounts included 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 increase or
decrease in deposits in banks, loans and time deposits in the
statements of cash flows.
Note 4. Federal Income Taxes
For financial reporting purposes the provision for loan losses charged
to operating expense is based on management's judgment, whereas for
federal income tax purposes, the amount allowable under present tax
law is deducted. Additionally, certain expenses are charged to
operating expense in the period the liability is incurred for
financial reporting purposes, whereas for federal income tax purposes,
these expenses are deducted when paid. As a result of these timing
differences, deferred income taxes are provided in the financial
statements. Federal income taxes were computed after reducing pretax
accounting income for nontaxable municipal and loan income.
Page 10 of 30
Note 5. Other Commitments
In the normal course of business, the Corporation makes various
commitments and incurs certain contingent liabilities which are not
reflected in the accompanying financial statements. These commitments
include various guarantees and commitments to extend credit and the
Corporation does not anticipate any losses as a result of these
transactions.
Note 6. Investment Securities
The carrying amounts of investment securities and their approximate
fair values at September 30, 2003 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
Debt securities available for sale:
FNMA/FHLMC non -
cumulative
preferred stocks $ 17,401,071 $ 85,500 ($ 740,196) $ 16,746,375
State & municipal
Securities 726,861 68,025 0 794,886
U.S. Government
Agencies 8,264,411 35,366 ( 3,736) 8,296,041
Mortgage-backed
Securities 3,492,202 5,830 ( 19,629) 3,478,403
Equity securities 132,000 2,300 ( 4,000) 130,300
------------ ------------ ------------- ------------
$ 30,016,545 $ 197,021 ($ 767,561) $ 29,446,005
============ ============ ============= ============
There were no securities categorized "Held-to-maturity" or "Trading" at
September 30, 2003.
Note 7. 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 owners and
distributions to owners.
Consequently, a "Statement of Comprehensive Income" has been included
in this filing.
Page 11 of 30
Note 8. Contingency
As of November 13, 2003, the Fulton County National Bank & Trust
Company is in the process of a regulatory examination being performed
by the Office of the Comptroller of the Currency (OCC). As a result of
preliminary results of the OCC exam, management has increased the
allowance for loan losses to the level unofficially required by the
examiners. Management does not expect any significant changes to the
allowance as a result of finalizing the OCC examination. However, it
is reasonably possible that the final OCC examination results may
require an additional provision to the allowance.
Page 12 of 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Net after tax income for the first nine months of 2003 was $ 559,000
compared to $ 1,254,000 for the same period in 2002, representing a decrease of
$ 695,000, or 55.4%. Net income on an adjusted per share basis for the first
nine months of 2003 was $ 1.13, a decrease of $ 1.41 from the $ 2.54 per share
realized during the nine months ended September 30, 2002.
RESULTS OF OPERATIONS
Third Quarter 2003 vs. Third Quarter 2002
Interest income for the third quarter of 2003 was $ 2,115,000 compared with
$ 2,500,000 earned during the same period in 2002, for a decrease of $ 385,000,
or 15.4%. The decrease was due primarily to a significant decrease in interest
rates earned on loans and investments in 2003 compared with the same period in
2002. Management expects average rates earned for the rest of 2003 to increase
slowly.
Interest expense for the third quarter of 2003 was $ 776,000, a decrease of
$ 342,000, or 30.5% from the $ 1,118,000 incurred for the same period in 2002.
The decrease was due primarily to a decrease in interest rates paid on deposits
and short-term borrowings. Management expects average rates paid for the rest
of 2003 to increase slowly.
Net interest income for the third quarter of 2003 totaled $ 1,339,000, down
$ 43,000, or 3.1%, from the third quarter of 2002.
Nine Months 2003 vs. Nine Months 2002
Interest income for the first nine months of 2003 was $ 6,455,000 compared
with $ 7,518,000 for the nine months ended September 30, 2002, for a decrease of
$ 1,063,000, or 14.1%. The decrease was due primarily to a significant decrease
in interest rates earned on loans and investments in 2003 compared with the same
period in 2002. Management expects average rates paid for the rest of 2003 to
increase slowly.
Interest expense for the first nine months of 2003 was $ 2,432,000, a
decrease of $ 882,000, or 26.6% over the $ 3,314,000 incurred for the same
period in 2002. The decrease was due primarily to a significant decrease in
time deposits, which pays higher rates than savings deposits, and a decrease in
interest rates paid on deposits and short-term borrowings in 2003 compared with
the same period in 2002. Management expects average rates paid for the rest of
2003 to increase slowly.
Page 13 of 30
NET INTEREST MARGIN
The net interest margin for the first nine months of 2003 was 3.70%
compared with 3.99% for the first nine months of 2002. 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 in
such a way that they can be repriced in response to changes in market interest
rates.
NON-INTEREST INCOME
Third Quarter 2003 vs. Third Quarter 2002
Third quarter 2003 non-interest income increased to $ 183,000 from
$ 157,000, or 16.5%. Service charges on deposit accounts were $ 54,000 for the
third quarter 2003 compared with $ 55,000 for the same period in 2002. Other
fee income increased $ 21,000, or 55.2%, primarily as a result of fee income
generated on the sale of mortgages to the Federal Home Loan Bank. Other non-
interest income increased $ 6,000, or 9.3%, primarily as a result of the
earnings on $ 353,000 additional directors and officers' life insurance that was
purchased in late June 2003. No securities gains or losses were reported for
the third quarter of 2003 or 2002.
Nine Months 2003 vs. Nine Months 2002
Non-interest income for the first nine months of 2003 and the same period
in 2002 was $ 726,000 and $ 475,000, respectively. Service charges on deposit
accounts increased $ 20,000, or 13.6%. Other fee income increased $ 65,000, or
54.1%, primarily as a result of fee income generated on the sale of mortgages to
the Federal Home Loan Bank. Other non-interest income increased $ 17,000, or
8.1%, primarily due to a $ 24,000 gain on sale of student loans in 2003 which
was partially offset by a $ 9,000 gain on sale of OREO reported in 2002.
Securities gains totaling $ 150,000 were reported for the first nine months of
2003 compared with $ 1,000 for the same period in 2002.
NON-INTEREST EXPENSES
Third Quarter 2003 vs. Third Quarter 2002
Non-interest expenses for the third quarter of 2003 totaled $ 1,002,000, an
increase of $ 37,000, or 3.8%, over the $ 965,000 for the third quarter of 2002.
Salaries and employee-related expenses decreased $ 14,000 or 3%. Fixed asset
expenses increased $ 23,000 or 13.1%. Other non-interest expenses increased by
$ 29,000, or 8.7%, due to increases in advertising and promotion costs, OCC
assessments, data processing, PA shares tax, telephone, and other operating
expenses.
Page 14 of 30
Nine Months 2003 vs. Nine Months 2002
Non-interest expenses for the first nine months of 2003 totaled
$ 2,941,000, an increase of $ 107,000, or 3.8%, over the $ 2,834,000 for the
same period of 2002. Salaries and employee-related expenses were down $ 64,000,
or 4.8%, primarily due to turnover of employees. Fixed asset expenses increased
$ 50,000, or 9.0%, primarily due to equipment and building maintenance costs and
depreciation. Other non-interest expenses increased by $ 123,000, or 12.8%, due
to increases in advertising and promotion costs, OCC assessments, data
processing, PA shares tax, telephone, and other operating expenses.
INCOME TAXES
The income tax provision for the third quarter of 2003 was ($ 280,000)
compared with $ 78,000 for the third quarter of 2002, while the provision was
($ 16,000) for the nine months ended September 30, 2003 compared to $ 351,000
for the first nine months of 2002. The significant change between 2003 and 2002
was a result of the deferred tax benefit related to the large increase in the
provision for loan losses and the increase in non-taxable income as a percentage
of total income. Effective income tax rates (compared to the marginal federal
income tax bracket of 34% applicable to each period) were as follows:
Nine Months Ended
September 30
2003 2002
(2.9%) 21.9%
PROVISION FOR LOAN LOSSES
A $ 1,265,000 provision for loan losses was made for the first nine months
of 2003 compared with $ 240,000 for the first nine months of 2002. The
provision for the third quarter 2003 was $ 1,030,000, compared to $ 115,000 for
2002. The provisions were based on management's evaluation of the reserve for
possible loan losses at September 30, 2003 and 2002.
Page 15 of 30
A summary of the allowance for loan losses is as follows:
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(In 000's)
Nine Months Ended
September 30, September 30,
2003 2002
Allowance for loan losses
Beginning of period $ 1,031 $ 845
------------- -------------
Loans charged-off during the period:
Real estate loans 0 0
Installment loans 23 50
Commercial and all other loans 363 4
------------- -------------
Total charge-offs 386 54
------------- -------------
Recoveries of loans previously charged-off:
Real estate loans 0 0
Installment loans 7 3
Commercial and all other loans 0 1
------------- -------------
Total recoveries 7 4
------------- -------------
Net loans (charged-off) recovered ( 379) ( 50)
Provision for loan losses charged to operations 1,265 240
------------- -------------
Allowance for loan losses - end of period $ 1,917 $ 1,035
============= =============
Loans 90 days or more past due (still accruing interest) and those on
nonaccrual status were as follows at September 30:
NONPERFORMING LOANS
(In 000's)
90 Days or More Past Due
and Still Accruing Nonaccrual Status
2003 2002 2003 2002
Real estate loans $ 0 $ 1,580 $ 2,426 $ 80
Installment loans 0 5 0 0
Commercial and all other loans 0 94 1,020 0
---------- ---------- --------- ---------
Total loans $ 0 $ 1,679 $ 3,446 $ 80
========== ========== ========= =========
There were no restructured loans for any of the time periods set forth
above.
Page 16 of 30
The bank 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
Commercial borrowing relationships over $ 500,000 and agribusiness
borrowing relationships over $ 250,000 are individually reviewed. Also, loans
that are 90 days or more past due or which 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 5%
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 bank's
trading area. Management is not aware of any problem loans that are indicative
of trends, events, or uncertainties that would significantly impact operations,
liquidity, or capital.
The reasons for the increase in the provision for loan losses for the
nine months ended September 30, 2003 compared to 2002 are significant increases
in delinquent and classified loans. Loans past due 90 days or more still
accruing interest have decreased significantly over the past four quarters. No
loans were past-due 90 days or more still accruing at September 30, 2003
compared with $ 1,600,000 at September 30, 2002. However, farm loans to one
borrower totaling $ 2,140,000 that were past due 90 days or more still accruing
interest at March 31, 2003 were placed on nonaccrual status during the second
quarter 2003. During the third quarter 2003, loans totaling 1,306,000, to two
other borrowers were placed on nonaccrual status. Seventy percent of the loans
in nonaccrual status are fully collateralized with real estate. Classified
loans on September 30, 2003 were $ 4,281,000 compared with $ 4,873,000 on
September 30, 2002. The Bank has identified farm loans as a concentration of
credit. At September 30, 2003, farm loans comprised $ 2,742,000, or 64.1%, of
the classified loans.
Page 17 of 30
In addition, the allowance has been adjusted in the third quarter
based on preliminary results of an OCC examination conducted in July and August
for which an official report has not yet been received. As a result of the
increased delinquencies and classified loans, the examiners have suggested
increasing the allowance to a level more in line with the bank's peer group (as
a percentage of total loans) as a way to provide for the perceived increase in
the overall risk associated with the bank's loan portfolio.
FINANCIAL CONDITION
Assets
Total assets on September 30, 2003 were $ 150,144,000 compared to
$ 162,282,000, on December 31, 2002, a decrease of 7.4%. Management intends to
contain growth and concentrate on maintaining adequate profit margins. Net
loans on September 30, 2003 stood at $ 103,588,000, a decrease of 3.4% from
$ 107,236,000 on December 31, 2002. The loan loss reserve at September 30, 2003
was $ 1,917,000 and is considered adequate, in management's judgment, to absorb
possible loan losses on existing loans.
Liabilities
Total deposits decreased 2.5% to $ 110,187,000 as of September 30, 2003
compared with $ 113,025,000 at December 31, 2002. Interest-bearing savings
deposits increased 4.5%, while non-interest-bearing demand deposits and
interest-bearing time deposits decreased 4.6% and 5.6%, respectively.
Capital
Total equity as of September 30, 2003 was $ 16,358,000 representing
10.8% of total assets compared with $ 16,659,000, or 10.3% of total assets,
reported on December 31, 2002. Accumulated earnings for the first nine months
of 2003 were offset by dividends declared and paid of $ 359,000 and $ 377,000
net unrealized losses on available-for-sale securities. On July 20, 2000, the
Board of Directors announced the approval of a plan to purchase, in open market
and private negotiated transactions, up to 2% of its shares of outstanding
common stock. As of September 30, 2003, the company had repurchased 2,190
shares, representing 0.44% of its 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.
Page 18 of 30
REGULATORY CAPITAL
The Company maintains capital ratios that are well above the minimum total
capital levels required by federal regulatory authorities, including risk-based
capital guidelines. A comparison of Fulton Bancshares Corporation's capital
ratios to regulatory minimum requirements at September 30, 2003 is as follows:
Fulton Regulatory
Bancshares Minimum
Corporation Requirements
Leverage ratio 10.97% 4.00%
Risk based capital ratios:
Tier I (core capital) 14.62% 4.00%
Combined tier I and tier II (core capital
plus allowance for loan losses) 15.87% 8.00%
BALANCE SHEET ANALYSIS
The following table highlights the changes in the balance sheet. Since
quarter-end balances can be distorted by one-day fluctuations, an analysis of
changes in the quarterly averages is provided to show balance sheet trends.
BALANCE SHEET ANALYSIS
(In 000's)
Balance Sheets Condensed
Average
Third Third
Quarter 2003 Quarter 2002
ASSETS
Federal funds sold $ 0 $ 1,577
Securities available for sale 30,901 38,258
Other investments 1,744 965
Loans 107,078 105,617
-------------- ------------
Total interest-earning assets 139,723 146,417
Cash and due from banks 3,725 3,517
Bank premises and equipment 3,844 3,936
All other assets 6,137 6,025
Allowance for loan losses ( 904) ( 931)
-------------- ------------
Total assets $ 152,525 $ 158,964
============== ============
LIABILITIES
Interest-bearing deposits in domestic offices $ 95,305 $ 109,047
Federal funds purchased 0 362
Other short-term borrowings 23,800 17,121
-------------- ------------
Total interest-bearing liabilities 119,105 126,530
-------------- ------------
Noninterest-bearing deposits 15,324 15,479
All other liabilities 975 971
-------------- ------------
Total liabilities 135,404 142,980
-------------- ------------
STOCKHOLDERS' EQUITY
Common stockholders' equity 17,241 15,891
Net unrealized holding losses, net of tax ( 120) 93
-------------- ------------
Total stockholders' equity 17,121 15,984
-------------- ------------
Total liabilities and stockholders'
equity $ 152,525 $ 158,964
============== ============
Page 19 of 30
CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The company maintains
controls and procedures designed to ensure that information required to be
disclosed in the reports that the company files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized, and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed within 90 days of the filing date of this
report, the chief executive and chief financial officers of the company
concluded that the company's disclosure controls and procedures were
adequate.
(b) Changes in internal controls. The Company made no significant changes in
its internal controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation of the controls by
the Chief Executive or Chief Financial officers.
Page 20 of 30
PART II - OTHER INFORMATION
Page 21 of 30
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
Not applicable
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
Referred to
Item 601 of
Regulation S-K: Description of Exhibit:
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350
99 Report of Independent Accountant on Interim Financial
Statements
(b) Reports on Form 8-K
None
Page 22 of 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date November 13, 2003 /s/Clyde H. Bookheimer
----------------- ---------------------------
Clyde H. Bookheimer,
President and Chief
Executive Officer
Date November 13, 2003 /s/Doriann Hoffman
----------------- ---------------------------
Doriann Hoffman, Vice
President (Chief
Financial Officer)
Page 23 of 30
Exhibit 31.1
CERTIFICATION
I, Clyde H. Bookheimer, President/CEO, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of Fulton
Bancshares Corporation.
2. Based on my knowledge, the quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this quarterly report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this quarterly report based on such evaluation; and
(c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Page 24 of 30
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
the equivalent function):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 13, 2003 By: /s/Clyde H. Bookheimer
----------------- -------------------------
Clyde H. Bookheimer,
President/CEO
(Chief Executive
Officer)
Page 25 of 30
Exhibit 31.2
CERTIFICATION
I, Doriann Hoffman, Vice President and CFO, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of Fulton
Bancshares Corporation.
2. Based on my knowledge, the quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this quarterly report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this quarterly report based on such evaluation; and
(c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Page 26 of 30
5. The registrant's other certifying officer and I have disclosed,based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 13, 2003 By: /s/Doriann Hoffman
----------------- ----------------------------
Doriann Hoffman
Vice President and CFO
(Chief Financial Officer)
Page 27 of 30
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Fulton Bancshares Corporation
(the "Company") on Form 10-Q for the period ending September 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Clyde H. Bookheimer, 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.
/s/ Clyde H. Bookheimer
------------------------
Chief Executive Officer
November 13, 2003
Page 28 of 30
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Fulton Bancshares Corporation
(the "Company") on Form 10-Q for the period ending September 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Doriann Hoffman, 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.
/s/ Doriann Hoffman
------------------------------
Chief Financial Officer
November 13, 2003
Page 29 of 30
Exhibit 99
INDEPENDENT ACCOUNTANT'S REPORT
Board of Directors
Fulton Bancshares Corporation and Subsidiaries
McConnellsburg, Pennsylvania
We have reviewed the accompanying consolidated balance sheet of Fulton
Bancshares Corporation and Subsidiaries as of September 30, 2003 and the related
consolidated statements of income and comprehensive income for the three and
nine month periods ended September 30, 2003 and 2002, and consolidated
statements of cash flows for the nine months ended September 30, 2003 and 2002.
These financial statements are the responsibility of the corporation's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the consolidated financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
/s/ Smith Elliott Kearns & Company, LLC
SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, Pennsylvania
November 13, 2003
Page 30 of 30