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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2004
Commission file number: 33-850626
FULTON BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Commonwealth of Pennsylvania 25-1598464
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Lincoln Way East
McConnellsburg, Pennsylvania 17233
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (717) 485-3144
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange 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 August 3, 2004
(Common stock, .625 par value) 492,790
Page 1 of 32
FULTON BANCSHARES CORPORATION
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Condensed consolidated balance sheets - June 30, 2004
and December 31, 2003 4
Condensed consolidated statements of income - three months
ended June 30, 2004 and 2003 5
Condensed consolidated statements of comprehensive income -
three months ended June 30, 2004 and 2003 6
Condensed consolidated statements of income - six months
ended June 30, 2004 and 2003 7
Condensed consolidated statements of comprehensive income -
six months ended June 30, 2004 and 2003 8
Condensed consolidated statements of cash flows - six
months ended June 30, 2004 and 2003 9
Notes to condensed consolidated financial statements 10 - 12
Item 2 - Management's discussion and analysis of financial
condition and results of operations 13 - 21
Item 3 - Quantitative and qualitative disclosures about
market risk 21
Item 4 - Controls and procedures 21
PART II - OTHER INFORMATION 22
Item 1 - Legal proceedings 23
Item 2 - Changes in securities, use of proceeds, and issuer
purchase of equity securities 23
Item 3 - Defaults upon senior securities 23
Item 4 - Submission of matters to a vote of security holders 23
Item 5 - Other information 23
Item 6 - Exhibits and reports on Form 8-K 24
Signatures 25
Exhibits 26 - 32
Page 2 of 32
PART I - FINANCIAL INFORMATION
Page 3 of 32
FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003*
(Unaudited)
(000 Omitted)
ASSETS
Cash and due from banks $ 4,390 $ 3,853
Federal funds sold 1,250 0
Available-for-sale securities 27,740 29,680
Federal Reserve, Atlantic Central Bankers Bank, 1,058 1,401
Federal Home Loan Bank, at cost which
approximates market
Loans, net of allowance for loan losses 97,800 101,389
Bank building, equipment, furniture & fixtures, net 3,742 3,759
Accrued interest/dividends receivable 673 657
Cash surrender value of life insurance 5,334 5,230
Other real estate owned 1,616 0
Other assets 1,718 1,775
--------- -----------
Total assets $ 145,321 $ 147,744
========= ===========
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 16,808 $ 13,925
Interest-bearing deposits:
Savings deposits 37,368 36,131
Time deposits 58,701 61,069
--------- -----------
Total deposits 112,877 111,125
Accrued interest payable 167 255
Other borrowed money 15,000 18,825
Other liabilities 1,407 1,261
--------- -----------
Total liabilities 129,451 131,466
--------- -----------
STOCKHOLDERS' EQUITY
Capital stock, common, par value - $ 0.625;
4,000,000 shares authorized; 495,000 shares
issued 309 309
Surplus 2,051 2,051
Retained earnings 14,777 14,576
Net unrealized gains/(losses) available - for-sale
securities ( 1,178) ( 570)
Treasury stock: 2,210 and 2,185 shares,
respectively, at cost ( 89) ( 88)
--------- -----------
Total stockholders' equity 15,870 16,278
--------- -----------
Total liabilities and
stockholders' equity $ 145,321 $ 147,744
========= ===========
* Condensed from audited financial statements
The accompanying notes are an integral part of these
condensed financial statements.
Page 4 of 32
FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
2004 2003
(000 Omitted, except
for per share data)
Interest & Dividend Income $ 1,571 $ 1,679
Interest & fees on loans
Interest & dividends on investment securities:
U.S. Government securities 118 70
Obligations of state & political
subdivisions 52 14
Interest on federal funds sold 4 0
Other interest & dividend income 133 272
--------- ---------
Total interest & dividend income 1,878 2,035
Interest Expense
Interest on deposits 516 537
Interest on other borrowed money 214 270
--------- ---------
Total interest expense 730 807
--------- ---------
Net interest income before provision
for loan losses 1,148 1,228
Provision for loan losses 0 205
--------- ---------
Net interest income after provision
For loan losses 1,148 1,023
--------- ---------
Other Income
Service charges on deposit accounts 45 57
Other fee income 42 52
Other non-interest income 76 90
Securities gains (losses) 6 150
Total other income 169 349
--------- ---------
Other Expense
Salaries and employee benefits 482 411
Fixed asset expenses (including depreciation) 205 188
FDIC insurance premiums 4 4
Other noninterest expenses 398 367
--------- ---------
Total other expnese 1,089 970
--------- ---------
Net income before income taxes 228 402
Applicable income taxes 82 120
--------- ---------
Net income $ 146 $ 282
========= =========
Weighted average number of shares outstanding 492,801 492,810
Net income per share $ 0.30 $ 0.57
Cash dividends declared per share $ 0.23 $ 0.23
The accompanying notes are an integral part of these
condensed financial statements.
Page 5 of 32
FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
2004 2003
(000 Omitted)
Net income $ 146 $ 282
Unrealized gain (loss) on
investments available for sale,
net of tax ( 1,073) ( 7)
Reclassification adjustment for gains
(losses) included in net income 6 150
-------- ---------
Comprehensive income (loss) ($ 921) $ 425
======== =========
The accompanying notes are an integral part of these
condensed financial statements.
Page 6 of 32
FULTON BANCSHARES, CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30, 2004 and 2003
(UNAUDITED)
2004 2003
(000 Omitted, except for
per share data)
Interest & Dividend Income $ 3,179 $ 3,477
Interest & fees on loans
Interest & dividends on investment securities:
U.S. Government securities 185 210
Obligations of state & political subdivisions 104 37
Interest on federal funds sold 4 0
Other interest & dividend income 322 616
--------- ---------
Total interest & dividend income 3,794 4,340
--------- ---------
Interest Expense
Interest on deposits 1,014 1,112
Interest on federal funds purchased 0 0
Interest on other borrowed money 450 544
--------- ---------
Total interest expense 1,464 1,656
--------- ---------
Net interest income before provision
for loan losses 2,330 2,684
Provision for loan losses 0 235
--------- ---------
Net interest income after provision for loan losses 2,330 2,449
--------- ---------
Other Income
Service charges on deposit accounts 90 112
Other fee income 73 126
Other non-interest income 159 155
Securities gains (losses) 10 150
--------- ---------
Total other income 332 543
--------- ---------
Other Expense
Salaries and employee benefits 913 809
Fixed asset expenses (including depreciation) 417 404
FDIC insurance premiums 8 9
Other noninterest expenses 765 717
--------- ---------
Total other expenses 2,103 1,939
--------- ---------
Net income before income taxes 559 1,053
Applicable income taxes 130 264
--------- ---------
Net income 429 $ 789
========= =========
Weighted average number of shares outstanding 492,808 492,810
Net income per share $ 0.87 $ 1.60
Cash dividends declared per share $ 0.46 $ 0.46
The accompanying notes are an integral part of these
condensed financial statements.
Page 7 of 32
FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
2004 2003
(000 Omitted)
Net income $ 429 $ 789
Unrealized gain (loss) on
investments available for sale,
net of tax ( 608) ( 8)
Reclassification adjustment for gains
(losses) included in net income 10 150
-------- ---------
Comprehensive income (loss) ($ 169) $ 931
The accompanying notes are an integral part of these
condensed financial statements.
Page 8 of 32
FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2004 and 2003
(UNAUDITED)
2004 2003
(000 Omitted)
Cash flows from operating activities:
Net income $ 429 $ 789
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 197 182
Provision for loan losses 0 235
Gain on sale - Securities ( 10) ( 150)
Gain on sale - OREO ( 12) 0
Gain on sale - loans ( 13) 0
Other - Net 102 237
--------- ---------
Net cash provided by operating activities 693 1,293
--------- ---------
Cash flows from investing activities:
Purchase of investment securities -
Available-for-sale ( 3,523) ( 5,503)
Redemption of Federal Home Loan Bank Stock 343 28
Sales of available-for-sale securities 1,080 1,614
Maturities of available-for-sale securities 3,451 10,852
Net decrease (increase) in loans 3,602 2,035
(Purchase)/Sale of OREO ( 1,398) ( 53)
Purchases of & deposits on bank premises
and equipment - net ( 160) ( 107)
Purchase of directors and officers life 0 ( 353)
insurance
--------- ---------
Net cash provided (used) by investing activities 3,395 8,513
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposits 1,752 ( 2,410)
Purchase of treasury stock ( 1) 0
Dividends paid ( 227) ( 226)
Net increase (decrease) in other borrowed money ( 3,825) ( 5,850)
--------- ---------
Net cash provided (used) by financing activities ( 2,301) ( 8,486)
--------- ---------
Net increase (decrease) in cash and cash 1,787 1,320
equivalents
--------- ---------
Cash and cash equivalents, beginning balance 3,853 5,214
--------- ---------
Cash and cash equivalents, ending balance $ 5,640 $ 6,534
========= =========
Supplemental disclosure of cash flows
information:
Cash paid during the period for:
Interest $ 1,552 $ 1,685
Income taxes 0 327
Supplemental schedule of noncash investing
and financing activities:
Change in unrealized gain (loss) on investments
available for sale (net of deferred taxes) ( 608) ( 8)
The accompanying notes are an integral part of these
condensed financial statements.
Page 9 of 32
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(UNAUDITED)
Review of Interim Financial Statements
The condensed consolidated financial statements as of and for the six
months ended June 30, 2004 and 2003 have been reviewed by independent
certified public accountants. Their report on the review is attached
as Exhibit 99 to the 10-Q filing.
Note 1. Basis of Presentation
The financial information presented at and for the six months ended
June 30, 2004 and 2003 is unaudited. Information presented at
December 31, 2003 is condensed from audited year-end financial
statements. However, unaudited information reflects all adjustments
(consisting solely of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation of the
financial position, results of operations and cash flows for the
interim period.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
in the United States of America for interim financial information.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included and
are of a normal, recurring nature. Operating results for the six-
month period ended June 30, 2004, are not necessarily indicative of
the results that may be expected for the year ending December 31,
2004. These statements should be read in conjunction with notes to
the financial statements contained in the 2003 Annual Report to
Stockholders.
In addition to historical information, this Form 10-Q Report contains
forward-looking statements. The forward-looking statements contained
herein are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected in the
forward-looking statements. Important factors that might cause such
differences include, but are not limited to, those discussed in the
section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations". Readers are cautioned not to
place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. Readers
should carefully review the risk factors described in other documents
the Fulton Bancshares Corporation files from time to time with the
Securities and Exchange Commission.
Note 2. Principles of Consolidation
The consolidated financial statements include the accounts of the
Fulton Bancshares Corporation and its wholly-owned subsidiaries,
Fulton County National Bank & Trust Company and the Fulton County
Community Development Corporation (together, the "Corporation"). All
significant intercompany transactions and accounts have been
eliminated.
Page 10 of 32
Note 3. Cash Flows
For purposes of the statements of cash flows, the corporation has
defined cash and cash equivalents as those amounts included in the
balance sheet captions "cash and due from banks" and "federal funds
sold". As permitted by Statement of Financial Accounting Standards
No. 104, the corporation has elected to present the net increase or
decrease in deposits in banks, loans and time deposits in the
statements of cash flows.
Note 4. Federal Income Taxes
For financial reporting purposes the provision for loan losses charged
to operating expense is based on management's judgment, whereas for
federal income tax purposes, the amount allowable under present tax
law is deducted. Additionally, certain expenses are charged to
operating expense in the period the liability is incurred for
financial reporting purposes, whereas for federal income tax purposes,
these expenses are deducted when paid. As a result of these timing
differences, deferred income taxes are provided in the financial
statements. Federal income taxes were computed after reducing pretax
accounting income for nontaxable municipal and loan income.
Note 5. Other Commitments
In the normal course of business, the Corporation makes various
commitments and incurs certain contingent liabilities which are not
reflected in the accompanying financial statements. These commitments
include various guarantees and commitments to extend credit and the
Corporation does not anticipate any losses as a result of these
transactions.
Note 6. Investment Securities
The carrying amounts of investment securities and their approximate
fair values at June 30, 2004 were as follows:
Amortized Gross Gross Fair Value
Cost Unrealized Unrealized
Gains (Losses)
Debt securities available for sale:
FNMA/FHLMC non -
cumulative
preferred stocks $ 11,654,968 $ 0 ($ 1,551,443) $ 10,103,525
State & municipal
Securities 5,395,136 34,059 ( 124,583) 5,304,612
U.S. Government
Agencies 9,743,435 0 ( 81,022) 9,662,413
Mortgage-backed
Securities 2,668,612 2,275 ( 58,793) 2,612,094
Equity securities 61,547 0 ( 5,304) 56,245
------------ ---------- ------------- ------------
$ 29,523,700 $ 36,334 ($ 1,821,145) $ 27,738,889
============ ========== ============= ============
There were no securities categorized "Held-to-maturity" or "Trading" at
June 30, 2004.
Page 11 of 32
Note 7. Comprehensive Income
Comprehensive income is defined as the change in equity from
transactions and other events from nonowner sources. It includes all
changes in equity except those resulting from investments by owners and
distributions to owners.
Consequently, a "Statement of Comprehensive Income" has been included
in this filing.
Page 12 of 32
FULTON BANCSHARES CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
Net after tax income for the first six months of 2004 was $ 429,000
compared to $ 789,000 for the same period in 2003, representing a decrease of
$ 360,000, or 45.6%. Net income on an adjusted per share basis for the first
six months of 2004 was $ 0.87 compared to $ 1.60 per share realized during the
first six months ended June 30, 2003.
Net Interest Income
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.
The net interest margin for the first six months of 2004 was 3.56% compared
to 3.72% for the first six months of 2003. Liquidity and interest rate risk are
continuously monitored through Asset-Liability Committee reports. Management
plans to protect its net interest margin by competitively pricing its loans and
deposits and by structuring interest-earning assets and liabilities so they can
be repriced in response to changes in market interest rates.
Second Quarter 2004 vs. Second Quarter 2003
Interest income for the second quarter of 2004 was $ 1,878,000 compared to
$ 2,035,000 earned during the same period in 2003, for a decrease of $ 157,000,
or 7.7%. The decrease was due primarily to a significant decrease in the
average balance of loans and investments in 2004 compared to the same period in
2003.
The average balance of loans during the second quarter of 2004 was
$ 100,595,000 versus $ 108,683,000 for the same quarter of 2003, a decline of
$ 8,088,000, or 9.26%. Similarly, the average balance of investments (including
federal funds sold) dropped from $ 34,319,000 for the second quarter 2003 to
$ 30,909,000 for the second quarter of 2004, a decline of 9.94%.
Management expects moderate growth in the average balance of loans and
investments during the rest of 2004. Management also expects average rates
earned on loans and investments to increase slowly over the rest of 2004.
Page 13 of 32
Interest expense for the second quarter of 2004 was $ 730,000, a decrease
of $ 77,000, or 9.5%. The decrease was due primarily to a decrease in the
average balance of time deposits, which typically pay higher yields, and a
decrease in interest rates paid on deposits and short-term borrowings.
Management expects to control growth of time deposits and concentrate on
increasing noninterest-bearing demand deposits, interest-bearing demand
deposits, and savings deposits. Management also expects average rates paid on
deposits to slowly increase over the rest of 2004.
Net interest income (before the provision for loan losses) for the second
quarter of 2004 totaled $ 1,148,000, down $ 80,000, or 6.5%, from the second
quarter of 2003.
Six Months 2004 vs. Six Months 2003
Interest income for the first six months of 2004 was $ 3,794,000 compared
to $ 4,340,000 earned during the same period in 2003, for a decrease of
$ 546,000, or 12.6%. The decrease was due primarily to a significant decrease
in the average balance of loans and investments in 2004 compared to the same
period in 2003, consistent with the second quarter results described above. In
addition, the Corporation sold approximately $ 5 million in FNMA/FHLMC preferred
stocks in the fourth quarter of 2003, which impacts the average balances for the
six month periods ended June 30, 2004 versus 2003. Management expects moderate
growth in the average balance of loans and investments during the rest of 2004.
Management also expects average rates earned on loans and investments to
increase slowly over the rest of 2004.
Interest expense for the first six months of 2004 was $ 1,464,000, a
decrease of $ 192,000, or 11.6%. The decrease was due primarily to a decrease
in the average balance of time deposits, which typically pay higher yields, and
a decrease in interest rates paid on deposits and short-term borrowings.
Management expects to control growth of time deposits and concentrate on
increasing noninterest-bearing demand deposits, interest-bearing demand
deposits, and savings deposits. Management also expects average rates paid on
deposits to slowly increase over the rest of 2004.
Other Income
Second Quarter 2004 vs. Second Quarter 2003
Second quarter 2004 other income decreased to $ 169,000 from $ 349,000, or
51.6%. Service charges on deposits decreased $ 12,000, or 21.1%, primarily due
to a decrease in overdraft charges. Other fee income decreased $10,000, or
19.2%, primarily due to decreases in fee income on the sale of mortgage loans to
the Federal Home Loan Bank and fee income from title insurance. Other
noninterest income decreased $ 14,000, or 15.6%, primarily due to a $ 24,000
gain on sale of student loans recognized during the second quarter of 2003 which
was offset by a $ 12,000 gain on sale of other real estate owned during the
second quarter of 2004. Securities gains of $ 150,000 were reported during the
second quarter of 2003 compared with $ 6,000 of securities gains reported during
the same period of 2004.
Page 14 of 32
Six Months 2004 vs. Six Months 2003
Other income for the first six months of 2004 decreased to $ 332,000 from
$ 543,000, or 38.9%. Service charges on deposits decreased $ 22,000, or 19.6%,
primarily due to a decrease in overdraft charges. Other fee income decreased
$ 53,000, or 42.1%, primarily due to decreases in fee income on the sale of
mortgage loans to the Federal Home Loan Bank and fee income from title
insurance. Other noninterest income increased $ 4,000, or 2.6%. Securities
gains of $ 150,000 were reported during the first six months of 2003 compared
with $ 10,000 of securities gains reported during the same period of 2004.
Other Expense
Second Quarter of 2004 vs. Second Quarter 2003
Second quarter 2004 other expenses totaled $ 1,089,000, an increase of
$ 119,000, or 12.3%, over the $970,000 for the second quarter of 2003. Salaries
and employee-related expenses increased $ 71,000, or 17.3%, primarily due to
merit pay increases, temporary full-time training of part-time staff, and the
rising cost of fringe benefits. Fixed asset expenses increased $ 17,000, or
9.0%, primarily due to increases in equipment maintenance and building
maintenance and supplies costs. Other noninterest expenses increased by
$ 31,000, or 8.4%, primarily due to increases in audits and exams, data
processing, deferred director compensation, printing and supplies, and
repossession and collections costs, and Pennsylvania shares taxes.
Six Months 2004 vs. Six Months 2003
Other expenses for the first six months of 2004 totaled $ 2,103,000, an
increase of $ 164,000, or 8.5%, over the $ 1,939,000 for the first six months of
2003. Salaries and employee-related expenses increased $ 104,000, or 12.9%,
primarily due to merit pay increases, temporary full-time training of part-time
staff, and the rising cost of fringe benefits. Fixed asset expenses increased
$ 13,000, or 3.2%, primarily due to increases in equipment maintenance and
building maintenance and supplies costs. Other noninterest expenses increased
by $ 48,000, or 6.7%, primarily due to increases in audits and exams, data
processing, deferred director compensation, printing and supplies, and
repossession and collections costs, and Pennsylvania shares taxes.
Income Taxes
The income tax provision for the first six months of 2004 was $ 130,000
compared to $ 264,000 for the first six months of 2003. Effective tax rates
(compared to the marginal federal income tax bracket of 34% applicable to each
period) were as follows:
Six Months Ended
June 31
2004 2003
23.3% 25.1%
Applicable income taxes changed between 2004 and 2003 because of changes in
pretax accounting income and taxable income. The decrease in the effective
income tax rate for 2004 was primarily due to a decrease in pretax accounting
income in which taxable income was reduced further by
Page 15 of 32
tax-exempt interest, dividends received deduction for FNMA/FHLMC preferred stock
and non-taxable increase in cash surrender value of life insurance.
Provision for Loan Losses
No provision for loan losses was made for the first six months of 2004
compared with $ 235,000 for the first six months of 2003. Provisions were based
on management's evaluation of the adequacy of the reserve for possible loan
losses at June 30, 2004 and 2003 and represent amounts deemed necessary to
maintain the reserve at the appropriate level based on the quality of the loan
portfolio and economic conditions. Management intends to maintain the reserve
at appropriate levels based on an ongoing evaluation of the loan portfolio.
A summary of the allowance for loan losses is as follows:
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(in 000's)
June 30, June 30,
2004 2003
Allowance for loan losses
Beginning of period $ 1,900 $ 1,031
------- -------
Loans charged-off during the period:
Real estate loans 0 0
Installment loans 12 15
Commercial and all other loans 343 362
------- -------
Total charge-offs 355 377
------- -------
Recoveries of loans previously charged-off:
Real estate loans 0 0
Installment loans 14 5
Commercial and all other loans 7 0
------- -------
Total recoveries 21 5
------- -------
Net loans (charged-off) recovered ( 334) ( 372)
Provision for loan losses charged to operations 0 235
------- -------
Allowance for loan losses-end of period $ 1,566 $ 894
======== ========
Loans 90 days or more past due (still accruing interest) and those on
nonaccrual status were as follows at June 30:
NONPERFORMING LOANS
(in 000's)
90 Days or More Past
Due and Still Accruing Nonaccrual Status
2004 2003 2004 2003
Real estate loans $ 0 $ 362 $ 1,400 $ 1,120
Installment loans 5 11 0 0
Commercial and all other loans 0 0 106 1,020
------ ------- ------- -------
Total loans $ 5 $ 373 $ 1,506 $ 2,140
There were no restructured loans for any of the time periods set forth
above.
Page 16 of 32
The bank utilizes a comprehensive systematic review of its loan portfolio
on a quarterly basis in order to determine the adequacy of the allowance for
loan losses. Each quarter the loan portfolio is categorized into various pools
as follows:
Pool #1 Specific allowances for any individually identified
problem loans
Pool #2 Commercial
Pool #3 Residential real estate
Pool #4 Consumer demand and installment
Pool #5 Farm loans
Business lines of credit over $ 75,000, agribusiness borrowers with lending
relationships over $ 250,000 and commercial borrowers with lending relationships
over $ 500,000 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 bank's
trading area. Management is not aware of any problem loans that are indicative
of trends, events, or uncertainties that would significantly impact operations,
liquidity, or capital.
The Bank has identified agribusiness lending as a concentration of credit.
The reasons for the increase in the provision for loan losses for the six months
ended June 30, 2003 compared to 2004 were significant increases in delinquent,
classified, nonaccrual, and loan losses, especially agribusiness loans. At June
30, 2003, agribusiness loans comprised $ 2,318,000, or 73.0%, of the classified
loans compared with 21.5% at June 30, 2004. Agribusiness losses charged to the
Reserve for Loan Losses were $ 336,000 and $ 362,000 for the second quarter of
2004 and 2003, respectively and were attributed to two borrowers. Prior to
these charge-offs, net loan losses were less than 0.5% of average loans. In
addition, the allowance and loans placed on nonaccrual status were adjusted in
the third quarter of 2003 based on preliminary results of an OCC examination
conducted in July and August for which an official report has not yet been
received. The examiners 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. In management's judgment, no additional provision to the
allowance was deemed necessary for the first six months of 2004 since
delinquencies, classified and nonaccrual loans, as well as total loans, have
decreased from the same period last year.
Page 17 of 32
FINANCIAL CONDITION
Assets
Total assets on June 30, 2004 were $ 145,321,000 compared to $ 147,744,000
at December 31, 2003, a decrease of 1.6%. Management intends to contain growth
and concentrate on maintaining adequate profit margins. Net loans on June 30,
2004 stood at $ 97,800,000, a decrease of 3.5% from $ 101,389,000 on December
31, 2003. The loan loss reserve at June 30, 2004 was $ 1,566,000 and is
considered adequate, in management's judgment, to absorb possible loan losses on
existing loans.
Liabilities
Total deposits increased 1.6% to $ 112,877,000 as of June 30, 2004 compared
with $ 111,125,000 at December 31, 2003. Noninterest-bearing demand deposits
increased 20.7% and interest-bearing savings deposits increased 3.4% while
interest-bearing time deposits decreased 3.9%.
Off-Balance Sheet Items
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
June 30, 2004
Financial instruments whose contract amounts
represent credit risk at December 31:
Commitments to extend credit $ 11,631,000
Standby letters of credit and financial 91,000
guarantees written
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.
Page 18 of 32
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.
Capital
Stockholders' equity was $ 15,870,000 at June 30, 2004 compared with
$ 16,278,000 at December 31, 2003, a decrease of 2.5%. Accumulated earnings
were partially offset by dividends declared and paid of $ 227,000 and a
$ 608,000 increase in net unrealized losses (net of tax effect) for the first
six months of 2004. Total stockholders' equity represented 10.9% of total
assets at June 30, 2004. Cash dividends of $ 0.46 were paid the first six
months of 2004 and 2003. On July 20, 2000, the Board of Directors announced the
approval of a plan to purchase, in open market and privately negotiated
transactions, up to 2% of its shares of outstanding common stock. Additionally,
on December 18, 2003, the company announced the approval of a plan to purchase,
in open
market and privately negotiated transactions, up to 1,000 shares of outstanding
common stock. As of June 30, 2004, the company had repurchased 2,210 shares,
representing 0.45% 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.
Liquidity and Interest Rate Sensitivity
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 June 30, 2004, the Bank had
borrowings of $ 15,000,000, a decrease of $ 2,150,000 from March 31, 2004. At
June 30, 2004, the Bank had additional borrowing capacity available of
approximately $ 56,000,000.
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. Management monitors the matching of assets and liabilities maturing
within one year and thereafter, and feels it is adequate to meet customer cash
and credit needs while maintaining a desired interest rate spread.
Page 19 of 32
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.
Regulatory Capital
The Company maintains capital ratios that are well above the minimum total
capital levels required by federal regulatory authorities, including risk-based
capital guidelines. A comparison of Fulton Bancshares Corporation's capital
ratios to regulatory minimum requirements at June 20, 2004 is as follows:
Fulton Regulatory
Bancshares Minimum
Corporation Requirements
Leverage ratio 11.6% 4.0%
Risk-based capital ratios:
Tier I (core capital) 16.2% 4.0%
Combined Tier I and Tier II (core
capital plus allowance for loan losses) 17.4% 8.0%
Balance Sheet Analysis
The following table highlights the changes in the balance sheet. Since
quarter end balances can be distorted by one-day fluctuations, an analysis of
changes in the quarterly averages is provided to show balance sheet trends.
BALANCE SHEET ANALYSIS
(in 000's)
Balance Sheets Condensed
Average
Second Second
Quarter 2004 Quarter 2003
ASSETS
Federal Funds Sold $ 625 $ 0
Securities Available for Sale 29,112 32,530
Other Investments 1,172 1,789
Loans 100,595 108,683
--------- ---------
Total interest-earning assets 131,504 143,002
Cash and Due from Banks 4,820 3,701
Bank Premises and Equipment 3,715 3,909
All Other Assets 8,445 5,897
Allowance for Loan Losses ( 1,730) ( 1,062)
--------- ---------
Total Assets $ 146,754 $ 155,447
========= =========
Page 20 of 32
Balance Sheets Condensed
Average
Second Second
Quarter 2004 Quarter 2003
LIABILITIES
Interest-bearing deposits in domestic offices $ 97,356 $ 95,271
Federal Funds Purchased 0 0
Other Short-term Borrowings 16,075 27,334
--------- ---------
Total interest-bearing liabilities 113,431 122,605
Non-interest bearing deposits 15,559 14,868
All Other Liabilities 1,544 971
--------- ---------
Total Liabilities 130,534 138,444
--------- ---------
STOCKHOLDERS' EQUITY
Common Stockholders' Equity 16,861 16,733
Net Unrealized Holding Gains (Losses), net of tax ( 641) 270
--------- ---------
Total Stockholders' Equity 16,220 17,003
--------- ---------
Total Liabilities and Stockholders' Equity $ 146,754 $ 155,447
========== ==========
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the quantitative and qualitative
disclosures made in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 2003.
See Management's Discussion and Analysis for further discussion of market risk.
ITEM 4 - CONTROLS AND PROCEDURES
The company's Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Corporation'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 June 30, 2004. Based on such
evaluation, such officers have concluded that, as of June 30, 2004, the
Corporation's disclosure controls and procedures are effective in alerting them
on a timely basis to material information relating to the Corporation (including
its consolidated subsidiaries) required to be included in the Corporation's
periodic filings under the Exchange Act.
There have not been any significant changes in the Corporation's internal
control over financial reporting or in other factors that could significantly
affect such control during the second quarter of 2004.
Page 21 of 32
PART II - OTHER INFORMATION
Page 22 of 32
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
In the opinion of the management of the Corporation, there are no
proceedings pending to which the Corporation or its subsidiary are a
party or to which their property is subject, which, if determined
adversely to the Corporation or its subsidiary, would be material in
relation to the Corporation's or its subsidiary's financial condition.
There are no proceedings pending other than ordinary routine litigation
incident to the business of the Corporation or its subsidiary. In
addition, no material proceedings are pending or are known to be
threatened or contemplated against the Corporation or its subsidiary by
government authorities.
Item 2 - Changes in Securities, Use of Proceeds, and Issuer Purchase of Equity
Securities
The Corporation purchased shares during the second quarter 2004 as
follows:
Period (a) (b) (c) (d)
Total Average Total Number Maximum Number
Number Price Paid of Shares of Shares that
of Shares per Share Purchased May Yet Be
Purchased as Part of Purchased Under
Publicly the Plans or
Announced Programs
Plans or
Programs
April 1 - April 30, 2004 15 52.88 15 8,700 shares
May 1 - May 31, 2004 0 0 0 8,700 shares
June 1 - June 30, 2004 10 50.60 10 8,690 shares
Total 25 51.75 25
Item 3 - Defaults Upon Senior Securities
Not applicable
Item 4 - Submission of Matters to a Vote of Security Holders
The annual meeting of the Board of Directors of Fulton Bancshares
Corporation was held on Monday, April 19, 2004. Directors were re-
appointed based on the following votes cast:
For Withhold
Authority
Clyde H. Bookheimer 202,247 2,670
Robert C. Snyder 202,297 2,620
Ellis L. Yingling 202,297 2,620
Item 5 - Other Information
None
Page 23 of 32
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
Referred to
Item 601 of
Regulation S-K: Description of Exhibit:
3(i) Articles of incorporation. Incorporated by reference
to registrant's Form 8-A filed with the Securities and
Exchange Commission on April 29, 2004.
3(ii) By-laws. Incorporated by reference to registrant's
Form 8-A filed with the Securities and Exchange
Commission on April 29, 2004.
10 Material Contracts. Incorporated by reference to
registrant's Form 10-K for the year ending December 31,
2003.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350
99 Report of Independent Accountant on Interim Financial
Statements
(b) Reports on Form 8-K
None
Page 24 of 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date August 11, 2004 /s/Clyde H. Bookheimer
----------------------------- -----------------------------
Clyde H. Bookheimer,
President and Chief
Executive Officer
Date August 11, 2004 /s/Doriann Hoffman
----------------------------- -----------------------------
Doriann Hoffman, Vice
President (Chief
Financial Officer)
Page 25 of 32
Exhibit 31.1
CERTIFICATION
I, Clyde H. Bookheimer, President/CEO, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of Fulton
Bancshares Corporation.
2. Based on my knowledge, the quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this quarterly report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this quarterly report based on such evaluation; and
(c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Page 26 of 32
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 11, 2004 By: /s/Clyde H. Bookheimer
---------------- --------------------------------
Clyde H. Bookheimer,
President and Chief
Executive Officer, Director
Page 27 of 32
Exhibit 31.2
CERTIFICATION
I, Doriann Hoffman, Vice President and CFO, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of Fulton
Bancshares Corporation.
2. Based on my knowledge, the quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this quarterly report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this quarterly report based on such evaluation; and
(c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Page 28 of 32
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 11, 2004 By: /s/Doriann Hoffman
---------------- --------------------------------
Doriann Hoffman
Vice President and
Treasurer
(Chief Financial Officer)
Page 29 of 32
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Fulton Bancshares Corporation
(the "Company") on Form 10-Q for the period ending June 30, 2004 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Clyde H. Bookheimer, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-
Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Clyde H. Bookheimer
-----------------------------------
Clyde H. Bookheimer
President and Chief Executive
Officer, Director
Dated: August 11, 2004
---------------
Page 30 of 32
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Fulton Bancshares Corporation
(the "Company") on Form 10-Q for the period ending June 30, 2004 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Doriann Hoffman, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ DoriAnn Hoffman
---------------------------------
DoriAnn Hoffman
Vice President and Treasurer
(Chief Financial Officer)
Dated: August 11, 2004
---------------
Page 31 of 32
Exhibit 99
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Fulton Bancshares Corporation and Subsidiaries
McConnellsburg, Pennsylvania
We have reviewed the accompanying consolidated balance sheet of Fulton
Bancshares Corporation and Subsidiaries as of June 30, 2004 and the related
consolidated statements of income and comprehensive income for the three and six
month periods ended June 30, 2004 and 2003, and consolidated statements of cash
flows for the six months ended June 30, 2004 and 2003. These financial
statements are the responsibility of the corporation's management.
We conducted our reviews in accordance with the standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with the standards of the Public Company Accounting Oversight
Board, the objective of which is the expression of an opinion regarding the
consolidated financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
/s/ Smith Elliott Kearns & Company, LLC
SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, Pennsylvania
August 6, 2004
Page 32 of 32