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, 2003
Commission file number: 33-85626
FULTON BANCSHARES CORPORATION
(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 [ ]
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 ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
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, 2004
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(Common stock, .625 par value) 492,815
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders' report for the year ended December 31, 2003
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 19, 2004
are incorporated by reference in Part III of this Form 10-K.
FULTON BANCSHARES CORPORATION
FORM 10-K
INDEX
Page
Part I
Item 1. Business 4 - 16
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 18
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 8. Financial Statements and Supplementary Data 18 - 26
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 27
Item 9a. Controls and Procedures 27
Part III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners
and Management 29
Item 13. Certain Relationships and Related Transactions 29
Item 14. Principal Accountant Fees and Services 29
Part IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 30 - 31
Signatures 32
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 2003, and
has no employees.
The principal executive office of the Company is located at 100
Lincoln Way East, McConnellsburg, Fulton County, Pennsylvania 17233. The
telephone number of the Company is (717) 485-3144.
The Company has no employees.
Supervision and Regulation - The Company
The Company is subject to the provisions of the Bank Holding Company
Act of 1956, as amended (the "Bank Holding Company Act"), and to supervision by
the Federal Reserve Board. The Bank Holding Company Act requires the Company to
secure the prior approval of the Federal Reserve Board before it owns or
controls, directly or indirectly, more than five percent (5%) of the voting
shares or substantially all of the assets of any institution, including another
bank. The Bank Holding Company Act prohibits acquisition by the Company of more
than five percent (5%) of the voting shares of, or interest in, all or
substantially all of the assets of any bank located outside of Pennsylvania
unless such acquisition is specifically authorized by the laws of the state in
which such bank is located.
A bank holding company is prohibited from engaging in or acquiring
direct or indirect control of more than five percent (5%) of the voting shares
of any company engaged in nonbanking activities unless the Federal Reserve
Board, by order or regulation, has found such activities to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto.
The Company is required to file an annual report with the Federal
Reserve Board and any additional information that the Federal Reserve Board may
require pursuant to the Bank Holding Company Act. The Federal Reserve Board may
also make examinations of the Company and any or all of its subsidiaries.
Federal law prohibits acquisitions of control of a bank holding
company without prior notice to certain federal bank regulators. Control is
defined for this purpose as the power, directly or indirectly, to direct the
Management or policies of the bank or bank holding company or to vote 25% or
more of any class of voting securities of the bank holding company. A person or
group holding revocable proxies to vote 25% or more of the stock of a bank or
its holding company would presumably be deemed to control the institution for
purposes of this federal law.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or any of its subsidiaries, on investments in the stock
or other securities of the bank holding company and on taking of such stock or
securities as collateral for loans to any borrower.
Permitted Activities
The Federal Reserve Board permits bank holding companies to engage in
activities so closely related to banking or managing or controlling banks as to
be a proper incident thereto. The Company does not at this time engage in any
of the permissible activities described below, nor does the Company have any
current plans to engage in these activities in the foreseeable future.
While the types of permissible activities are subject to a variety of
limitations and to change by the Federal Reserve Board, the principal activities
that presently may be conducted by a bank holding company and may in the future
be engaged by the Company are: (1) making, acquiring or servicing loans and
other extensions of credit for its own account or for the account of others,
such as would be made by consumer finance, credit card, mortgage, commercial
finance and factoring companies; (2) operating as an industrial bank or similar
entity in the manner authorized by state law so long as the institution does not
both accept demand deposits and make commercial loans; (3) operating as a trust
company in the manner authorized by federal or state law so long as the
institution does not make certain types of loans or investments or accept
deposits, except as may be permitted by the Federal Reserve Board; (4) acting as
an investment or financial advisor to investment companies and other persons;
(5) leasing personal and real property or acting as agent, broker or advisor in
leasing property; (6) making equity and debt investments in corporations or
projects designed primarily to promote community welfare; (7) providing to
others financially oriented data processing or bookkeeping services; (8) acting
as an insurance agent or broker in relation to insurance for itself and its
subsidiaries or for insurance directly related to extensions of credit; (9)
acting as underwriter for credit life insurance and credit accident and health
insurance: (10) providing courier services of a limited character; (11)
providing management consulting advice to nonaffiliated banks and nonbank
depository institutions; (12) selling money orders, travelers' checks and United
States savings bonds; (13) performing appraisals of real estate; (14) acting as
intermediary for the financing of commercial or industrial income-producing real
estate by arranging for the transfer of the title, control and risk of such a
real estate project to one or more investors; (15) providing securities
brokerage services, related securities credit activities and incidental
activities such as offering custodial services, individual retirement accounts
and cash management services, if the securities brokerage services are
restricted to buying and selling securities solely as agent for the account of
customers and do not include securities underwriting or dealing or investment
advice or research services; (16) underwriting and dealing in obligations of the
United States, general obligations of states and their political subdivisions
such as bankers' acceptances and certificates of deposit; (17) providing general
information, advisory services and statistical forecasting with respect to
foreign exchange markets; (18) acting as a futures commission merchant in the
execution and clearance on major commodity exchanges of futures contracts and
options on futures contracts for bullion, foreign exchange, government
securities, certificates of deposit and other money market instruments; (19)
performing personal property appraisals that require expertise regarding all
types of personal and business property, including intangible property such as
corporate securities; (20) providing commodity trading and futures commission
merchant advice; (21) providing consumer financial counseling to individuals on
consumer-oriented financial management matters, including debt consolidation,
mortgage applications, bankruptcy, budget management, real estate
tax shelters, tax planning, retirement and estate planning, insurance and
general investment management, so long as this activity does not include the
sale of specific products or investments; (22) providing tax planning and
preparation advice to corporations and individuals; (23) providing check
guaranty services to subscribing merchants; (24) operating a collection agency
and credit bureau; and (25) acquiring and operating thrift institutions,
including savings and loan associations, building and loan associations and
FDIC-insured savings banks.
Certain Provisions of Pennsylvania Banking Law
Under the Pennsylvania Banking Code of 1965, as amended, (the "Code"),
the Company has been permitted since March 4, 1990 to control an unlimited
number of banks. However, the Company would be subject to the requirements of
the Bank Holding Company Act as discussed in the "Supervision and Regulation -
The Company" section above.
Also since March 4, 1990, the Code authorizes reciprocal interstate
banking without any geographic limitation. Reciprocity between states exists
when a foreign state's law authorizes Pennsylvania bank holding companies to
acquire banks or bank holding companies located in that state on terms and
conditions substantially no more restrictive than those applicable to such an
acquisition by a bank holding company located in that state. For a further
discussion of interstate banking and branching, see the section entitled
"Legislation and Regulatory Changes" below.
Legislation and Regulatory Changes
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, and before various bank regulatory
agencies. No prediction can be made as to the likelihood of any major changes
or the impact such changes might have on the Company and its subsidiary, the
Bank. Certain changes of potential significance to the Company are discussed
below.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Interstate Banking and Branch Act") permits interstate banking to
occur. Bank holding companies, pursuant to an amendment to the Bank Holding
Company Act, can acquire a bank located in any state, as long as the acquisition
does not result in the bank holding company controlling more than 10% of the
deposits in the United States, or 30% of the deposits in the target bank's
state. The legislation permits states to waive the concentration limits and
require that the target institution be in existence for up to five years before
it can be acquired by an out-of-state bank or bank holding company. Interstate
branching and merging of existing banks 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.
Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley
Act of 2002. The Sarbanes-Oxley Act represents a comprehensive revision of laws
affecting corporate governance, accounting obligations and corporate reporting.
The Sarbanes-Oxley Act is applicable to all companies with equity securities
registered or that file reports under the Securities Exchange Act of 1934. In
particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit
committees, including independence, expertise, and responsibilities; (ii)
additional responsibilities regarding financial statements for the Chief
Executive Officer and Chief Financial Officer of the reporting company; (iii)
new standards for auditors and regulation of audits; (iv) increased disclosure
and reporting obligations for the reporting company and its directors and
executive officers; and (v) new and increased civil and criminal penalties for
violations of the securities laws. Many of the provisions were effective
immediately while other provisions become effective over a period of time and
are subject to rulemaking by the SEC. Because the Company's common stock is
registered with the SEC, it is currently subject to this Act.
Future Legislation
Changes to the laws and regulations in the state where the Company and
the Bank do business can affect the operating environment of bank holding
companies and their subsidiaries in substantial and unpredictable ways. The
Company cannot accurately predict whether those changes in laws and regulations
will occur, and, if those changes occur, the ultimate effect they would have
upon the financial condition or results of operations of the Company.
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
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, 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, 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 also
offers telephone and internet banking to its customers. 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, and (8) home equity lines of credit. Loans of these types will be
considered desirable by the Bank provided such loans meet the test of sound
credit.
The Bank has adopted the following loan-to-value ratios, in accordance
with standards adopted by its bank supervisory agencies:
Loan Category Loan-to-Value
Limit
Raw land 65%
Land development 75%
Construction:
Commercial, multifamily, and 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.
Allowance for Loan Losses and Related Provision
The provision for loan losses was $ 1,265,000 in 2003 compared to
$ 255,000 in 2002 and $ 15,000 in 2001. The provisions were based on
management's evaluation of the adequacy of the reserve balance and represent
amounts deemed necessary to maintain the reserve at the appropriate level based
on the quality of the loan portfolio and economic conditions. Actual charge-
offs (net of recoveries) were $ 396,000 in 2003 and $ 70,000 in 2002. These
were significantly higher than in previous years, and were directly related to
agri-business loans. 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
2003 2002 2003 2002
Loans secured by $ 0 $ 59 $ 3,314 $ 1,525
real estate
Personal loans 0 11 74 0
Commercial and other 0 0 771 71
loans
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Total loans $ 0 $ 70 $ 4,159 $ 1,596
========= ======= ======= =======
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
Commercial borrowers with lending relationships over $ 500,000 and
agribusiness borrowers with lending relationships over $ 250,000 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 35 - 50%
Substandard 3 - 5%
Special Mention 1 - 3%
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 significant increase in the provision for loan
losses for 2003 compared to 2002 are significant increases in nonaccrual and
classified loans. No loans were past-due 90 days or more still accruing
interest at December 31, 2003. Nonaccrual loans have increased more than 160%
over the past four quarters and represent 4.0% of totals loans compared with
1.5% of total loans at December 31, 2002. At December 31, 2003, 80% of loans on
nonaccrual status were fully-secured by real estate. Classified loans on
December 31, 2003 were $ 4,728,000 compared to $ 4,264,000 on December 31, 2002,
an increase of 11%. The Corporation has identified agribusiness lending as a
concentration of credit. At December 31, 2003, agribusiness loans comprised
$ 2,484,000, or 60%, of the classified loans. In addition, the allowance and
loans placed on nonaccrual status were adjusted in the third quarter 2003 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. They have also
classified as "nonaccrual" several loans with current payment status (amounting
to $ 1,956,000) due to perceived weaknesses in the collateral or borrower's
financial condition.
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, 91% 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% of the
classified loans.
Concentrations
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 22% of loan portfolio and 136% of stockholders' equity).
The Company also has a significant concentration in FNMA and FHLMC
preferred stocks, representing 37% of total investments and 72% of stockholders'
equity at December 31, 2003.
Employees
As of December 31, 2003, the Bank has forty-eight (48) full-time
equivalent employees.
Supervision and Regulation - The Bank
The operations of the Bank are subject to federal and state statutes
applicable to banks chartered under the banking laws of the United States, to
members of the Federal Reserve System and to banks whose deposits are insured by
the FDIC. The operations of the Bank are also subject to regulations of the
Comptroller, the Federal Reserve Board, and the FDIC. The primary supervisory
authority of the Bank is the Comptroller, which regulates and examines the Bank.
The Comptroller has authority to prevent national banks from engaging in unsafe
or unsound practices in conducting their businesses.
Federal and state banking laws and regulations govern, among other
things, the scope of a bank's business, the investments a bank may make, the
reserves against deposits a bank must maintain, loans a bank makes and
collateral it takes, the maximum interest rates a bank may pay on deposits, the
activities of a bank with respect to mergers and consolidations and the
establishment of branches. Under Pennsylvania law, the Bank may establish or
acquire branch offices, subject to certain limitations, in any county of the
state. National bank branches, however, may be established within the permitted
area only after approval by the Comptroller.
As a subsidiary bank of a bank holding company, the Bank is subject to
certain restrictions imposed by the Federal Reserve Act on any extensions of
credit to the bank holding company or its subsidiaries, or investments in the
stock or other securities as collateral for loans. The Federal Reserve Act and
Federal Reserve Board regulations also place certain limitations and reporting
requirements on extensions of credit by the Bank to principal shareholders of
its parent holding company, among others, and to related interests of such
principal shareholders. In addition, such legislation and regulations may
affect the terms upon which any person becoming a principal shareholder of a
holding company may obtain credit from banks with which the subsidiary Bank
maintains a correspondent relationship.
FDIC
Under the Federal Deposit Insurance Act, the Comptroller possesses the
power to prohibit institutions regulated by it (such as the Bank) from engaging
in any activity that would be an unsafe and unsound banking practice or would
otherwise be in violation of the law. Moreover, the Financial Institutions
Regulatory and Interest Rate Control Act of 1978 ("FIRA") generally expanded the
circumstances under which officers or directors of a bank may be removed by the
institution's federal supervisory agency, restricts lending by a bank to its
executive officers, directors, principal shareholders or related interests
thereof and restricts management personnel of a bank from serving as directors
or in other management positions with certain depository institutions whose
assets exceed a specified amount or which have an office within a specified
geographic area, and restricts management personnel from borrowing from another
institution that has a correspondent relationship with their bank.
Additionally, FIRA requires that no person may acquire control of a bank unless
the appropriate federal supervisory agency has been given sixty (60) days prior
written notice and within that time has not disapproved the acquisition or
otherwise extended the period for disapproval. Control for purposes of FIRA,
means the power, directly or indirectly, to direct the management or policies or
to vote twenty-five percent (25%) or more of any class of outstanding stock of a
financial institution or its respective holding company. A person or group
holding revocable proxies to vote twenty-five percent (25%) or more of the
outstanding common stock of a financial institution or holding company such as
the Company, would presumably be deemed to control the institution for purposes
of FIRA.
Garn-St Germain
The Garn-St Germain Depository Institutions Act of 1982 ("1982 Act")
removed certain restrictions on a bank's lending powers and liberalized its
depository capabilities. The 1982 Act also amended FIRA (see above) by changing
the statutory limits on lending by a bank to its executive officers, directors,
principal shareholders, or related interests thereof and by relaxing certain
reporting requirements. The 1982 Act, however, also tightened FIRA provisions
respecting management interlocks and correspondent bank relationships involving
a bank's management personnel.
CRA
Under the Community Reinvestment Act of 1977, as amended ("CRA"), the
Comptroller is required to assess the record of all financial institutions
regulated by it to determine if these institutions are meeting the credit needs
of the community (including low and moderate income neighborhoods) which they
serve and to take this record into account in its evaluation of any application
made by any of such institutions for, among other things, approval of a branch
or other deposit facility, office relocation, a merger or an acquisition of bank
shares. The Financial Institutions Reform, Recovery and Enforcement Act of 1989
amended the CRA to require, among other things, that the Comptroller make
publicly available the evaluation of a bank's record of meeting the credit needs
of its entire community, including low and moderate income neighborhoods. This
evaluation will include a descriptive rating and a statement describing the
basis for the rating, which is publicly disclosed.
BSA
Under the Bank Secrecy Act ("BSA"), banks and other financial
institutions are required to report to the Internal Revenue Service currency
transactions of more than $ 10,000 or multiple transactions of which the Bank is
aware in any one day that aggregate in excess of $ 10,000. Civil and criminal
penalties are provided under the BSA for failure to file a required report, for
failure to supply information required by the BSA or for filing a false or
fraudulent report.
CEBA
An omnibus federal banking bill, known as the Competitive Equality
Banking Act ("CEBA"), was signed into law in August of 1987. Included in the
legislation were measures: (1) imposing certain restrictions on transactions
between banks and their affiliates; (2) expanding the powers available to
Federal bank regulators in assisting failed and failing banks; (3) limiting the
amount of time banks may hold certain deposits prior to making such funds
available for withdrawal and any interest thereon; and (4) requiring that any
adjustable rate mortgage loan secured by a lien on a one-to-four family dwelling
include a limitation on the maximum rate at which interest may accrue on the
principal balance during the term of such loan.
FDICIA
Capital Categories
In December of 1991 the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") became law. Under FDICIA, institutions must
be classified, based on their risk-based capital ratios into one of five defined
categories, as illustrated below:
Total Risk- Tier 1 Tier 1 Under a
Based Ratio Risk-Based Leverage Capital
Ratio Ratio Order or
Directive
CAPITAL CATEGORY
Well capitalized 10.0 6.0 5.0 No
Adequately
capitalized 8.0 4.0 4.0*
Undercapitalized < 8.0 < 4.0 < 4.0*
Significantly
Undercapitalized < 6.0 < 3.0 < 3.0
Critically
undercapitalized < 2.0
* 3.0 for those banks having the highest available regulatory rating.
Based on the above criteria, the Bank is classified as "well
capitalized".
Prompt Corrective Action
In the event an institution's capital deteriorates to the
undercapitalized category or below, FDICIA prescribes an increasing amount of
regulatory intervention, including: (1) the institution of a capital restoration
plan and a guarantee of the plan by a parent institution; and (2) the placement
of a hold on increases in assets, number of branches or lines of business. If
capital has reached the significantly or critically undercapitalized levels,
further material restrictions can be imposed, including restrictions on interest
payable on accounts, dismissal of management and (in critically undercapitalized
situations) appointment of a receiver. For well capitalized institutions,
FDICIA provides authority for regulatory intervention where the institution is
deemed to be engaging in unsafe or unsound practices or receives a less than
satisfactory examination report rating for asset quality, management, earnings,
or liquidity. All but well capitalized institutions are prohibited from
accepting brokered deposits without prior regulatory approval.
Operational Controls
Under FDICIA, financial institutions are subject to increased
regulatory scrutiny and must comply with certain operational, managerial and
compensation standards to be developed by Federal Reserve Board regulations.
FDICIA also requires the regulators to issue new rules establishing
certain minimum standards to which an institution must adhere including
standards requiring a minimum ratio of classified assets to capital, minimum
earnings necessary to absorb losses and minimum ratio of market value to book
value for publicly held institutions. Additional regulations are required to be
developed relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth and excessive compensation,
fees and benefits.
Examinations and Audits
Annual full-scope, on site examinations are required for all FDIC-
insured institutions except institutions with assets under $ 250 million which
are well capitalized, well managed and not subject to a recent change in
control, in which case, the examination period is every eighteen (18) months.
Banks with total assets of $ 150 million or more are required to submit to their
supervising federal and state banking agencies a publicly available annual audit
report and are subject to additional accounting and reporting regulations.
Truth-In-Savings
A separate subtitle within FDICIA, called the "Bank Enterprise Act of
1991", requires "truth-in-savings" on consumer deposit accounts so that
consumers can make meaningful comparisons between the competing claims of banks
with regard to deposit accounts and products. Under this provision, the Bank is
required to provide information to depositors concerning the terms of their
deposit accounts, and in particular, to disclose the annual percentage yield.
There are some operational costs of complying with the Truth-In-Savings law.
Federal regulators recently issued regulations to implement the
privacy provisions of the Gramm-Leach-Bliley Act (Financial Services
Modernization Act). This new law took effect in 2000 and requires banks to
notify consumers about their privacy policies and to give them an opportunity to
"opt-out" or prevent the bank from sharing "nonpublic personal information"
about them with nonaffiliated third parties. The Bank has developed privacy
policies and procedures to provide timely disclosure of such policies and a
convenient means for consumers to opt out of the sharing of their information
with unaffiliated third parties.
The earnings of the Bank, and therefore the earnings of the Company
are affected by general economic conditions, management policies, and the
legislative and governmental actions of various regulatory authorities including
the FRB, the Comptroller, and the FDIC.
In addition to banking and securities laws, regulations and regulatory
agencies, the Company also is subject to various other laws, regulations, and
regulatory agencies throughout the United States. 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
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.
The Company files periodic reports with the Securities and Exchange
Commission (SEC) in the form of 10-Q's - quarterly reports; 10-K - annual
report; annual proxy statements and Form 8-K for any significant events that may
arise during the year. Copies of the Company's filings may be obtained through
the SEC's internet site at www.sec.gov. The Company has not yet made
arrangements to have these filings available on its website at www.fnbctc.com,
but will provide paper copies of its filings free of charge upon request. This
can be done by contacting Doriann Hoffman in writing at Fulton Bancshares
Corporation, 100 Lincoln Way East, McConnellsburg, Pennsylvania 17233.
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
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 under the symbol FULB. As of December 31, 2003,
the approximate number of shareholders of record was 500. Market prices at the
end of each quarter are based on the latest sales prices.
The stock market analysis and dividends for 2003 and 2002 on page 34
of the annual shareholders report for the year ended December 31, 2003 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 2003, 5 shares of treasury
stock were reissued, covering compensation of $ 245. In 2002, 40 shares of
treasury stock were reissued, covering $ 1,800 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, 2003 is incorporated herein
by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Contractual obligations of the Company as of December 31, 2003 are as
follows:
Payments due by period
- - - - - - - - - - - - - - - - - - - - - - -
(In thousands) Total Less 1 - 3 3 - 5 More
Contractual obligations than 1 years years than 5
year years
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Long-term obligations $ 15,000 $ 0 $ 0 $ 0 $ 15,000
Operating lease obligations 339 58 121 120 40
-------- ------- ------- ------- --------
Total $ 15,339 $ 58 $ 121 $ 120 $ 15,040
======== ======= ======= ======= ========
All other information required by Item 7 is included in "Management's
Discussion and Analysis of Financial Condition and Results of Operation", on
pages 27 through 34 of the annual shareholders' report which are 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 26 of the annual shareholders' report for the year
ended December 31, 2003 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
Investment portfolio 20
Loan portfolio 21
Summary of loan loss experience 22
Nonaccrual, delinquent loans, and impaired 23
Allocation of allowances for loan losses 24
Deposits/return on equity and assets 25
Consolidated summary of operations 26
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
INVESTMENT PORTFOLIO
The following table shows the maturities of investment securities at
book value as of December 31, 2003, and weighted average yields of such
securities. Yields are shown on a tax equivalent basis, assuming a 34% federal
income tax rate.
After 1 After 5
year but years but
Within 1 within 5 within 10 After 10
year years years years Total
(000 omitted)
Bonds:
U. S. Government
agencies
Book value $ 0 $ 9,238 $ 0 $ 0 $ 9,238
Yield 0% 2.45% 0% 0% 2.45%
State and municipal
Book value 0 0 2,369 3,026 5,395
Yield 0% 0% 5.88% 5.79% 5.82%
Mortgage-Backed
Book value 0 0 0 3,128 3,128
Yield 0% 0% 0% 2.29% 2.29%
----- ------- ------- ------- --------
Total book value $ 0 $ 9,238 $ 2,369 $ 6,154 $ 17,761
===== ======= ======= ======= ========
Yield 0% 2.45% 5.88% 4.01% 3.45%
===== ======= ======= ======= ========
Other Debt
Securities:
FHLMC/FNMA non-
cumulative
preferred stock
Book value $ 12,652
========
Yield 6.44%
========
Equity Securities:
Total Equity $ 1,533
Securities
========
Yield 2.10%
========
Total Investment $ 31,946
Securities
========
Yield 4.57%
========
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) 2003 2002 2001 2000 1999
Commercial, $ 18,623 $ 15,171 $ 17,418 $ 13,097 $ 12,294
financial and
agricultural
Real estate - 0 0 0 0 0
Construction
Real estate - 80,398 82,098 78,796 80,020 69,273
Mortgage
Installment and 4,268 10,998 8,287 9,788 10,228
other personal
loans (net of
unearned discount)
--------- --------- --------- --------- --------
Total loans $ 103,289 $ 108,267 $ 104,501 $ 102,905 $ 91,795
========= ========= ========= ========= ========
Presented below are the approximate maturities of the loan portfolio
(excluding real estate mortgages and installments) at December 31, 2003:
One to Over
Under One Five Five
Year Years Years Total
(000 omitted)
Commercial, financial and $ 12,105 $ 4,656 $ 1,862 $ 18,623
agricultural
Real estate - Construction 0 0 0 0
-------- ------- ------- --------
Total $ 12,105 $ 4,656 $ 1,862 $ 18,623
======== ======= ======= ========
The following table presents the approximate amount of fixed rate
loans and variable rate loans due as of December 31, 2003:
Fixed Rate Variable Rate
Loans Loans
(000 omitted)
Due within one year $ 7,779 $ 24,790
Due after one but within five years 10,052 10,552
Due after five years 18,827 31,289
-------- --------
Total $ 36,658 $ 66,631
======== ========
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31
2003 2002 2001 2000 1999
(000 omitted)
Average total loans
outstanding (net of
unearned income) $107,140 $105,219 $105,028 $98,052 $87,902
======== ======== ========= ======= =======
Allowance for loan
losses,
beginning of period $ 1.031 $ 845 $ 847 $ 800 $ 580
Additions to provision 1,265 255 15 45 195
for loan losses charged
to operations
Loans charged off during
the year
Real estate 25 0 0 0 0
Commercial and 363 3 20 3 14
agricultural
Installment 23 73 14 29 34
-------- -------- --------- ------- -------
Total charge-off's 411 76 34 32 48
-------- -------- --------- ------- -------
Recoveries of loans
previously charged off:
Real estate 6 0 0 0 0
Commercial and 0 1 2 24 63
agricultural
Installment 9 6 15 10 10
-------- -------- --------- ------- -------
Total recoveries 15 7 17 34 73
-------- -------- --------- ------- -------
Net loans charged off 396 69 17 ( 2) ( 25)
-------- -------- --------- ------- -------
Allowance for loan $ 1,900 $ 1,031 $ 845 $ 847 $ 800
======== ======== ========= ======= =======
Ratio of net loans .37% .06% .02% ( .01)% .12%
charged off 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.
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
NONACCRUAL, DELINQUENT, AND IMPAIRED 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.
2003 2002 2001 2000 1999
(000 omitted)
Nonaccrual loans $ 4,159 $ 1,596 $ 289 $ 0 $ 0
======= ======= ======= ======= =======
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $ 0
30 through 89 days past 3,362 3,692 4,121 1,787 1,084
due
90 days or more past due 0 70 922 549 168
------- ------- ------- ------- -------
Total accrual loans $ 3,326 $ 3,762 $ 5,043 $ 2,336 $ 1,252
======= ======= ======= ======= =======
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, as well as loan impairment details for 2001 through 2003.
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
2003 2002
Allowanc Percentag Allowanc Percentag
e Amount e of e Amount e of
Loans to Loans to
Total Total
Loans Loans
(000 omitted)
Commercial, financial and $ 1,507 79.34% $ 561 54.41%
agricultural
Real estate - Construction 0 0.00 0 0.00
Real estate - Mortgage 351 18.46 333 32.30
Installment 42 2.20 137 13.29
------- ------- ----- -------
Total 1,900 100.00% 1,031 100.00%
======= ======= ===== =======
Years Ended December 31
2001 2000
Allowanc Percentag Allowanc Percentag
e Amount e of e Amount e of
Loans to Loans to
Total Total
Loans Loans
(000 omitted)
Commercial, financial and $ 141 16.67% $ 108 12.73%
agricultural
Real estate - Construction 0 0.0 0 0.00
Real estate - Mortgage 637 75.40 659 77.76
Installment 67 7.93 80 9.51
----- ------- ----- -------
Total $ 845 100.00% $ 847 100.00%
===== ======= ===== =======
Years Ended December 31
1999
Allowance Percentage of
Amount Loans to Total
Loans
(000 omitted)
Commercial, financial and $ 107 13.37%
agricultural
Real estate - Construction 0 0.00
Real estate - Mortgage 609 76.13
Installment 84 10.50
----- -------
Total $ 800 100.00%
===== =======
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
DEPOSITS
The average amounts of deposits are summarized below:
Years Ended December 31
2003 2002 2001
(000 omitted)
Demand deposits $ 14,966 $ 15,237 $
12,534
Interest bearing demand 11,925 11,431 10,992
deposits
Savings deposits 22,579 18,438 16,891
Time deposits 61,069 74,238
71,974
--------- --------- --------
Total deposits $ 110,539 $ 119,344 $112,391
========= ========= ========
The following is a breakdown of maturities of time deposits of
$ 100,000 or more as of December 31, 2003:
Maturity (000
omitted)
Certificates of Deposit
Three months or less $ 5,849
Over three months through six months 2,245
Over six months through twelve months 1,708
Over twelve months 6,724
--------
$ 16,526
========
RETURN ON EQUITY AND ASSETS (APPLYING DAILY AVERAGE BALANCES)
The following table presents a summary of significant earnings and
capital ratios:
2003 2002 2001
Assets $ 153,621 $ 155,563 $ 144,384
Net income $ 830 $ 1,730 $ 1,486
Equity $ 16,971 $ 15,850 $ 14,683
Cash dividends paid $ 517 $ 503 $ 468
Return on assets 0.54% 1.11% 1.03%
Return on equity 4.89% 10.91% 10.12%
Dividend payout ratio 62.33% 29.06% 31.50%
Equity to asset ratio 11.02% 10.19% 10.17%
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December 31
2003 2002 2001 2000 1999
(000 omitted)
Interest income $ 8,469 $ 9,837 $ 10,185 $ 9,992 $ 8,759
Interest expense 3,175 4,271 5,432 5,210 4,325
-------- ------- -------- -------- -------
Net interest income 5,294 5,566 4,753 4,782 4,434
Provision for loan losses 1,265 255 15 45 195
-------- ------- -------- -------- -------
Net interest income after 4,029 5,311 4,738 4,737 4,239
provision for loan losses
Other income:
Trust 19 22 19 18 12
Service charges - Deposits 224 208 189 177 160
Other service charges, 182 165 125 124 127
collection and exchange,
charges, commission fees
Other operating income 378 279 306 203 290
-------- ------- -------- -------- -------
Total other income 803 674 639 522 589
-------- ------- -------- -------- -------
Income before operating
expense 4,932 5,985 5,377 5,259 4,828
Operating expenses:
Salaries and employees 1,708 1,728 1,560 1,509 1,314
benefits
Occupancy and equipment 833 746 729 728 647
expense
Other operating expenses 1,471 1,304 1,162 1,133 1,050
-------- ------- -------- -------- -------
Total operating expenses 4,012 3,778 3,451 3,370 3,011
------- ------- -------- -------- -------
Income before income taxes 820 2,207 1,926 1,889 1,817
Income tax expense ( 10) 477 440 449 380
(benefit)
-------- ------- -------- -------- -------
Net income applicable to $ 830 $1,730 $ 1,486 $ 1,440 $ 1,437
common stock
======== ======= ======== ======= =======
Per share data:
Earnings per common share 1.68 $ 3.51 $ 3.02 $ 2.91 $ 2.90
Cash dividend - Common 1.05 1.02 .95 .86 .86
Weighted average number of 492,810 492,772 492,747 494,054 495,000
common shares
Item 9. Disagreements on Accounting and Financial Disclosures.
Not applicable.
Item 9a. 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 December 31, 2003. Based on such
evaluation, such officers have concluded that, as of December 31, 2003, 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
There have not been any significant changes in the Company's internal
control or in other factors that could significantly affect such control during
the fourth quarter of 2003.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Company has adopted a code of ethics that applies to all senior
financial officers (including its chief executive officer, chief financial
officer, and any person performing similar functions). The Company has filed a
copy of this Code of Ethics as Exhibit 14 to this Form 10-K. The Company has
also made the Code of Ethics available on its website at http://www.fcnbtc.com.
All other information required by Item 10 is incorporated by reference
from Fulton County Bancshares Corporation's definitive proxy statement for the
2004 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, 2003, 2002, and 2001 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 Restricted Options LTIP All Other
Principal ($) ($) Annual Stock /SARS Payouts Compensatio
Position Compensation Award(s) (#) ($) n
($) ($)s) ($)
Annual Compensation Long-Term Compensation
Clyde H. 2003 140,858 $ 0 $ 0 $ 0 $ 0 $ 0 $ 81,711
Bookheimer,
President &
CEO
2002 140,666 0 0 0 0 0 128,855
2001 130,008 0 0 0 0 0 163,903
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)
2003 $ 0 $ 937 $ 18,864 $ 61,910 $ 0
2002 0 1,015 16,270 111,570 0
2001 0 1,232 13,890 148,781 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, 2003, the cash surrender value of the policies was
$ 1,363,905.
All other information required by Item 11 is incorporated by reference
from Fulton County Bancshares Corporation's definitive proxy statement for the
2004 Annual Meeting of Shareholders filed pursuant to Regulation 17A.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated by reference from
Fulton Bancshares Corporation's definitive proxy statement for the 2004 Annual
Meeting of Shareholders filed pursuant to Regulation 14A.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference from
Fulton Bancshares Corporation's definitive proxy statement for the 2004 Annual
Meeting of Shareholders filed pursuant to Regulation 14A.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 is incorporated by reference from
Fulton Bancshares Corporation's definitive proxy statement for the 2004 Annual
Meeting of Shareholders filed pursuant to Regulation 14A.
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, 2003, are incorporated by
reference in Item 8:
Consolidated balance sheets - December 31, 2003 and 2002
Consolidated statements of income - Years ended December 31,
2003, 2002, and 2001
Consolidated statements of stockholders' equity - Years
ended December 31, 2003, 2002, and 2001
Consolidated statements of cash flows - Years ended
December 31, 2003, 2002, and 2001
Notes to consolidated financial statements - December 31,
2003
(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 (14) Code of Ethics
Exhibit (21) Subsidiaries of the registrant
Exhibit (23) Consent of independent auditors
Exhibit (31) Rule 13a-14(a)/15d-14(a) Certifications
Exhitit (32) Section 1350 Certifications
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
(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 incorporated by reference to the
registrant's Form 10-K for the year ended December 31, 2002.
(13) Annual report to security holders. Filed herewith.
(14) Code of Ethics
(21) Subsidiaries of the registrant. Filed herewith.
(23) Consent of independent auditors. Filed herewith.
(31.1) Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 - filed
herewith
(31.2) Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 - filed
herewith
(32.1) 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.
(32.2) 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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FULTON BANCSHARES CORPORATION
--------------------------------------
(Registrant)
By /s/ Clyde H. Bookheimer
--------------------------------------
Clyde H. Bookheimer, President
Dated: March 26, 2004 (Duly authorized officer)
By /s/ Doriann Hoffman
--------------------------------------
Doriann Hoffman, Chief Financial Officer
(Principal Accounting Officer)
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, 2004
Clyde H. Bookheimer CEO
/S/ David L. Seiders Director & Vice ChairmanMarch 26, 2004
David L. Seiders
/S/ Cecil B. Mellott Director & Vice March 26, 2004
Cecil B. Mellott Chairman
/S/ Robert C. Snyder Director March 26, 2004
Robert C. Snyder
/S/ Ellis L. Yingling Director & March 26, 2004
Ellis L. Yingling Chairman
/S/ Clair R. Miller Director March 26, 2004
Clair R. Miller
/s/ Martin R. Brown Director March 26, 2004
Martin R. Brown
/s/Robert L. Thomas Director March 26, 2004
Robert L. Thomas
EXHIBIT 13
FULTON BANCSHARES CORPORATION
2003 Annual Financial Report
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
Summary of quarterly financial data 24
Distribution of assets, liabilities and stockholders' equity,
interest rates and interest differential 25
Changes in net interest income 26
Management's discussion and analysis of consolidated financial condition
and results of operations 27 - 34
Stock market analysis and dividends 34
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, 2003 and 2002 and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the three years
ended December 31, 2003. 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, 2003 and 2002, and the results of their operations and their cash
flows for each of the three years ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America.
/S/Smith Elliott Kearns & Company, LLC
--------------------------------------------------------------
SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, Pennsylvania
February 17, 2004
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
2003 2002
ASSETS
Cash and due from banks $ 3,852,702 $ 5,213,690
Investment securities available for sale 29,680,370 37,674,900
Federal Reserve, Atlantic Central Bankers Bank
and Federal Home Loan Bank stocks 1,400,850 1,771,950
Loans, net of reserve for loan losses
2003 - $ 1,899,643; 2002 - $ 1,030,713 101,388,847 107,236,147
Premises and equipment 3,759,508 3,938,272
Cash surrender value of life insurance 5,229,926 4,657,795
Accrued interest receivable 656,642 939,089
Real estate owned other than premises 206,199 0
Other assets 1,568,336 956,134
-------------- -------------
Total assets $ 147,743,380 $ 162,387,977
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing $ 13,924,892 $ 16,155,636
Interest bearing 97,200,011 96,869,814
111,124,903 113,025,450
Other borrowed funds 18,825,000 31,250,000
Accrued interest payable 254,599 313,724
Other liabilities 1,261,143 1,139,523
--------------- --------------
Total liabilities 131,465,645 145,728,697
--------------- --------------
Stockholders' Equity
Common stock: par value $.625 per share;
4,000,000
shares authorized; 495,000 shares issued 309,375 309,375
Additional paid-in capital 2,051,337 2,051,294
Retained earnings 14,575,473 14,262,722
Accumulated other comprehensive income (loss) ( 570,538) 124,003
Treasury stock, shares at cost -
2003 - 2,185 ; 2002 - 2,190 ( 87,912) ( 88,114)
--------------- --------------
Total stockholders' equity 16,277,735 16,659,280
--------------- --------------
Total liabilities and stockholders' equity $ 147,743,380 $ 162,387,977
=============== ==============
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
Interest Income
Interest and fees on loans $ 6,954,044 $ 7,593,348 $ 8,584,709
Interest and dividends on investment securities:
Other U. S. Government agencies 352,657 708,802 587,996
Mortgage-backed securities 126,030 197,870 228,320
Obligations of state and political subdivisions - tax 75,232 102,247 135,056
exempt
FNMA and FHLMC preferred stock 883,931 1,102,811 463,856
Other interest and dividends 77,027 119,954 130,407
Interest on federal funds sold 0 11,976 54,335
----------- ----------- -------------
Total interest income 8,468,921 9,837,008 10,184,679
----------- ----------- -------------
Interest Expense
Interest on deposits 2,132,148 3,289,201 4,470,576
Interest on federal funds purchased 726 4,111 2,632
Interest on other borrowed money 1,042,110 977,695 959,091
----------- ----------- -------------
Total interest expense 3,174,984 4,271,007 5,432,299
----------- ----------- -------------
Net interest income before provision for loan losses 5,293,937 5,566,001 4,752,380
Provision for Loan Losses 1,265,000 255,000 15,000
----------- ----------- -------------
Net interest income after provision for loan losses 4,028,937 5,311,001 4,737,380
----------- ----------- -------------
Other Income
Service charges on deposit accounts 224,257 208,084 189,186
Other service charges and fees 181,804 165,311 108,567
Earnings - Cash surrender value of life insurance 258,209 258,203 249,418
Trust services 19,133 22,277 19,002
Gain on sale of investment securities 86,472 705 57,329
Gain on sale of OREO property 0 8,516 0
Gain on sale of loans 24,012 0 0
Other income 9,515 10,544 15,975
----------- ----------- -------------
Total other income 803,402 673,640 639,477
----------- ----------- -------------
Other Expenses
Salaries, fees and employee benefits 1,707,844 1,727,652 1,559,673
Net occupancy expense of bank premises and
furniture and equipment expense 833,377 746,394 729,435
FDIC insurance premiums 17,515 20,386 19,754
Other expenses 1,453,379 1,283,779 1,141,725
----------- ----------- -------------
Total other expenses 4,012,115 3,778,211 3,450,587
----------- ----------- -------------
Income before income taxes 820,224 2,206,430 1,926,270
Applicable income tax (benefit) ( 9,977) 476,878 440,016
----------- ----------- -------------
Net income $ 830,201 $1,729,552 $ 1,486,254
=========== =========== =============
Earnings per common share $ 1.68 $ 3.51 $ 3.02
=========== =========== =============
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002 and 2001
Accumulated
Other
Additional Comprehensive Total
Common Paid-In Retained Income Treasury Stockholders'
Stock Capital Earnings (Loss) Stock Equity
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 $ $ 21,337 21,337
10,992
-------------
Total comprehensive income 1,507,591
Issuance of treasury stock
(25 shares) ( 169) 1,006 837
Cash dividends ($ .95 per ( 468,110) ( 468,110)
share)
---------- ----------- ------------ ------------- ----------- -------------
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 $ 186,675 186,675
96,166
-------------
Total comprehensive income 1,916,227
Issuance of treasury stock
(40 shares) 188 1,612 1,800
Cash dividends ($ 1.02 per ( 502,626) ( 502,626)
share)
---------- ----------- ------------ ------------- ----------- -------------
Balance, December 31, 2002 309,375 2,051,294 14,262,722 124,003 ( 88,114) 16,659,280
Comprehensive income:
Net income 830,201 830,201
Change in unrealized (loss) on
investment securities
available
for sale, net of tax of $ ( 694,541) ( 694,541)
357,794
-------------
Total comprehensive income 135,660
Issuance of treasury stock
(5 shares) 43 202 245
Cash dividends ($ 1.05 per ( 517,450) ( 517,450)
share)
---------- ----------- ------------ ------------- ----------- -------------
Balance, December 31, 2003 $ 309,375 $ 2,051,337 $14,575,473 ($ 570,538) ($ 87,912) $ 16,277,735
========== =========== ============ ============= =========== =============
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
Supplemental disclosure of cash flows
information:
Cash paid during the year for:
Interest $ 3,234,108 $4,382,026 $ 5,509,953
Income taxes 424,500 645,000 471,000
Supplemental schedule of noncash investing and
financing activities:
Unrealized holding gain (loss), net of tax ($ 694,541) $ 186,675 $ 21,337
Treasury stock issued as compensation $ 245 $ 1,800 $ 837
Other real estate acquired in settlement of $ 206,199 $ 241,645 $ 0
loans
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 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.
Note 1. Significant Accounting Policies (Continued)
Investment Securities
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.
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, 2003 and 2002, 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.
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
shares of common stock outstanding as follows:
Year Shares
2003 492,810
2002 492,772
2001 492,747
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". 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
The Corporation meets the requirements for 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.
Certain financial instruments and all nonfinancial instruments are
excluded from the 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.
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, 2003, 2002, and 2001, were
$ 93,876, $ 93,217, and $ 85,169, 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:
2003 2002 2001
Gross unrealized holding gains ($ 965,863) $ 283,546 $ 89,658
(losses)
arising during the year
Reclassification adjustment for gains ( 86,472) ( 705) ( 57,329)
realized in net income
------------- --------- -----------
Net unrealized holding gains (losses) ( 1,052,335) 282,841 32,329
before taxes
Tax effect 357,794 ( 96,166) ( 10,992)
------------- --------- -----------
Net change ($ 694,541) $ 186,675 $ 21,337
============= ========= ===========
Note 2. Investments
The amortized cost and fair value of investment securities available for
sale at December 31 were:
Amortized Gross Gross Fair Value
Cost Unrealized Unrealized
Gains Losses
2003
Obligations of U. S. Government
corporations and agencies $ 9,237,758 $ 50,640 $ 14,654 $ 9,273,744
Obligations of states and political
subdivisions 5,395,500 77,886 10,444 5,462,942
Mortgage-backed securities 3,127,194 4,536 7,571 3,124,159
FNMA and FHLMC preferred stock 12,652,370 18,000 983,245 11,687,125
Other stocks 132,000 5,400 5,000 132,400
Totals $ 30,544,822 $ 156,462 $ 1,020,914 $ 29,680,370
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
The amortized cost and fair value of investment securities available for
sale at December 31, 2003, 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 9,237,758 9,273,743
years
Due after five years through 2,369,024 2,433,878
ten years
Due after ten years 3,026,476 3,029,065
Mortgage-backed securities 3,127,194 3,124,159
FNMA and FHLMC preferred stock 12,652,370 11,687,125
Other stocks 132,000 132,400
$ 30,544,822 $29,680,370
Proceeds from sales of securities available for sale during 2003 were
$ 6,299,942. Gross gains and losses on those sales were $ 151,028 and
$ 64,556, respectively. Proceeds from maturities of investment
securities during 2003 were $ 20,568,343, resulting in no gains or
losses. Included in stockholders' equity at December 31, 2003 is
$ 570,538 of unrealized holding losses on securities available for sale,
net of $ 293,914 in deferred taxes.
Note 2. Investments
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.
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.
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:
2003 2002
Federal Home Loan Bank $ 1,320,000 $ 1,691,100
Atlantic Central Bankers Bank 10,000 10,000
Federal Reserve Bank 70,850 70,850
----------- -----------
$ 1,400,850 $ 1,771,950
=========== ===========
Securities with a cost basis of $ 9,237,758 (fair value of $ 9,273,744)
and $ 14,237,861 (fair value of $ 14,382,444) at December 31, 2003 and
2002, 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):
2003 2002
Real estate loans:
Secured by farmland $ 13,359 $ 15,179
Secured by 1-4 family residential 48,063 52,444
Secured by multifamily (5 or more) residential 351 314
properties
Secured by nonfarm nonresidential 18,625 13,705
Loans to finance agricultural production:
Loans to farmers 8,850 6,104
Commercial and industrial loans 9,773 9,067
Loans to individuals for household, family and
other personal expenditures 3,784 10,959
Obligations of states and political subdivisions in the U.S. 475 456
All other loans 9 39
103,289 108,267
--------- ---------
Less: reserve for loan losses ( 1,900) ( 1,031)
--------- ---------
$ 101,389 $ 107,236
========= ==========
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 - - - - -
- - - - - -
2003 2002 2001 2003 2002 2001
Loans secured by real estate $ 0 $ 59 $ 567 $ 3,314 $ 1,525 $ 269
Personal loans 0 11 48 74 0 0
Commercial and other loans 0 0 307 771 71 20
-------- -------- -------- -------- -------- --------
Total $ 0 $ 70 $ 922 $ 4,159 $ 1,596 $ 289
======== ======== ======== ======== ======== ========
Foregone revenue on nonaccrual loans was as follows:
2003 2002 2001
Interest income that would have been $ 147,128 $ 6,503 $ 20,284
accrued at original loan rates
Amount recognized as interest income 3,198 0 0
--------- ------- --------
Foregone revenue $ 143,930 $ 6,503 $ 20,284
========= ======= ========
At December 31, 2003, the total recorded investment in impaired loans,
all of which had allowances determined in accordance with SFAS No. 114,
amounted to approximately $ 740,000. The average recorded investment in
impaired loans amounted to approximately $ 1,064,000 for the year ended
December 31, 2003. The allowance for loan losses related to impaired
loans amounted to approximately $ 250,000 at December 31, 2003. Interest
income on impaired loans of $ 1,043 was recognized for cash payments
received in 2003. The Bank has no commitments to loan additional funds
to borrowers whose loans have been modified. There was no recorded
investment in impaired loans at December 31, 2002 and 2001.
During 2003, the Corporation sold a majority of its student loan
portfolio. Proceeds from the sale of these loans were $ 1,683,784, which
resulted in a gain of $ 24,012 for the year ended December 31, 2003.
During 2003, the Corporation sold certain mortgage loans to Federal Home
Loan Bank (FHLB), but the Corporation continues to service these loans
for FHLB. The outstanding balance of these loans was $ 2,228,413 at
December 31, 2003.
Note 4.Reserve for Loan Losses
Activity in the reserve for loan losses is summarized as follows:
2003 2002 2001
Balance at beginning of period $ 1,030,713 $ 845,045 $ 847,121
Recoveries 15,036 7,441 16,830
Current year provision charged to 1,265,000 255,000 15,000
income
----------- ------------ ---------
Total 2,310,749 1,107,486 878,951
Losses 411,106 76,773 33,906
----------- ----------- ---------
Balance at end of period $ 1,899,643 $ 1,030,713 $ 845,045
=========== =========== =========
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 $ 3,639,000 and $ 3,375,000 at December 31,
2003 and 2002, respectively. During 2003, $ 1,050,000 of new loans were
made and repayments totaled $ 786,000. During 2002, $ 1,258,000 of new
loans were made and repayments totaled $ 1,273,000.
Outstanding loans to employees totaled $ 1,148,000 and $ 781,000 at
December 31, 2003 and 2002, respectively.
Note 6. Premises and Equipment
A summary of premises and equipment is as follows:
Description Cost Accumulated Depreciated
Depreciation Cost
2003
Premises and improvements (including land $ 3,810,227 $ 864,541 $ 2,945,686
$500,207)
Equipment, furniture and fixtures 3,165,230 2,415,284 749,946
Vehicles 98,296 34,420 63,876
$ 7,073,753 $ 3,314,245 $ 3,759,508
2002
Premises and improvements (including land $ 3,770,477 $ 788,538 $ 2,981,939
$482,257)
Equipment, furniture and fixtures 3,007,411 2,127,273 880,138
Vehicles 111,505 35,310 76,195
$ 6,889,393 $ 2,951,121 $ 3,938,272
Depreciation and amortization expense on property and equipment and other
real estate owned amounted to $ 385,655 in 2003, $ 332,253 in 2002, and
$ 365,201 in 2001.
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
2003 2002
Financial instruments whose contract amounts represent credit
risk at December 31:
Commitments to extend credit $12,388,552 $15,502,585
Standby letters of credit and financial guarantees written 91,000 106,000
Note 7. Financial Instruments With Off-Balance-Sheet Risk/Commitments
(Continued)
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Corporation evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the
Corporation upon extension of credit is based on management's credit
evaluation of the customer. Collateral held varies but may include
accounts receivable, inventory, real estate, equipment, and income-
producing commercial properties.
Standby letters of credit and financial guarantees written are
conditional commitments issued by the Corporation to guarantee the
performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loans to customers. The corporation
holds collateral supporting those commitments when deemed necessary by
management.
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 $ 110,100 for 2003,
$ 104,206 for 2002, and $ 66,000 for 2001.
Note 9.Federal Income Taxes
The components of federal income tax expense are summarized as follows:
2003 2002 2001
Current year provision $ 338,653 $ 555,323 $ 503,104
Deferred income taxes (benefits) ( 378,030) ( 78,685) ( 82,580)
Income tax effect of securities transactions 29,400 240 19,492
---------- --------- ---------
Applicable income taxes (credits) ($ 9,977) $ 476,878 $ 440,016
========== ========= =========
Federal income taxes were computed after reducing pretax accounting
income for nontaxable interest and dividend income in the amount of
$ 670, 932, $ 593,555, and $ 464,229, for 2003, 2002, and 2001,
respectively.
A reconciliation of the effective income tax rate to the federal
statutory rate is as follows:
2003 2002 2001
Applicable federal income tax rate 34.0% 34.0% 34.0%
Reductions resulting from:
Nontaxable investment income and other 35.2% ( 12.4%) ( 11.2%)
items, net of nondeductible expenses
Effective income tax rate ( 1.2%) 21.6% 22.8%
Description Cost Accumulated Depreciated
Depreciation Cost
2003
Premises and improvements (including land $ $ 3,810,227 $ 864,541 $ 2,945,686
500,207)
Equipment, furniture and fixtures 3,165,230 2,415,284 749,946
Vehicles 98,296 34,420 63,876
$ 7,073,753 $ 3,314,245 $ 3,759,508
2002
Premises and improvements (including land $ $ 3,770,477 $ 788,538 $ 2,981,939
482,257)
Equipment, furniture and fixtures 3,007,411 2,127,273 880,138
Vehicles 111,505 35,310 76,195
$ 6,889,393 $ 2,951,121 $ 3,938,272
Note 9.Federal Income Taxes (Continued)
Net deferred tax assets are included in other assets on the balance sheet
as follows:
2003 2002
Total deferred tax assets $ 1,308,605 $ 601,482
Total deferred tax liabilities ( ( 254,443)
225,743)
Net deferred tax asset $ 1,082,862 $ 347,039
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:
2003 2002
Net unrealized losses (gains) on securities available $ 293,914 ($ 63,880)
for sale
Deferred compensation 383,357 312,571
Allowance for loan losses 582,398 286,700
Depreciation ( 225,743) ( 190,563)
Foregone interest on non-accrual loans 48,936 2,211
---------- ----------
Net deferred tax asset $1,082,862 $ 347,039
========== ==========
Note 10. Leases
The Corporation is party to real estate leases with base monthly rental
charges of $ 3,453. 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, 2003, 2002, and 2001 was $ 68,131, $ 64,195, and
$ 62,937, respectively.
Based on the current monthly rent, future minimum rental payments for the
next five years are as follows:
2004 $ 58,440
2005 41,436
2006 39,936
2007 39,936
2008 39,936
Note 11. Deposits
Included in interest-bearing deposits at December 31 are NOW and Money
Market Account balances totaling $ 20,476,269 and $ 19,099,495 for 2003
and 2002, respectively.
Time deposits of $ 100,000 and over aggregated $ 16,526,248 and
$ 18,337,176 at December 31, 2003 and 2002, respectively. Interest
expense on time deposits of $ 100,000 and over was $ 504,000,
$ 1,009,000, and $ 1,064,000 for the years ended 2003, 2002, and 2001,
respectively.
Note 11. Deposits (Continued)
The amount of time deposits maturing over the next 5 years is as follows:
2004 $ 36,852,037
2005 2,345,491
2006 2,003,677
2007 8,389,899
2008 10,037,191
------------
$ 59,628,295
============
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 $ 3,137,434 and $ 3,648,369 at December 31, 2003
and 2002, respectively.
Overdrafts of $ 5,843 and $ 34,679 at December 31, 2003 and 2002,
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 years
ended December 31:
Balance Sheets
Assets 2003 2002
Cash $ 23,049 $ 14,364
Investment in Fulton County National Bank & Trust Company 16,091,245 16,483,857
Investment in the Fulton County Community Development Corporation 31,196 36,859
Securities available for sale 132,400 120,200
Deferred taxes 0 4,012
------------ ------------
Total assets $ 16,277,890 $ 16,659,292
============ ============
Liabilities
Accounts payable $ 19 $ 12
Deferred taxes 136 0
------------ ------------
Total liabilities 155 12
------------ ------------
Stockholders' Equity
Common stock, par value $ .625 per share, 309,375 309,375
4,000,000 shares authorized; 495,000 shares issued
Additional paid-in capital 2,051,337 2,051,294
Retained earnings 14,575,473 14,262,722
Accumulated other comprehensive income (loss) ( 570,538) 124,003
Treasury stock; shares at cost - 2003 - 2,185; 2002 - ( 87,912 ( 88,114)
------------ ------------
Total stockholders' equity 16,277,735 16,659,280
------------ ------------
Total liabilities and stockholders' equity $ 16,277,890 $ 16,659,292
============ ============
Note 12. Fulton Bancshares Corporation (Parent Company Only) Financial
Information (Continued)
2002 2001
Statements of Income
Years Ended December 31
Cash dividends from wholly-owned subsidiary $ 555,000 $ 512,000
Investment income 1,360 1,200
Equity in undistributed income of subsidiaries 1,223,162 1,018,365
Printing, supplies, amortization and other expenses ( 49,970) ( 45,311)
------------ ------------
Net income $ 1,729,552 $ 1,486,254
============ ============
Statements of Cash Flows
Years Ended December 31
Cash flows from operating activities:
Net income $ 1,729,552 $ 1,486,254
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed income of subsidiary ( 1,223,162)( 1,018,365)
Compensation - treasury stock issued 1,800 837
Increase (decrease) in accounts payable 12 0
Net cash provided by operating activities 508,202 468,726
Cash flows from financing activities:
Dividends paid ( 502,626)( 468,110)
------------ ------------
Net cash provided (used) by financing activities ( 502,626)( 468,110)
------------ ------------
Net change in cash 5,576 616
Beginning cash 8,788 8,172
------------ ------------
Ending cash $ 14,364 $ 8,788
============ ============
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, 2003 and 2002.
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.
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 $ 3,613,413, $ 3,455,122,
and $ 3,207,341 at December 31, 2003, 2002, and 2001, 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 2003 2002
Leverage (total adjusted 3.0% 11.3% 10.4%
capital/total average
assets)
Tier 1 (Tier 1 core 4.0% 15.7% 14.5%
capital/risk
weighted assets)
Total capital (total capital 8.0% 16.9% 15.4%
plus
allowance for loan
losses/risk
weighted assets)
As of December 31, 2003, 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, 2003 and 2002, 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, 2003 and 2002
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 $ 53 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 $ 3,825,000 and $ 16,250,000 at December 31, 2003 and
2002, respectively. The variable interest rate was 1.03% and 1.31% at
December 31, 2003 and 2002, respectively, and can change daily based on
FHLB's cost of funds. Collateral for the borrowings consists of certain
investments and mortgages approximating $ 62 million at December 31,
2003.
Note 16. Real Estate Owned Other Than Premises
At December 31, 2003, real estate owned other than premises consisted of
four properties that the Corporation foreclosed on in 2003, which are
carried at the cost of $ 206,199.
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.
Note 16. Real Estate Owned Other Than Premises (Continued)
The Corporation also sold a rental property in 2002. Net proceeds from
the sale were $ 91,040, which resulted in a gain of $ 8,516.
Note 17.Fair Value of Financial Instruments
The estimated fair values of the Corporation's financial instruments were
as follows at December 31, 2003 and 2002:
- - - - - - 2003 - - - - - - - - - - 2002- - - -
- - - - -
Carrying Fair Carrying Fair
Amount Value Amount Value
(000 Omitted)
FINANCIAL ASSETS
Cash and due from banks $ 3,853 $ 3,853 $ 5,214 $ 5,214
Securities available for 29,680 29,680 37,675 37,675
sale
Federal Reserve, Atlantic 1,401 1,401 1,772 1,772
Central Bankers Bank,
and
Federal Home Loan Bank
stocks
Loans receivable (net) 101,389 101,529 107,236 108,245
Accrued interest 657 657 939 939
receivable
FINANCIAL LIABILITIES
Time certificates 59,628 60,791 63,993 65,429
Other deposits 51,497 51,497 49,032 49,032
Accrued interest payable 255 255 314 314
Other borrowed funds 18,825 20,258 31,250 33,452
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 to named third parties of generally double
their current salary level, and is also funded by single premium life
insurance.
Note 18. Deferred Compensation and Other Benefit Programs (Continued)
As a result of these plans, the following items are recognized in the
financial statements:
2003 2002 2001
Asset
Cash surrender value of life insurance $5,229,926 $4,657,795 $4,430,903
Liabilities
Supplemental executive retirement plan 798,930 653,785 501,946
Deferred directors fees liability 328,592 272,818 219,808
Income
Earnings on cash surrender value of life 258,209 258,203 249,418
insurance
Expenses
Life insurance expense 39,078 31,311 31,276
Supplemental executive retirement 145,145 151,839 149,915
expense
Deferred directors fees 63,711 54,695 50,148
Director emeritus fees 12,000 12,000 12,000
Payments made to retired director 1,685 1,685 1,685
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 at
December 31, 2003 (approximately 22% of loan portfolio and 136% of
stockholders' equity).
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.
The Corporation also has a significant concentration in FNMA and FHLMC
preferred stocks, representing 37% of total investments and 72% of
stockholders' equity at December 31, 2003.
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
SELECTED FIVE-YEAR FINANCIAL DATA
2003 2002 2001 2000 1999
Income (000 omitted)
Interest income $ 8,469 $ 9,837 $ 10,184 $ 9,992 $ 8,759
Interest expense 3,175 4,271 5,432 5,210 4,325
Provision for loan losses 1,265 255 15 45 195
--------- --------- --------- --------- ---------
Net interest income after 4,029 5,311 4,737 4,737 4,239
provision for loan losses
Securities gains (losses) 86 1 57 6 6
Other operating income 717 673 582 516 583
Other operating expenses 4,012 3,778 3,450 3,370 3,011
--------- --------- --------- --------- ---------
Income before income taxes 820 2,207 1,926 1,889 1,817
Applicable income tax ( 10) 477 440 450 380
(benefit)
--------- --------- --------- --------- ---------
Net income $ 830 $ 1,730 $ 1,486 $ 1,439 $ 1,437
========= ========= ========= ========= =========
Per share amounts are based on following weighted averages:
2003 - 492,810 2001 - 492,747 1999 - 495,000
2002 - 492,772 2000 - 494,054
Income before income taxes $ 1.66 $ 4.48 $ 3.91 $ 3.82 $ 3.67
Applicable income taxes ( .02) .97 .89 .91 .77
Net income 1.68 3.51 3.02 2.91 2.90
Cash dividend paid 1.05 1.02 .95 .86 .86
Book value 33.03 33.81 30.94 28.75 25.76
Year-End Balance Sheet Figures (000 omitted)
Total assets $ 147,743 $ 162,282 $ 150,855 $ 140,480 $ 128,478
Net loans 101,389 107,236 103,656 102,058 90,995
Total investment securities 31,081 39,447 31,899 24,643 24,436
Deposits-noninterest bearing 13,925 16,155 13,486 13,025 12,354
Deposits-interest bearing 97,200 96,870 103,552 92,107 90,957
Total deposits 111,125 113,025 117,038 105,132 103,311
Liabilities for borrowed money 18,825 31,250 17,325 20,000 11,475
Total stockholders' equity 16,278 16,659 15,244 14,204 12,753
Ratios (includes net unrealized gain/loss on AFS securities)
Average equity/average assets 11.05% 10.19% 10.17% 9.82% 10.36%
Return on average equity 4.89% 10.91% 10.12% 10.94% 11.19%
Return on average assets 0.54% 1.11% 1.03% 1.07% 1.16%
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the years ended
December 31, 2003 and 2002 are as follows:
2003 2002
($ 000 omitted except per share) - - - - - - - - Quarter Ended - - - - - - - - - - - - - Quarter Ended - -
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. Dec. 31
30
Interest income $ 2,305 $ 2,035 $ 2,115 $ 2,014 $ 2,443 $ 2,575 $ 2,500 $ 2,319
Interest expense 849 807 776 743 1,064 1,132 1,118 957
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 1,456 1,228 1,339 1,271 1,379 1,443 1,382 1,362
Provision for loan losses 30 205 1,030 0 15 110 115 15
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after 1,426 1,023 309 1,271 1,364 1,333 1,267 1,347
provision for loan losses
Securities gains (losses) 0 150 0 ( 64) 1 0 0 0
Other income 194 199 183 141 156 161 157 199
Other expenses 969 970 1,002 1,071 936 933 965 944
------- ------- ------- ------- ------- ------- ------- -------
Operating income before income 651 402 ( 510) 277 585 561 459 602
Applicable income taxes 144 120 ( 280) 6 151 122 78 126
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 507 $ 282 ($ 230) $ 271 $ 434 $ 439 $ 381 $ 418
======= ======= ======= ======= ======= ======= ======= =======
Net income applicable to common
stock
Per share data:
Net income $ 1.03 $ .57 ($ .47) $ .55 $ .88 $ .89 $ .77 $ .97
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
YEARS ENDED DECEMBER 31
2003 2002 2001
(000 omitted) Average Interest Rate Average Interest Rate Average Interest Rate
Balance Balance Balance
ASSETS
Investment
securities:
Taxable interest $ 32,341 $ 1,440 4.4% $ 34,783 $ 2,102 6.0% $23,097 $ 1,410 6.1%
Nontaxable 1,657 75 4.5 2,240 102 4.6 2,817 135 4.8
interest income --------- --------- --- --------- --------- --- -------- --------- ---
Total investment 33,998 1,515 4.5 37,023 2,204 6.0 25,914 1,545 6.0
securities
Loans (net of 107,140 6,954 6.5 105,219 7,621 7.2 105,028 8,585 8.2
unearned
discounts)
Other short-term 0 0 0.0 723 12 1.6 1,514 54 3.6
investments --------- --------- --- --------- --------- --- -------- --------- ---
Total interest 141,138 $ 8,469 6.0% 142,965 $ 7,837 6.9% 132,456 $ 10,184 7.7%
earning
assets
--------- -------- --------
Allowance for loan ( 1,159) ( 920) ( 863)
losses
Cash and due from 3,748 3,667 3,601
banks
Bank premises and 3,869 3,861 3,572
equipment
Other assets 6,025 5,990 5,618
--------- --------- --------
-
Total assets $ 153,621 $ 155,563 $
144,384
========= ========= ========
=
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing $ 11,925 $ 76 0.6% $ 11,431 $ 85 .7% $ $ 199 1.8%
demand deposits 10,992
Savings deposits 22,579 198 0.9 18,438 237 1.3 16,891 363 2.1
Time deposits 61,069 1,858 3.0 74,238 2,967 4.0 71,974 3,908 5.4
Borrowings 25,290 1,043 4.1 19,464 982 5.0 5.9
16,389 962
--------- --------- --- --------- --------- --- -------- --------- ---
-
Total interest 120,863 $ 3,175 2.6% 123,571 $ 4,271 3.5% 116,246 $ 5,432 4.7%
bearing
liabilities
--------- --------- --------
Demand deposits 14,966 15,237 12,534
Other liabilities 821 905
921
---------- --------- --------
-
Total liabilities 136,650 139,713 129,701
Stockholders' equity 16,971 15,850
14,683
--------- --------- --------
-
Total liabilities $ 153,621 $ 155,563 $
& stockholders' 144,384
equity
========= ========= ========
=
Net interest $ 5,294 3.8% $ 5,566 3.9% $ 4,752 3.6%
income/net
yield on
average
earning
assets
======== ====== ======== ===== ======== =====
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
CHANGES IN NET INTEREST INCOME
- - - - - - 2003 Versus 2002 - - - - - - - - - 2002 Versus 2001 - -
- - - - - - -
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 $ 121 ($ 760) ($ 639) $ 15 ($ 1,007) ($ 992)
unearned discounts)
Taxable investment ( 190) ( 500) ( 690) 740 ( 20) 720
securities
Nontaxable investment ( 26) ( 1) ( 27) ( 27) ( 6) ( 33)
securities
Other short-term ( 12) 0 ( 12) ( 28) ( 14) ( 42)
investments
-------- --------- --------- ------- --------- ---------
Total interest ( 107) ( 1,261) ( 1,368) 700 ( 1,047) ( 347)
income
-------- --------- --------- ------- --------- ---------
Interest Expense
Interest bearing ( 2) ( 7) ( 9) 6 ( 121) ( 115)
demand
Savings deposits 57 ( 96) ( 39) 24 ( 150) ( 126)
Time deposits ( 524) ( 585) ( 1,109) 101 ( 1,042) ( 941)
Short-term 283 ( 222) 61 187 ( 166) 21
borrowings
-------- --------- --------- ------- --------- ---------
Total interest ( 186) ( 910) ( 1,096) 318 ( 1,479) ( 1,161)
expense
-------- --------- --------- ------- --------- ---------
Net interest income ($ 272) $ 814
======== ========
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 financial tables/statistics, financial statements and notes to the
financial statements presented elsewhere in this report.
OPERATING RESULTS
Overview
Net after tax income was $ 830,000 for 2003 compared to $ 1,730,000
for 2002, representing a decrease of $ 900,000, or 52.0%. Net income on an
adjusted per share basis for 2003 was $ 1.68, a decrease of $ 1.83 from the
$ 3.51 per share realized during 2002.
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.
Net Interest Income
Total interest income for 2003 was $ 8,469,000 compared with
$ 9,837,000 earned during 2002, for a decrease of $ 1,368,000, or 13.9%. While
there was a decrease in average investments in 2003, the decrease in interest
income is due primarily to a significant decrease in interest rates earned on
loans and investments in 2003 compared with the same period in 2002.
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 decreased 1.3% in 2003 and increased 7.9% in
2002. Average investments decreased 8.2% in 2003, with the decrease
concentrated in U. S. Government Agency securities and FNMA/FHLMC preferred
stocks. The 2002 increase was concentrated in U. S. Government Agencies and
FNMA/FHLMC preferred stocks. Average loans, which typically produce higher
yields than investments, increased 1.8% in 2003 and 0.2% in 2002. Net loans at
December 31, 2003 stood at $ 101,389,000 compared to $ 107,236,000 as of
December 31, 2002, a decrease of 5.5%. Net loans at December 31, 2002 were up
3.5% over those at December 31, 2001.
Total interest expense was $ 3,175,000 for 2003, a decrease of
$ 1,096,000, or 25.7%, from the $ 4,271,000 for 2002. 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 decreases were due primarily to a significant
decrease in interest rates paid on deposits and short-term borrowings.
Average interest-bearing liabilities decreased 2.2% in 2003 and
increased 6.3% in 2002. Average borrowings increased 31.0% while average time
deposits, which typically pay higher yields, decreased 21.5% in 2003 after
increasing 3.1% in 2002. Average interest-bearing demand deposits and savings
deposits increased 4.3% and 22.5%, respectively, in 2003, and increased 4.0% and
9.2%, respectively, in 2002. Interest bearing deposits stood at $ 97,200,000 at
December 31, 2003 compared to $ 96,870,000 as of December 31, 2002, an increase
of 0.3%. Interest-bearing deposits at December 31, 2002 were 6.5% lower than at
December 31, 2001.
OPERATING RESULTS (Continued)
Net interest income is the difference between total interest income
and total interest expense. Interest income is generated through earning
assets, which include loans, deposits with other banks, and investments.
Interest income is dependent on many factors including the volume of earning
assets; 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 2003 totaled $ 5,294,000, down $ 272,000, or
4.9% from 2002. 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 and expenses
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 $ 130,000, or 19.3%, from 2002 to 2003. The
increase in 2003 resulted primarily from $ 24,000 of income generated on the
sale of PHEAA loans and $ 81,000 from gains on the sale of investments. 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.
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 decreased 1.1% for 2003, primarily due to
merit pay increases which were offset by turnover of staff that was replaced
with lower payscale employees, versus a 10.8% increase in 2002. The 2002
increase resulted primarily from staffing a new branch office opened in February
2002. Occupancy and furniture and equipment expenses increased 11.7% and 2.3%
for 2003 and 2002, respectively, primarily due to increased equipment and
building maintenance costs, utilities and depreciation. Other operating
expenses increased 13.2% and 12.4% for 2003 and 2002, respectively, primarily
due to increases in advertising costs, OCC assessments, PA shares tax, printing
and supplies, telephone and other overhead expenses.
Income Taxes
Applicable income taxes changed between 2003, 2002, and 2001 because
of changes in pretax accounting income and taxable income. The effective tax
rate for 2003 was (1.2%) compared to 21.6% and 22.8% for 2002 and 2001,
respectively. The decrease in the effective income tax rate for 2003 was due
primarily to an increase in deferred tax assets that was a result of the
$1,265,000 increase in the Reserve for Loan Losses balance. This effectively
lowered the pre-tax book income to a level in which tax exempt interest, the
dividends received deduction, and the non-taxable increase in cash surrender
value of life
insurance fully eliminated all taxes. The 2002 decrease 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.
FINANCIAL CONDITION
Total assets at December 31, 2003 were $ 147,743,000, a 9.0% decrease
over December 31, 2002. Net loans at December 31, 2003 totaled $ 101,389,000, a
decrease of 5.5% over December 31, 2002. These reductions were the result of a
decision to start reducing the Bank's concentration in agri-business loans,
which make up 60% of classified loans at December 31, 2003. In addition,
investments maturing during 2003 were utilized to pay down $ 12.4 million in
FHLB borrowings.
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.
Allowance for Loan Losses and Related Provision
The provision for loan losses was $ 1,265,000 in 2003 compared to
$ 255,000 in 2002 and $ 15,000 in 2001. The provisions were based on
management's evaluation of the adequacy of the reserve balance and represent
amounts deemed necessary to maintain the reserve at the appropriate level based
on the quality of the loan portfolio and economic conditions. Actual charge-
offs (net of recoveries) were $ 396,000 in 2003 and $ 70,000 in 2002. These
were significantly higher than in previous years, and were directly related to
agri-business loans. 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
2003 2002 2003 2002
Loans secured by real estate $ 0 $ 59 $ 3,314 $ 1,525
Personal loans 0 11 74 0
Commercial and other loans 0 0 771 71
--------- ------- ------- -------
Total loans $ 0 $ 70 $ 4,159 $ 1,596
========= ======= ======= =======
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
Commercial borrowers with lending relationships over $ 500,000 and
agribusiness borrowers with lending relationships over $ 250,000 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 35 - 50%
Substandard 3 - 5%
Special Mention 1 - 3%
FINANCIAL CONDITION (Continued)
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 significant increase in the provision for loan
losses for 2003 compared to 2002 are significant increases in nonaccrual and
classified loans. No loans were past-due 90 days or more still accruing
interest at December 31, 2003. Nonaccrual loans have increased more than 160%
over the past four quarters and represent 4.0% of totals loans compared with
1.5% of total loans at December 31, 2002. At December 31, 2003, 80% of loans on
nonaccrual status were fully-secured by real estate. Classified loans on
December 31, 2003 were $ 4,728,000 compared to $ 4,264,000 on December 31, 2002,
an increase of 11%. The Corporation has identified agribusiness lending as a
concentration of credit. At December 31, 2003, agribusiness loans comprised
$ 2,484,000, or 60%, of the classified loans. In addition, the allowance and
loans placed on nonaccrual status were adjusted in the third quarter 2003 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. They have also
classified as "nonaccrual" several loans with current payment status (amounting
to $ 1,956,000) due to perceived weaknesses in the collateral or borrower's
financial condition.
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, 91% 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% of the
classified loans.
Total deposits decreased 1.7% to $ 111,125,000 at December 31, 2003
compared with $ 113,025,000 at December 31, 2002. Non-interest-bearing demand
deposits decreased 13.8% while interest-bearing deposits increased 0.3%. 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 was $ 16,278,000 at December 31, 2003 compared
with $16,659,000 at December 31, 2002, which was up 9.3% over the balance at
December 31, 2001. Accumulated earnings for 2003 were offset by dividends
declared and paid of $ 517,000 and a $ 695,000 increase in net unrealized losses
(net of tax effect). 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 11.0%
and 10.3% of total assets at the end of 2003 and 2002, respectively. Cash
dividends of $ 1.05 and $ 1.02 per share were paid in 2003 and 2002,
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 December 31, 2003, the company
had repurchased 2,185 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. At December 31, 2003 and 2002, the
Bank had borrowings of $ 18,825,000 and $ 31,250,000, respectively. At December
31, 2003, the Bank had additional borrowing capacity available of $ 53,000,000.
Interest rate sensitivity is the matching or mismatching of the
maturity and rate structure of the interest-bearing assets and liabilities. It
is the objective of management to control the difference in the timing of the
rate changes for these assets and liabilities to preserve a satisfactory net
interest margin. The following table approximately reflects the matching of
assets and liabilities maturing within one year and thereafter, which management
feels is adequate to meet customer cash and credit needs while maintaining a
desired interest rate spread.
Due Due Due Due Due Total
0 - 30 31 - 90 91 - 180 181 - 360 After
Days Days Days Days 1 Year
Rate Sensitive Assets
Investment securities $ 10,574 $ 2,350 $ 3,527 $ 7,634 $ 6,996 $ 31,081
Real estate, commercial 23,289 5,059 7,126 8,898 58,917 103,289
and consumer loans
-------- -------- -------- -------- -------- ---------
$ 33,863 $ 7,409 $ 10,653 $ 16,532 $ 65,913 $ 134,370
======== ======== ======== ======== ======== =========
Rate Sensitive Liabilities
Short-term borrowings $ 3,825 $ 0 $ 0 $ 0 $ 0 $ 3,825
Long-term borrowings 0 0 0 0 15,000 15,000
Certificates of deposit 3,915 1,934 2,245 1,708 6,724 16,526
over $ 100,000
Other certificates of deposit 10,990 3,908 5,661 6,492 16,051 43,102
Money market deposit accounts 0 0 1,866 3,734 1,866 7,466
Other interest-bearing 0 0 3,010 12,042 15,054 30,106
deposits
-------- --------- -------- -------- -------- ---------
18,730 5,842 12,782 23,976 54,695 116,025
-------- --------- -------- -------- -------- ---------
Cumulative GAP - 12/31/03 $ 15,133 $ 16,700 $ 14,571 $ 7,127 $ 18,345 $ 18,345
======== ========= ======== ======== ======== =========
Cumulative GAP - 12/31/02 ($ 4,565) ($ 2,953) $ 1,593 ($ 8,888) $ 17,634 $ 17,634
========= ========== ======== ========= ======== =========
LIQUIDITY (Continued)
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 2004 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 $ 16.2 million at December 31, 2003. Regulatory authorities
have established capital guidelines in the form of the "leverage" and "risk-
based capital" ratios. The leverage ratio compares capital to total balance
sheet assets, while the risk-based ratios compare capital to risk-weighted
assets and off-balance-sheet activity in order to make capital levels more
sensitive to risk profiles of individual banks. A comparison of Fulton
Bancshares Corporation's capital ratios to regulatory minimums at December 31
is as follows:
Fulton Regulator
Bancshares y Minimum
Corporation Requireme
nts
2003 2002
Leverage ratio 11.3% 10.4% 3%
Risk-based capital ratio
Tier I (core capital) 15.7% 14.5% 4%
Combined Tier I and Tier II
(core capital plus allowance
for loan losses) 16.9% 15.4% 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.
2003 2002 2001
Equity capital at December 31
($ 000 omitted)
$ 16,278 $ 16,659 $ 15,244
Equity capital as a percent of assets
at December 31
11.02% 10.27% 10.10%
Return on average assets 0.54% 1.11% 1.03%
Return on average equity 4.89% 10.91% 10.12%
Cash dividend payout ratio 62.33% 29.06% 31.50%
MARKET RISK MANAGEMENT
The Bank has risk management policies to monitor and limit exposure to
market risk, and works diligently to take advantage of profit opportunities
available in interest rate movements.
Management continuously monitors liquidity and interest rate risk
through its Asset-Liability Committee reporting, and reprices products in order
to maintain desired net interest margins. Management expects to continue to
direct its marketing efforts toward attracting more low cost retail deposits
while competitively pricing its time deposits in order to maintain favorable
interest spreads, while minimizing structural interest rate risk.
MARKET RISK MANAGEMENT (Continued)
The following table sets forth the projected maturities and average
rates for all rate sensitive assets and liabilities based on the following
assumptions. All fixed and variable rate loans were based on original
maturities since the bank has not experienced, and does not expect, a
significant rewriting of loans. Investments are based on maturity date except
certain long-term agencies, which are classified by call date. The bank has
historically experienced very little deposit runoff and has generally had net
gains in deposits over the years. Based on this experience, it was estimated
that maximum runoff of noninterest-bearing checking, NOW checking and other
savings would be 10%, and maximum runoff of money market deposits would be 33%.
It was estimated that maximum runoff of time deposits would be 25% and these
deposits are classified by original maturity date.
- - - - - - - - - - - Principal/Notional Amount Maturing In - - - - - - - - - -
(In millions)
Rate sensitive assets 2004 2005 2006 2007 2008 Thereafter Total Fair
Value
Fixed rate loans $ 7,779 $ 3,083 $ 2,576 $ 2,305 $ 2,088 $ 18,827 $ 36,658 $ 36,798
Average interest rates 6.88% 8.63% 8.30% 7.97% 7.78% 7.31% 7.46%
Variable rate loans 24,790 2,728 2,790 2,548 2,486 31,289 66,631 66,631
Average interest rates 4.94% 5.90% 5.77% 5.88% 5.91% 6.02% 5.63%
Fixed rate securities 19,688 0 1,300 0 4,315 1,733 27,107 26,282
Average interest rates 4.22% 0% 5.13% 0% 3.90% 4.14% 4.21%
Variable rate 2,701 782 625 469 262 0 4,839 4,799
securities
Average interest rates 2.48% 3.07% 3.07% 3.07% 3.07% 0% 2.74%
Rate sensitive
liabilities
Noninterest-bearing 1,393 1,253 1,128 1,015 914 8,222 13,925 13,925
checking
Average interest rates N/A N/A N/A N/A N/A N/A N/A
Savings and interest- 6,322 5,048 4,062 3,295 2,696 16,149 37,572 37,572
bearing checking
Average interest rates 0.73% 0.73% 0.73% 0.73% 0.73% 0.73% 0.73%
Time deposits 9,213 7,496 6,123 6,690 7,527 22,579 59,628 60,791
Average interest rates 2.40% 3.32% 3.45% 4.16% 3.34% 3.34% 2.89%
Variable rate 3,825 0 0 0 0 15,000 18,825 20,258
borrowings
Average interest rates 1.03% 0 0 0 0 5.93% 4.93%
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement 150 - Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity, was issued May of 2003 and is effective for financial instruments
entered into or modified after May 31, 2003. This statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. Provisions of this statement are consistent
with the Board's proposal to revise the definition of liabilities to encompass
certain obligations that a reporting entity can or must settle by issuing its
own equity shares, depending on the nature of the relationship established
between the holder and the issuer. Management does not expect there to be a
significant impact from this statement since the Corporation currently does not
have any obligations requiring settlement by the issuance of its own shares of
stock.
In December 2003, the Financial Accounting Standards Board released
Financial Interpretation No. 46, Consolidation of Variable Interest Entities.
This Interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, addresses consolidation by business enterprises of
variable interest entities, which have one or more of the following
characteristics:
1.The equity investment at risk is not sufficient to permit the
entity to finance its activities without additional subordinated
financial support provided by any parties, including the equity
holders.
2.The equity investors lack one or more of the following essential
characteristics of a controlling financial interest:
a.The direct or indirect ability to make decisions about the
entity's activities through voting rights or similar rights;
b.The obligation to absorb the expected losses of the entity;
c.The right to receive the expected residual returns of the entity.
3.The equity investors have voting rights that are not proportionate
to their economic interests, and the activities of the entity
involve or are conducted on behalf of an investor with a
disproportionately small voting interest.
Management does not expect this interpretation to have a significant
impact since the Corporation does not have any investment in any entity with the
aforementioned characteristics.
STOCK MARKET ANALYSIS AND DIVIDENDS
The Corporation's common stock is traded inactively in the over-the-
counter market. As of December 31, 2003 the number of shareholders of record
was about or around 500.
Market Cash Market Cash
Price Dividend Price Dividend
2003 2002
First Quarter $ 44.15 $ .23 $ 35.25 $ .22
Second Quarter 49.00 .23 35.25 .22
Third Quarter 55.05 .27 37.50 .26
Fourth Quarter 49.20 .32 45.00 .32
Exhibit 14
FULTON BANCSHARES CORPORATION
CODE OF ETHICS
The Directors, officers and employees of Fulton Bancshares Corporation (the
"Company"), and any and all subsidiaries, hold an important and elevated role in
corporate governance. They are vested with both the responsibility and
authority to protect and preserve the interests of all of the Company's
constituents, including shareholders, customers and citizens of the communities
in which we conduct business. The maintenance of extremely high standards of
honest, ethical and impartial conduct is essential to assure the proper
performance of the Company's business and the maintenance of the public's trust.
This Code of Ethics prescribes the policies and procedures to be employed and
enforced in the Company's operations. This Code augments The Fulton County
National Bank & Trust Company Employee Handbook.
* It is your responsibility to comply with the law and behave in an
ethical manner. This responsibility cannot be delegated or assumed
by the Company.
* This Code cannot anticipate every possible situation or cover every
topic in detail. Most of the topics covered in this Code are
explained in greater detail in The Fulton County National Bank &
Trust Company Employee Handbook. From time-to-time the Company may
establish compliance programs to address specific subjects.
If you are unclear about a situation, seek guidance before taking
action.
* The standards in this Code do not necessarily take into account all
legal requirements. Where more restrictive local laws or
requirements exist, those take precedence.
* Comply with all applicable governmental rules and regulations.
Failure to obey laws and regulations violates this Code and may
expose both you and the Company to criminal or civil prosecution.
Any violation of this Code or other compliance programs may result
in corrective action, up to and including termination. The
Company may also seek civil remedies from you and even refer
criminal misconduct to law enforcement agencies.
* You are responsible for reporting suspected violations of this Code.
* If you have a question about a topic covered in this Code, please
review The Fulton County National Bank & Trust Company Employee
Handbook. If you still have a concern regarding any unethical
or illegal conduct, please contact DoriAnn Hoffman, our Corporate
Compliance Officer, or follow the guidelines in the Whistleblower
Policy.
Conflicts of Interest
A "conflict of interest" exists any time one faces a choice between what is in
his/her personal interest (financial or otherwise) and the interest of the
Company. These situations are not always easy to avoid. When a conflict of
interest arises, it is important that officers act with great care to avoid even
the appearance that their actions were not in the best interest of the Company.
If you find yourself in a position where your objectivity may be questioned
because of individual interest or family or personal relationships, notify
DoriAnn Hoffman, our Corporate Compliance Officer, immediately.
Ownership Interests
Board of Directors approval is required for the Company to do business with a
company in which a member of the Board of Directors, an officer, an employee or
a family member of a director, officer or employee owns - directly or indirectly
- - an interest. If you or a family member own or acquire an interest that is
greater than 5% in any company, Board approval is needed:
* If that company has more than $1,000 in deposits, loans or does more
than $1,000 in annual sales of goods or services to the Company or
its affiliates; or
* If you help make that company's purchasing or lending decisions
or have a part in payment for the goods and services.
If your ownership interest does not meet any of the above criteria, Board
approval is not needed, but you remain obligated to keep the Company's interests
first in mind.
Gifts, Meals, Services and Entertainment
One should not request or accept anything that might be used as a means to
influence, or even appear to influence, you against the Company's best
interests. Personal gifts should not be accepted other than those considered
common business courtesies and for which one would reasonably expect to give
something similar in return in the normal course of business.
Safeguarding Company Assets/Accuracy of Books and Records
The Company maintains internal controls to provide direction on protecting
Company assets and financial accountability. The controls are based upon the
following principles.
Do not:
* Make personal use of Company assets that creates any additional costs
for theCompany, interferes with work duties or violates any Company
policies;
* Allow Company property to be used to help carry out illegal acts;
* Manipulate financial accounts, records or reports for personal gain;
* Maintain off-the-book accounts to facilitate questionable or illegal
payments; or
* Violate any law or regulation.
Do:
* Ensure effective internal controls and procedures are designed and
implemented;
* Prepare project budget proposals with accurate information;
* Maintain books, accounts and records according to generally accepted
accounting principles, using enough detail to reflect accurately and
fairly Company transactions;
* Record transactions in a timely manner, so that no misleading financial
information is created. (These transactions include, but are not
limited to, income, expense, indebtedness, obligation, reserves and
acquisition or disposition of assets, etc.); and
* Give full, fair, accurate, timely, and understandable disclosure in
any and all periodic reports filed with the Securities Exchange
Commission.
Insider Trading
Insider trading is a crime that can carry severe penalties. If you know
material, confidential information about the Company or any company with whom we
have a business relationship and you trade Company securities, such as stocks or
bonds, while in possession of that information or tell others about it before it
is made public, you may have violated the insider trading laws.
Material information is the type of news that would affect a reasonable
investor's decision on whether or not to invest in the Company's stock.
Examples include plans to issue securities, sharp changes in earnings patterns,
changes in dividend rates, changes in key management personnel, mergers,
acquisitions, and important regulatory actions affecting the Company. This
policy forbids you from trading not only in Company stock, but also in stock of
our suppliers, customers or other companies with whom we have a business
relationship while in possession of material inside information learned in the
course of your employment at our Company.
We encourage all members of the Board of Directors and officers to invest in our
stock. However, if you have access to any information not readily available to
the public, you must be very careful when trading stock to be sure you have not
traded while in possession of material non-public information. When you have
such information:
* Do not tell anyone not authorized to have the information. A casual
remark to a friend may find its way to a broker and eventually to
the entire financial community thereby requiring the Company to make
a premature or unplanned public announcement. This "tipping" may
be illegal and damaging to the Company.
* In compliance with the Sarbanes-Oxley Act of 2002, do not trade and
trading is prohibited in the Company's stock (or that of an
applicable outside company) until the news has been made public for
a least two full business days.
Circumstances suggesting the possibility of insider trading may
result in an investigation by governmental authorities of the
Company and stockbroker records of stock trading transactions.
This investigation could damage our Company's reputation and result
in liability or penalties, including criminal charges and
fines against the individual.
* This policy against insider trading also covers transfers into and
out of the Company stock or savings plans and changes in patterns
involving purchases of our stock within the plans. However,
generally, regular scheduled monthly purchases of the Company stock
within plans are not prohibited.
If you are planning to effect a transaction in our securities, you must contact
DoriAnn Hoffman, our Corporate Compliance Officer, in advance.
Bribery, Kickbacks and Other Improper Payments
The Company, our Board of Directors, officers and employees must maintain high
ethical and professional standards in all dealings.
* Do not directly or indirectly promise, offer or make payment in money
or anything of value to anyone, including a government official,
agent or employee of a government, political party, labor
organization or business entity or a candidate of a political party,
with the intent to induce favorable business treatment or to
improperly affect business or governmental decisions.
* Our Code does not take into account all local legal requirements.
Where more restrictive local laws exist, those take precedence.
In general, the Company does not consider ordinary and reasonable
business entertainment or gifts of insubstantial value that are
customary and legal in the local market to be improper.
* Document any entertainment of and gifts to customers and potential
customers.
* Loans are not made by the Company to its Board members, officers or
employees. Loans may be made by our banking subsidiaries and will
comply with all federal and state laws, statutes and regulations.
ACKNOWLEDGMENT
I, the undersigned, hereby acknowledge that I have received a copy of the FULTON
BANCSHARES CORPORATION Code of Ethics. I further certify that I have reviewed
the Code of Ethics, and that I understand its provisions and what they require
of me. I understand that a violation of this Code of Ethics may result in the
termination of my employment and/or a request to resign.
- ------------------------------ ------------------------------
Date Signature
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PRINT NAME
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 17, 2004, appearing in the 2003 annual report on
shareholders incorporated by reference in this Form 10-K of Fulton Bancshares
Corporation for the year ended December 31, 2003.
/S/SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, PA
March 20, 2004
EXHIBIT 31.1
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-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 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 and presented in this annual report our
conclusions about the effectiveness of the disclosure controls and
procedures as of the end of the period covered by this annual report
based on such evaluation; and
(c) disclosed in this annual 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.
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 and material weaknesses in the design
or operation of the 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: March 26, 2004
-----------------------------
By: /s/Clyde H. Bookheimer
-----------------------------
Clyde H. Bookheimer
President and Chief
Executive Officer,
Director
EXHIBIT 31.2
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-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 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 and presented in this annual report our
conclusions about the effectiveness of the disclosure controls and
procedures as of the end of the period covered by this annual report
based on such evaluation; and
(c) disclosed in this annual 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.
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 and material weaknesses in the design
or operation of the 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: March 26, 2004
-----------------------------
By: /s/Doriann Hoffman
-----------------------------
Doriann Hoffman
Vice President and Treasurer
(Chief Financial Officer)
EXHIBIT 32.1
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, 2003 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, 2004
--------------
EXHIBIT 32.2
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, 2003 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
(Chief Financial Officer)
Dated: March 26, 2004
---------------