FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 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 November 3, 2004
(Common stock, .625 par value) 492,790
Page 1 of 31
FULTON BANCSHARES CORPORATION
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Condensed consolidated balance sheets
- September 30, 2004 and December
31, 2003 4
Condensed consolidated statements of
income - three months ended
September 30, 2004 and 2003 5
Condensed consolidated statements of
comprehensive income - three months
ended September 30, 2004 and 2003 6
Condensed consolidated statements of
income - nine months ended September
30, 2004 and 2003 7
Condensed consolidated statements of
comprehensive income - nine months
ended September 30, 2004 and 2003 8
Condensed consolidated statements of
cash flows - nine months ended
September 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 - 19
Item 3 - Quantitative and qualitative
disclosures about
market risk 20
Item 4 - Controls and procedures 20
PART II - OTHER INFORMATION 21
Item 1 - Legal proceedings 22
Item 2 - Unregistered sales of equity
securities and use of proceeds 22
Item 3 - Defaults upon senior securities 22
Item 4 - Submission of matters to a vote
of security holders 22
Item 5 - Other information 22
Item 6 - Exhibits 23
Signatures 24
Exhibits 25 - 31
Page 2 of 31
PART I - FINANCIAL INFORMATION
Page 3 of 31
FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2004 2003*
(Unaudited)
(000 Omitted)
ASSETS
Cash and due from banks $ 4,133 $ 3,853
Federal funds sold 1,325 0
Available-for-sale securities 27,867 29,680
Federal Reserve, Atlantic Central Bankers Bank,
Federal Home Loan Bank, at cost which
approximates market 1,164 1,401
Loans, net of allowance for loan losses 96,731 101,389
Bank building, equipment, furniture & fixtures, net 3,653 3,759
Accrued interest/dividends receivable 647 657
Cash surrender value of life insurance 5,382 5,230
Other real estate owned 1,534 206
Other assets 1,631 1,569
-------------- --------------
Total assets $ 144,067 $ 147,744
============== ==============
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 17,372 $ 13,925
Interest-bearing deposits:
Savings deposits 36,170 36,131
Time deposits 57,651 61,069
-------------- --------------
Total deposits 111,193 111,125
Accrued interest payable 162 255
Other borrowed money 15,000 18,825
Other liabilities 1,410 1,261
-------------- --------------
Total liabilities 127,765 131,466
-------------- --------------
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 14,951 14,576
Net unrealized gains/(losses) available - for-sale
securities ( 920) ( 570)
-------------- --------------
Treasury stock: 2,210 and 2,185 shares,
respectively, at cots ( 89) ( 88)
-------------- --------------
Total stockholders'equity 16,302 16,278
-------------- --------------
Total liabilities and
stockholders'equity $ 144,067 $ 147,744
============= ==============
*Condensed from audited financial statements
The accompanying notes are an integral part of these
condensed financial statements.
Page 4 of 31
FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
September 03, September 03,
2004 2003
(000 Omitted)
Interest & Dividend Income
Interest & fees on loans $ 1,590 $ 1,773
Interest & dividends on investment
securities:
U.S. Government securities 29 175
Obligations of state & political
subdivisions 52 9
Interest on federal funds sold 1 0
Other interest & dividend income 208 158
---------------- ----------------
Total interest & dividend income 1,880 2,115
Interest Expense ---------------- ----------------
Interest on deposits 489 522
Interest on federal funds purchased 0 0
Interest on other borrowed money 228 254
---------------- ----------------
Total interest expense 717 776
---------------- ----------------
Net interest income before provision
for loan losses 1,163 1,339
Provision for loan losses 0 1,030
---------------- ----------------
Net interest income after provision
for loan losses 1,163 309
---------------- ----------------
Other Income
Service charges on deposit accounts 44 54
Other fee income 46 59
Other non-interest income 44 70
Securities gains (losses) 0 0
---------------- ----------------
Total other income 134 183
Other Expense ---------------- ----------------
Salaries and employee benefits 354 438
Fixed asset expenses (including 207 198
depreciation)
FDIC insurance premiums 12 4
Other noninterest expenses 431 362
---------------- ----------------
Total other expenses 1,004 1,002
---------------- ----------------
Net income (loss) before income taxes 293 ( 510)
Applicable income taxes (benefit) ( 13) ( 280)
---------------- ----------------
Net income (loss) $ 306 ($ 230)
================ =================
Weighted average number of shares $ 492,795 $ 492,810
outstanding
Net income (loss) per share $ 0.62 ($ 0.47)
Cash dividends declared per share $ 0.27 $ 0.27
The accompanying notes are an integral part of these
condensed financial statements.
Page 5 of 31
FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
Net income (loss) $ 306 ($ 230)
Other comprehensive income, net of tax
Unrealized gain (loss) on investments
available for sale 258 ( 493)
------- --------
Comprehensive income (loss) $ 564 ($ 723)
======= ========
The accompanying notes are an integral part of these
condensed financial statements.
Page 6 of 31
FULTON BANCSHARES, CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
(000 Omitted)
Interest & Dividend Income
Interest & fees on loans $ 4,769 $ 5,250
Interest & dividends on investment securities:
U.S. Government securities 214 385
Obligations of state & political subdivisions 156 46
Interest on federal funds sold 5 0
Other interest & dividend income 530 774
--------- ---------
Total interest & dividend income 5,674 6,455
Interest Expense --------- ---------
Interest on deposits 1,503 1,634
Interest on federal funds purchased 0 0
Interest on other borrowed money 678 798
--------- ---------
Total interest expense 2,181 2,432
--------- ---------
Net interest income before provision for loan losses 3,493 4,023
Provision for loan losses 0 1,265
--------- ---------
Net interest income after provision for loan losses 3,493 2,758
--------- ---------
Other Income
Service charges on deposit accounts 134 166
Other fee income 119 185
Other non-interest income 203 225
Securities gains (losses) 10 150
--------- ---------
Total other income 466 726
Other Expense --------- ---------
Salaries and employee benefits 1,267 1,247
Fixed asset expenses (including depreciation) 624 602
FDIC insurance premiums 20 13
Other noninterest expenses 1,196 1,079
--------- ---------
Total other expense 3,107 2,941
--------- ---------
Net income before income taxes 852 543
Applicable income taxes (benefit) 117 ( 16)
--------- ---------
Net income $ 735 $ 559
========= =========
Weighted average number of shares outstanding $ 492,805 $ 492,810
Net income per share $ 1.49 $ 1.13
Cash dividends declared per share $ 0.73 $ 0.73
The accompanying notes are an integral part of these
condensed financial statements.
Page 7 of 31
FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
Net income $ 735 $ 559
Unrealized gain (loss) on investments ( 350) ( 501)
available for sale, net of tax
Reclassification adjustment for gains 10 150
(losses) included in net income ------- -------
Comprehensive income $ 395 $ 208
======= =======
The accompanying notes are an integral part of these
condensed financial statements.
Page 8 of 31
FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
Cash flows from operating activities:
Net income $ 735 $ 559
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 294 288
Provision for loan losses 0 1,265
(Increase) decrease in accrued interest receivables 10 ( 168)
Decrease in accrued interest payable ( 93) ( 65)
Increase in CSV-Life Insurance ( 152) ( 165)
Gain on sale - Securities ( 10) ( 150)
Gain on sale - OREO ( 5) 0
Gain on sale of loans ( 13) 0
Other - Net 273 369
--------- ---------
Net cash provided by operating activities 1,039 1,933
--------- ---------
Cash flows from investing activities:
Purchase of investment securities - Available-for-sale ( 3,527) ( 10,465)
Net redemption of Federal Home Loan Bank Stock 237 28
Sales of available-for-sale securities 1,075 1,614
Maturities of available-for-sale securities 3,711 16,457
Net decrease in loans 4,671 2,383
Net increase in OREO ( 1,323) ( 53)
Purchase of directors and officers life insurance 0 ( 353)
Purchases of & deposits on bank premises and equipment - net ( 160) ( 156)
--------- ---------
Net cash provided (used) by investing activities 4,684 9,455
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposits 68 ( 2,838)
Purchase of treasury stock ( 1) 0
Dividends paid ( 360) ( 359)
Net increase (decrease) in other borrowed money ( 3,825) ( 9,075)
--------- ---------
Net cash provided (used) by financing activities ( 4,118) ( 12,272)
--------- ---------
Net increase (decrease) in cash and cash equivalents 1,605 ( 884)
Cash and cash equivalents, beginning balance 3,853 5,214
--------- ---------
Cash and cash equivalents, ending balance $ 5,458 $ 4,330
========= =========
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest $ 2,274 $ 2,497
Income taxes 0 387
Supplemental schedule of noncash investing and
financing activities:
Change in net unrealized gain on investments
available for sale (net of deferred taxes) ( 350) ( 501)
The accompanying notes are an integral part of these
condensed financial statements.
Page 9 of 31
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(UNAUDITED)
Review of Interim Financial Statements
The condensed consolidated financial statements as of and for the nine
months ended September 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 nine months ended
September 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 nine-
month period ended September 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 31
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 September 30, 2004 were as follows:
Amortized Cost Gross Gross Unrealized Fair Value
Unrealized (Losses)
Gains
Debt securities available for sale:
FNMA/FHLMC non -
cumulative
preferred stocks $ 11,656,267 $ 0 ($ 1,490,807) $ 10,165,460
State & municipal
Securities 5,394,995 85,903 ( 434) 5,480,464
U.S. Government
Agencies 9,735,694 11,161 ( 11,824) 9,735,031
Mortgage-backed
Securities 2,413,520 19,263 ( 2,588) 2,430,195
Equity securities 61,549 150 ( 5,900) 55,799
------------ ------------ ------------ ------------
$ 29,262,025 $ 116,477 ($ 1,511,553) $ 27,866,949
============ ============ ============= ============
There were no securities categorized "Held-to-maturity" or "Trading" at
September 30, 2004.
Page 11 of 31
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.
Note 8. Reclassification
Other Assets as of December 31, 2003 was reported as $ 1,775,000 in the
quarterly filings at March 31 and June 30, 2004. This amount included
$ 206,000 of Other Real Estate Owned("OREO"). Therefore, the
December 31, 2003 line items for Other Real Estate Owned and Other
Assets have been adjusted accordingly in this filing.
Page 12 of 31
FULTON BANCSHARES CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Net after tax income for the first nine months of 2004 was $735,000
compared to $559,000 for the same period in 2003, representing an increase of
$176,000, or 31.5%. Net income on an adjusted per share basis for the first
nine months of 2004 was $1.49 compared to $1.13 per share realized during the
first nine months ended September 30, 2003.
RESULTS OF OPERATIONS
Third Quarter 2004 vs. Third Quarter 2003
Interest income for the third quarter of 2004 was $1,880,000 compared to
$2,115,000 earned during the same period in 2003, for a decrease of $235,000, or
11.1%. The decrease was due primarily to a significant decrease in the average
balance of loans and investments in 2004 and a slightly overall lower interest
income yield, when compared to the same period in 2003. Management expects
relative stability in the average balance of loans and investments during the
remainder of 2004, and also expects the yield earned on average loans and
investments to increase slightly over the rest of 2004.
Interest expense for the third quarter of 2004 was $717,000, a decrease of
$59,000, or 7.6% compared to the third quarter of 2003. The decrease was due
primarily to a moderate 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 in the average
balance 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 third
quarter of 2004 totaled $1,163,000, down $176,000, or 13.1%, from the third
quarter of 2003.
Nine Months 2004 vs. Nine Months 2003
Interest income for the first nine months of 2004 was $5,674,000 compared
to $6,455,000 earned during the same period in 2003, for a decrease of $781,000,
or 12.1%. The decrease was due primarily to a significant decrease in the
average balance of loans and investments in 2004 and an overall lower interest
income yield, when compared to the same period in 2003. Management expects
relative stability in the average balance of loans and investments during the
remainder of 2004, and also expects the yield earned on loans and investments to
increase slightly over the rest of 2004.
Interest expense for the first nine months of 2004 was $2,181,000, a
decrease of $251,000, or 10.3% compared to the first nine months of 2003. The
decrease was due primarily to a moderate 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 in the average balance 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.
Page 13 of 31
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 MARGIN
The net interest margin for the first nine months of 2004 was 3.60%
compared to 3.70% for the first nine 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.
NONINTEREST INCOME
Third Quarter 2004 vs. Third Quarter 2003
Third quarter 2004 noninterest income decreased $49,000 to $134,000 from
$183,000, or 26.8%. Service charges on deposits decreased $10,000, or 18.5%,
primarily due to a decrease in overdraft charges. Other fee income decreased
$13,000, or 22.0%, primarily due to decreases in fee income on the sale of
mortgage loans to the Federal Home Loan Bank. Other noninterest income
decreased $26,000, or 37.1%, primarily due to a $24,000 gain on sale of student
loans recognized during the second quarter of 2003.
Nine Months 2004 vs. Nine Months 2003
Noninterest income for the first nine months of 2004 decreased $260,000 to
$466,000 from $726,000, or 35.8%. Service charges on deposits decreased
$32,000, or 19.3%, primarily due to a decrease in overdraft charges. Other fee
income decreased $66,000, or 35.7%, 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 company. Other noninterest income decreased $22,000, or 9.8%
primarily due to a $24,000 gain on sale of student loans recognized in the first
nine months of 2003. Securities gains of $150,000 were realized during the
first nine months of 2003 compared with $10,000 of securities gains reported
during the same period of 2004, accounting for the majority of the decrease in
noninterest income.
NONINTEREST EXPENSE
Third Quarter of 2004 vs. Third Quarter 2003
Third quarter 2004 noninterest expenses totaled $1,004,000, an increase of
$2,000, or 0.2%, over the $1,002,000 for the third quarter of 2003. Salaries
and employee-related expenses decreased $84,000, or 19.2%, primarily due to
decreased management salary expense in the third quarter of 2004 due to turnover
in certain lending and financial management positions. Fixed asset expenses
increased $9,000, or 4.5%, primarily due to increases in equipment and building
maintenance, and supplies costs. Other noninterest expenses increased by
$69,000, or 19.1%, primarily due to increases in data processing costs and legal
and professional service fees.
Page 14 of 31
Nine Months 2004 vs. Nine Months 2003
Noninterest expenses for the first nine months of 2004 totaled $3,107,000,
an increase of $166,000, or 5.6%, over the $2,941,000 for the first nine months
of 2003. Salaries and employee-related expenses increased $20,000, or 1.6%,
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
$22,000, or 3.7%, primarily due to increases in equipment and building
maintenance and supplies costs. Other noninterest expenses increased by
$117,000, or 10.8%, primarily due to increases in data processing fees, deferred
director compensation, legal and professional fees, repossession and
collections costs, and Pennsylvania shares taxes.
INCOME TAXES
The income tax provision for the first nine months of 2004 was $117,000
compared to a benefit of $16,000 for the first nine months of 2003. Effective
tax rates (compared to the marginal federal income tax bracket of 34% applicable
to each period) were as follows:
Nine Months Ended
September 30
2004 2003
13.7% - 2.9%
Applicable income taxes changed between 2004 and 2003 because of changes in
pretax accounting income and taxable income. The increase in the effective
income tax rate for 2004 was primarily due to an increase in pretax accounting
income.
PROVISION FOR LOAN LOSSES
No provision for loan losses was made for the first nine months of 2004
compared with $1,265,000 for the first nine months of 2003. Provisions were
based on management's evaluation of the adequacy of the reserve for possible
loan losses at September 30, 2004 and 2003 and represents amounts deemed
necessary to maintain the reserve at the appropriate level based on size, mix,
and quality of the loan portfolio, and considering economic conditions and other
relevant risk factors. 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)
Nine Months Ended
Sept. 30, Sept. 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 13 23
Commercial and all other loans 343 363
------- -------
Total charge-offs 356 386
------- -------
Recoveries of loans previously charged-off:
Real estate loans 0 0
Installment loans 14 7
Commercial and all other loans 9 0
------- -------
Total recoveries 23 7
------- -------
Net loans (carged-off) recovered ( 333) ( 379)
Provision of loan losses charged to
operations 0 1,265
------- -------
Allowance for loan losses-end of period $ 1,567 $ 1,917
======= =======
Page 15 of 31
Loans 90 days or more past due (still accruing interest) and those on
nonaccrual status were as follows at September 30:
NONPERFORMING LOANS
(in 000's)
90 Days or More Nonaccrual Status
Past Due and
Still Accruing
2004 2003 2004 2003
Real estate loans $ 545 $ 0 $ 331 $ 2,426
Installment loans 17 0 0 0
Commercial and all other loans 0 0 0 1,020
----- ----- ----- -------
Total loans $ 562 $ 0 $ 331 $ 3,446
===== ===== ===== =======
There were no significantly restructured loans for any of the time periods
set forth above.
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 relevant pools
as follows:
- - Specific allowances for any individually identified problem loans
- - Commercial, Non-Farm Loans
- - Farm Loans
- - Residential real estate
- - Consumer demand and installment
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 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 5 - 15%
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 considering relevant economic conditions within
the bank's trading area. Management is not aware of any overall loan portfolio
conditions, trends, events, or uncertainties that would significantly impact
operations, liquidity, or capital.
The Bank has identified agribusiness lending as a concentration of credit.
The primary reason for the significant provision for loan losses for the nine
months ended September 30, 2003 were significant increases in delinquent,
classified, nonaccrual, and expected loss agribusiness loans. Agribusiness
losses charged to the Reserve for Loan Losses were $336,000 and $363,000 for the
third quarter of 2004 and 2003, respectively, and were attributed to two
borrowers. In management's judgment, no provisions to the allowance were deemed
necessary for the first nine months of 2004 since delinquencies, classification
severity, and nonaccrual loans, as well as total loans, have decreased compared
to the same prior year period.
Page 16 of 31
FINANCIAL CONDITION
Assets
Total assets on September 30, 2004 were $144,067,000 compared to
$147,744,000 at December 31, 2003, a decrease of 2.5%. Management intends to
contain loan growth and concentrate on maintaining adequate profit margins. Net
loans on September 30, 2004 stood at $96,731,000, a decrease of 4.6% from
$101,389,000 on December 31, 2003. The loan loss reserve at September 30, 2004
was $1,567,000 and is considered adequate, in management's judgment, to provide
for possible loan losses on existing loans.
Liabilities
Total deposits increased 0.1% to $111,193,000 as of September 30, 2004
compared with $111,125,000 at December 31, 2003. Noninterest-bearing demand
deposits increased 24.8% and interest-bearing savings deposits increased 0.1%
while interest-bearing time deposits decreased 5.6%.
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
sheet. 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
September 30, 2004
Financial Instruments whose contract amounts
represent credit risk at December 31:
Commitments to extend credit $ 15,442,000
Standby letters of credit and financial
guarantees written 171,000
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 17 of 31
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.
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 September 30, 2004, the Bank had
borrowings of $15,000,000, representing no change from June 30, 2004. At
September 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.
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.
Capital
Stockholders' equity was $16,302,000 at September 30, 2004 compared with
$16,278,000 at December 31, 2003, a decrease of 0.2%. Accumulated earnings were
partially offset by dividends declared and paid of $360,000, and an unfavorable
$350,000 increase in net unrealized losses (net of tax effect) for the first
nine months of 2004. Total stockholders' equity represented 11.3% of total
assets at September 30, 2004. Cash dividends of $0.73 were paid the first nine
months of both 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 September 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 maintain a strong capital position and allow for continued sound
financial condition and quality growth.
Page 18 of 31
REGULATORY CAPITAL
The Company maintains capital ratios that are well above the minimum total
capital levels required by federal regulatory authorities, including risk-based
capital guidelines. A comparison of Fulton Bancshares Corporation's capital
ratios to regulatory minimum requirements at September 30, 2004 is as follows:
Fulton Regulatory
Bancshares Minimum
Corporation Requirements
Leverage ratio 11.9% 4.0%
Risk-based capital ratios:
Tier I (core capital) 16.4% 4.0%
Combined Tier I and Tier II (core
capital plus allowance for loan losses) 17.7% 8.0%
BALANCE SHEET ANALYSIS
The following table highlights the changes in the balance sheet. Because
quarter end balances can be distorted by one-day fluctuations, an analysis of
changes in the quarterly averages is provided to show balance sheet trends.
BALANCE SHEET ANALYSIS
(in 000's)
Balance Sheets Condensed
Average
Third Third
Quarter 2004 Quarter 2003
ASSETS
Federal Funds Sold $ 726 $ 0
Securities Available for Sale 28,940 30,901
Other Investments 1,231 1,744
Loans 100,639 107,078
--------- ---------
Total interest-earning assets 131,536 139,723
Cash and Due from Banks 4,334 3,725
Bank Premises and Equipment 3,714 3,844
All Other Assets 8,400 6,137
Allowance for Loan Losses ( 1,745) ( 904)
--------- ---------
Total Assets $ 146,239 $ 152,525
--------- ---------
LIABILITIES
Interest-bearing deposits in $ 97,261 $ 95,305
domestic offices
Federal Funds Purchased 204 0
Other Short-term Borrowings 16,371 23,800
--------- ---------
Total interest-bearing liabilities 113,836 119,105
Non-interest bearing deposits 14,474 15,324
All Other Liabilities 1,551 975
--------- ---------
Total Liabilities 129,861 135,404
--------- ---------
STOCKHOLDERS' EQUITY
Common Stockholders' Equity 17,035 17,241
Net Unrealized Holding Losses, net of tax ( 657) ( 120)
--------- ---------
Total Stockholders' Equity 16,378 17,121
--------- ---------
Total Liabilities and Stockholders' Equity $ 146,239 $ 152,525
========= =========
Page 19 of 31
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 September 30, 2004. Based on such
evaluation, such officers have concluded that, as of September 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 third quarter of 2004.
Page 20 of 31
PART II - OTHER INFORMATION
Page 21 of 31
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 - Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item 3 - Defaults Upon Senior Securities
Not applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not applicable
Item 5 - Other Information
The Fulton County National Bank and Trust Company, a wholly owned
subsidiary of Fulton Bancshares, was recently examined by its primary
regulator, the Office of Comptroller of the Currency ("OCC"). While
the OCC has not issued a formal report of examination, Management is
aware of certain findings that were made by the OCC and which are
likely to be included in its formal report. Management believes that
the OCC will communicate a number of findings including the following:
(1) the overall condition of the Bank has deteriorated and displays a
number of deficiencies; (2) Board oversight, management supervision and
staffing require immediate consideration and improvement; (3) credit
risk management practices, compliance management programs and interest
rate risk management are in need of immediate improvement; (4)
management of information technology, the overall audit function,
liquidity management, and earnings need to be improved; and (5) capital
levels are currently adequate.
Management and the Board of Directors are committed to addressing these
issues which are expected to be part of the OCC formal report.
Management has prepared a comprehensive action plan which outlines
several significant organizational, financial, operational, and
compliance improvements and adjustments necessary to address the
findings of the OCC and to strengthen the Bank.
Page 22 of 31
Item 6 - Exhibits
(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.
10.1 Salary Continuation Agreement and Second Amendment - Chief
Executive Officer. Incorporated by reference to
registrant's Form 10-K filed with the Securities and
Exchange Commission on December 31, 2002.
10.2 Director Deferred Compensation Plan Incorporated by
reference to registrant's Form 10-K filed with the
Securities and Exchange Commission on December 31, 2002.
10.3 Director Emeritus Retirement Agreement Incorporated by
reference to registrant's Form 10-K filed with the
Securities and Exchange Commission on December 31, 2002.
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
Page 23 of 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date November 12, 2004 /s/Clyde H. Bookheimer
Clyde H. Bookheimer,
President and Chief
Executive Officer
Date November 12, 2004 /s/Angela M. Bishop
Angela M. Bishop
Acting Chief Financial Officer
Page 24 of 31
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 25 of 31
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 12, 2004 By: /s/Clyde H. Bookheimer
Clyde H. Bookheimer,
President and Chief
Executive Officer, Director
Page 26 of 31
Exhibit 31.2
CERTIFICATION
I, Angela M. Bishop, Acting Chief Financial Officer, 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 27 of 31
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 12, 2004 By: /s/Angela M. Bishop
Angela M. Bishop
Acting Chief Financial Officer
Page 28 of 31
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Fulton Bancshares Corporation
(the "Company") on Form 10-Q for the period ending September 30, 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: November 12, 2004
Page 29 of 31
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Fulton Bancshares Corporation
(the "Company") on Form 10-Q for the period ending September 30, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Angela M. Bishop, Acting 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/ Angela M. Bishop
Angela M. Bishop
Acting Chief Financial Officer
Dated: November 12, 2004
Page 30 of 31
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 September 30, 2004 and the related
consolidated statements of income and comprehensive income for the three and
nine month periods ended September 30, 2004 and 2003, and consolidated
statements of cash flows for the nine months ended September 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
November 12, 2004
Page 31 of 31