<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-QSB
-----------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ending December 31, 1998
-----------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-21273
--------------------------
Fulton Bancorp, Inc.
----------------------------------
(Exact name of small business
issuer as specified in its charter)
Delaware 43-1754577
- --------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
410 Market Street, Fulton, MO 65251
- ------------------------------------------ ------------
(Address of principal executive offices) (Zip Code)
573-642-6617
- -----------------------------------
(Registrant's telephone number)
None
-----------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
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 twelve months (or for such 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
----------- -----------
As of February 9, 1999, there were 1,653,949 shares of the Registrant's Common
Stock, $0.01 par value per share, outstanding.
Transitional Small Business Disclosure Format
Yes No X
----------- -----------
<PAGE>
FULTON BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
December 31, 1998
<TABLE>
<CAPTION>
INDEX PAGE
- ----- ----
PART I - FINANCIAL INFORMATION
- ------------------------------
<S> <C>
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 3
CONSOLIDATED STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1 - LEGAL PROCEEDINGS 17
ITEM 2 - CHANGES IN SECURITIES 17
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4 - SUBMISSION OF MATTER TO VOTE OF SECURITY-HOLDERS 17
ITEM 5 - OTHER INFORMATION 17
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
FINANCIAL DATA SCHEDULE 19
</TABLE>
<PAGE>
FULTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ ---------
(Unaudited)
ASSETS
<S> <C> <C>
Cash, including interest-bearing accounts of $7,225
and $13,147, respectively $ 7,856 $ 13,778
Investment securities, available-for-sale 1,700 950
Stock in Federal Home Loan Bank of Des Moines 986 643
Loans held for sale 4,074 3,649
Loans receivable, net of allowance for loan losses of
$1,032 and $971, respectively 98,669 88,104
Accrued interest receivable 746 678
Premises and equipment 1,431 1,420
Foreclosed real estate 158 158
Loan servicing assets 637 535
Other assets 265 195
--------- --------
TOTAL ASSETS $ 116,522 $110,110
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 71,368 $ 69,164
Advances from Federal Home Loan Bank of Des Moines 18,549 12,810
Advances from borrowers for property taxes and insurance 392 985
Accrued interest payable 60 84
Other liabilities 897 1,572
--------- --------
TOTAL LIABILITIES 91,266 84,615
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value per share, 1,000,000 shares
authorized, none issued -- --
Common stock, $0.01 par value per share, 6,000,000 shares
authorized, 1,765,411 and 1,719,250 issued and outstanding,
respectively 18 17
Additional paid-in capital 17,839 16,943
Treasury stock (1,824) --
Retained earnings - substantially restricted 11,019 10,674
Unearned ESOP shares (1,064) (1,134)
Deferred management recognition and development plan (733) (1,006)
Unrealized gain (loss) on securities available-for-sale 1 1
--------- --------
TOTAL STOCKHOLDERS' EQUITY 25,256 25,495
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 116,522 $110,110
========= ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
3
<PAGE>
FULTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
------------ ---------- -------- --------
(Unaudited)
INTEREST INCOME
<S> <C> <C> <C> <C>
Mortgage loans $1,847 $1,659 $3,589 $ 3,251
Consumer and other loans 228 236 442 462
Investment securities 34 37 64 77
Interest-earning deposits 139 162 325 259
------ ------ ------ -------
TOTAL INTEREST INCOME 2,248 2,094 4,420 4,049
INTEREST EXPENSE
Deposits 886 874 1,770 1,735
Advances from Federal Home Loan Bank
of Des Moines 287 172 518 280
------ ------ ------ -------
1,173 1,046 2,288 2,015
------ ------ ------ -------
NET INTEREST INCOME 1,075 1,048 2,132 2,034
PROVISION FOR LOAN LOSSES 40 20 70 60
------ ------ ------ -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,035 1,028 2,062 1,974
NON-INTEREST INCOME
Loan servicing fees 79 93 148 174
Gain on sale of loans 84 126 162 217
Service charges and other fees 23 22 48 44
Income (loss) from foreclosed assets (10) (20) (10) (39)
Other 3 (1) 4 4
------ ------ ------ -------
TOTAL NON-INTEREST INCOME 179 220 352 400
NON-INTEREST EXPENSE
Employee salaries and benefits 395 463 851 742
Occupancy costs 80 70 144 137
Advertising 18 18 29 33
Data processing 51 37 93 79
Federal insurance premiums 11 12 23 24
Directors' fees 23 21 46 43
Other 174 112 274 267
------ ------ ------ -------
TOTAL NON-INTEREST EXPENSE 752 733 1,460 1,325
------ ------ ------ -------
INCOME BEFORE INCOME TAXES 462 515 954 1,049
INCOME TAXES 169 192 351 387
------ ------ ------ -------
NET INCOME $ 293 $ 323 $ 603 $ 662
====== ====== ====== =======
BASIC EARNINGS PER SHARE $ 0.19 $ 0.20 $ 0.39 $ 0.41
====== ====== ====== =======
DILUTED EARNINGS PER SHARE $ 0.19 $ 0.20 $ 0.38 $ 0.41
====== ====== ====== =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
4
<PAGE>
FULTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 603 $ 662
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 74 87
Provision for loan losses 70 60
Provision for loss on foreclosed real estate -- 40
Proceeds from sales of loans held for sale 16,075 17,327
Origination of loans held for sale (16,500) (17,452)
Gain on sale of loans held for sale (146) (210)
Amortization of servicing asset 44 --
ESOP shares released 118 147
MRDP compensation expense 273 --
Change to assets and liabilities increasing (decreasing)
cash flows
Accrued interest receivable (68) 26
Other assets (70) (48)
Accrued interest payable (24) (9)
Other liabilities 173 (38)
-------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 622 592
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities
Available-for-sale 750 700
Purchase of securities available-for-sale (1,500) --
Loans originated, net of repayments (10,635) 461
Purchase of premises and equipment (85) (28)
Purchase of Federal Home Loan Bank stock (343) (87)
-------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (11,813) 1,046
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 2,204 1,387
Advances from Federal Home Loan Bank of Des Moines:
Borrowings 8,000 6,000
Repayments (2,261) (36)
Net increase (decrease) in advance payments by
borrowers for taxes and insurance (593) (510)
Purchase of treasury shares (1,824) --
Dividends paid (257) (172)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,269 6,669
-------- --------
NET INCREASE (DECREASE) IN CASH (5,922) 8,307
Cash, beginning of period 13,778 7,095
-------- --------
CASH, END OF PERIOD 7,856 15,402
======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
5
<PAGE>
FULTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- Basis of Presentation
- -------------------------------
The consolidated interim financial statements as of December 31, 1998, included
in this report have been prepared by Fulton Bancorp, Inc. ("Company") without
audit. In the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation are reflected in the
December 31, 1998, interim financial statements. The results of operations for
the period ended December 31, 1998, are not necessarily indicative of the
operating results for the full year.
NOTE B -- Earnings Per Share
- ----------------------------
During the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
The Statement requires dual presentation of basic and diluted earnings per share
("EPS") on the face of the statement of income. Basic EPS is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
A summary of EPS calculations for the three and six month periods ended December
31, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
-------- ------ ------ ------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Basic earnings per share:
Income available to common shareholders $ 293 $ 323 $ 603 $ 662
====== ====== ====== ======
Average common shares outstanding 1,533 1,597 1,557 1,595
====== ====== ====== ======
Basic earnings per share $ 0.19 $ 0.20 $ 0.39 $ 0.41
====== ====== ====== ======
Diluted earnings per share:
Income available to common shareholders $ 293 $ 323 $ 603 $ 662
====== ====== ====== ======
Average common shares outstanding 1,533 1,597 1,557 1,595
Dilutive potential common shares outstanding
due to common stock options and grants 16 27 20 13
------ ------ ------ ------
Average number of common shares and
dilutive potential common shares outstanding 1,549 1,624 1,577 1,608
====== ====== ====== ======
Diluted earnings per share $ 0.19 $ 0.20 $ 0.38 $ 0.41
====== ====== ====== ======
</TABLE>
6
<PAGE>
FULTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE C -- Employee Stock Ownership Plan
- ---------------------------------------
In connection with the conversion to stock form, the Company's subsidiary,
Fulton Savings Bank, F.S.B., ("Bank"), established an Employee Stock Ownership
Plan ("ESOP") for the exclusive benefit of participating employees (all salaried
employees who have completed at least 1,000 hours of service in a twelve-month
period and have attained to age of 21). The ESOP borrowed funds from the
Company in an amount sufficient to purchase 137,450 shares (8% of the Common
Stock issued in the stock offering). The loan is secured by the shares purchased
and will be repaid by the ESOP with funds from contributions made by the Bank,
dividends received by the ESOP and any other Earnings on ESOP assets. The Bank
presently expects to contribute approximately $203,300, including interest,
annually to the ESOP. Contributions will be applied to repay interest on the
loan first, then the remainder will be applied to principal. The loan is
expected to be repaid in approximately 10 years. Shares purchased with the loan
proceeds are held in a suspense account for allocation among participants as the
loan is repaid. Contributions to the ESOP and shares released from the suspense
account are allocated among participants in proportion to their compensation
relative to total compensation of all active participants. Benefits generally
become 20% vested after three years of credited service and then 20% per year
thereafter until 100% vested. Vesting is accelerated upon retirement, death or
disability of the participant. Forfeitures are returned to the Company or
reallocated to other participants to reduce future funding costs. Benefits may
be payable upon retirement, death, disability or separation from service. Since
the Bank's annual contributions are discretionary, benefits payable under the
ESOP cannot be estimated.
The Company accounts for its ESOP in accordance with Statement of Position 93-6,
Employers' Accounting for Employee Stock Ownership Plans. Accordingly, the debt
of the ESOP is eliminated in consolidation and the shares pledged as collateral
are reported as unearned ESOP shares in the consolidated balance sheets.
Contributions to the ESOP shall be sufficient to pay principal and interest
currently due under the loan agreement. As shares are committed to be released
from collateral, the Company reports compensation expense equal to the average
market price of the shares for the respective period, and the shares become
outstanding for earnings per share computations. Dividends on allocated ESOP
shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt and accrued
interest. ESOP compensation expense was $99,611 for the six months ended
December 31, 1998.
7
<PAGE>
FULTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A summary of ESOP shares at December 31, 1998, is as follows:
<TABLE>
<S> <C>
Shares distributed to terminated participants 208
Shares allocated 30,910
Unreleased shares 106,422
----------
TOTAL 137,540
==========
Fair value of unreleased shares $1,736,062
==========
</TABLE>
NOTE D - Stock Based Compensation Plans
---------------------------------------
The Board of Directors adopted and the shareholders subsequently approved a
Management Recognition and Development Plan ("MRDP") and a Stock Option Plan
("SOP") on October 23, 1997. These plans were established to assist the Company
and its subsidiary in attracting, retaining and motivating key management and
employees by aligning their financial interest with those of the shareholders of
the Company.
The MRDP is a fixed award of 68,761 shares of restricted stock which vests over
a five year period. The Company selected an amortization method which
recognizes a higher percentage of compensation cost in the earlier years than in
the later years of the service period. Compensation cost will approximate 34%
of the cost of the MRDP awards in the first year, 31% the second year, 18% the
third, and 17% in the remaining two years.
Under the SOP, options to acquire shares of the Company's common stock may be
granted to certain officer, directors and employees of the Bank. The options
will enable the recipient to purchase stock at an exercise price equal to the
fair market value of the stock at the date of the grant. On November 12, 1997,
the Company granted options for 171,925 shares at $19.75 per share. The options
will vest over a five year period following the date of grant and are
exercisable for up to ten years.
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company has elected to apply the recognition provisions of Accounting Principles
Board Opinion No. 25, under which compensation expense is recorded on the date
of grant only if the current market price of the underlying stock exceeds the
exercise price. Accordingly, adoption of SFAS No. 123 will have no impact on
the Company's consolidated financial position or results of operations.
8
<PAGE>
FULTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE E - Year 2000 Issue
- ------------------------
The year 2000 issue concerns computer software programs which use only two
digits to identify the calendar year in date fields. Software applications
utilizing two digit date fields could produce erroneous results at the turn of
the century. The Federal Financial Institutions Examination Council requires
all insured financial institutions to complete an inventory of core computer
function and set priorities for meeting Year 2000 conversion goals. The
Company's material software applications are provided by a third party data
processing service. The Company has inventoried and assessed core computer
functions. All material systems were judged compliant by September 30, 1998.
Testing will continue into the first quarter of 1999. Estimated cost to the
Company is not expected to be material since all critical applications are
supported by the third party data processing service.
NOTE F - Reclassifications
- --------------------------
Certain amounts in the prior period's consolidated financial statements have
been reclassified to conform with the current year presentation.
NOTE G - Comprehensive Income
- -----------------------------
On July 1, 1998 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income", which
established standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. For the three- and six-month periods ended
December 31, 1998 and 1997, unrealized holding gains and losses on investments
in debt and equity securities available-for-sale were the Company's only other
comprehensive income component.
9
<PAGE>
FULTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Comprehensive income for the three- and six-month periods ended December 31,
1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
------ ------- ----- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net income $ 293 $ 323 $ 603 $ 662
Other comprehensive income:
Net unrealized holding gains (losses)
on investments in debt and equity
securities available-for-sale (2) (1) 0 1
Adjustment for net securities (gains)
losses realized in net income, net
of applicable income taxes 0 0 0 0
----- ----- ----- -------
Total other comprehensive income (2) (1) 0 1
----- ----- ----- -------
Comprehensive income 291 322 603 663
===== ===== ===== =======
</TABLE>
10
<PAGE>
FULTON BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
Fulton Bancorp, Inc. ("Company") is a Delaware corporation that was organized
for the purpose of becoming the holding company for Fulton Savings Bank, FSB
("Bank") upon the Bank's conversion from a federal mutual savings bank to a
federal capital stock savings bank. The Bank's conversion was completed on
October 17, 1996. The Bank is a community oriented financial institution that
engages primarily in the business of attracting deposits from the general public
and using those funds to originate residential and commercial mortgage loans
within its market area. The Bank's deposits are insured up to applicable limits
by the Savings Association Insurance Fund.
The Company's operating results depend primarily on its net interest income,
which is the difference between the income it receives on its loan and
investments portfolio, and its cost of funds, which consists of interest paid on
deposits and borrowings. The Company's operating results are also affected by
its level of non-interest income and expenses. Non-interest income consists
primarily of loan servicing fees, gain on sale of loans and service charges and
other fees. Non-interest expenses include employee salaries and benefits,
occupancy costs, deposit insurance premiums, data processing expenses and other
operating costs.
The discussion and analysis included herein covers certain changes in results of
operations during the three month and six month periods ended December 31, 1998
and 1997, as well as those material changes in liquidity and capital resources
that have occurred since June 30, 1998.
The following should be read in conjunction with the Company's 1998 Annual
Report to Shareholders which contains the latest audited financial statements
and notes thereto, together with Management's Discussion and Analysis of
Financial Condition and Results of Operations contained therein. Therefore,
only material changes in financial condition and results of operation are
discussed herein.
FINANCIAL CONDITION AT DECEMBER 31, 1998 AND JUNE 30, 1998
- ----------------------------------------------------------
Total assets increased $6.4 million or 5.8% to $116.5 million at December 31,
1998 primarily due to growth in loans receivable, which increased $10.6 million
or 12.0%. Management took advantage of favorable rates and terms available on
Federal Home Loan Bank advances which funded $5.7 million of the growth in total
assets. Deposits increased by $2.2 million or 3.2% due primarily to growth in
transaction savings accounts, which increased $1.2 million or 7.7% due to
normal seasonal fluctuations, and certificates of deposit increased $1.0 million
or 1.8%.
11
<PAGE>
During the six months ended December 31, 1998, the Company completed one stock
repurchase program and its Board of Directors authorized, subject to Office of
Thrift Supervision approval which was received on November 18, 1998, a second
stock repurchase program for the repurchase of up to ten percent of the
Company's outstanding common shares, or 170,205 shares, in the open market over
a twelve month period. In connection with the repurchase programs, the Company
purchased 106,862 shares of treasury stock for $1,824,000 during the six months
ended December 31, 1998. Primarily as a result of the treasury stock purchases,
total stockholders' equity decreased $239,000 from June 30, 1998 to December 31,
1998. Employee Stock Ownership Plan (ESOP) and Management Recognition and
Development Plan (MRDP) transactions increased total stockholders equity
$1,239,000 in the aggregate, net income contributed $603,000 and dividends paid
totaled $257,000.
Nonperforming assets, which are defined as loans 90 days or more past due and
loans on nonaccrual status, totaled $453,000 or 0.39% of total assets at
December 31, 1998 compared to $313,000 or 0.28% of total assets as June 30,
1998.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------
Net income for the three months ended December 31, 1998 decreased $30,000 or
9.3% compared to the three months ended December 31, 1997, and diluted earnings
per share decreased 1 cent or 5.0% to 19 cents per share for the current
quarter. Net interest income increased $27,000 and income taxes decreased
$23,000. Those favorable variances were partially offset by a $41,000 decrease
in non-interest income, a $19,000 increase in non-interest expense, and a
$20,000 increase in the provision for loan losses.
The $27,000 or 2.6% increase in net interest income reflected a $10.6 million or
10.1% increase in average total interest earning assets. Average mortgage loans
increased $11.8 million or 14.7%. All other interest earning assets declined
$1.2 million in the aggregate. An increase in average Federal Home Loan Bank
advances of approximately $7.8 million funded a significant portion of the
increase in average total earning assets. Net interest margin was 3.70% of
average earning assets for the current quarter compared to 3.97% for the same
period last year. The decline in net interest margin primarily reflected a 24
basis point decrease in mortgage loan yields.
The $41,000 or 18.6% decrease in non-interest income primarily reflected
decreases in loan servicing fees and gain on sales of loans, which were
partially offset by a decrease in loss from foreclosed assets. The decline in
loan servicing fees was due to the amortization of servicing assets pursuant to
SFAS No. 125 adopted January 1, 1997, while the decline in gain on sales of
loans reflected a lower volume of loan sales.
The $19,000 or 2.6% increase in non-interest expense primarily reflected a
$62,000 increase in other non-interest expense plus increases in data processing
and occupancy costs. Those unfavorable variances were partially offset by a
$68,000 decrease in employee salaries and benefits. The increase in other non-
interest expense primarily reflected timing differences in the payment of
expenses. The 14.7% decrease in employee salaries and benefits, the largest
component of non-interest expense, was due primarily to a decrease of $77,000 in
MRDP
12
<PAGE>
expense for the current quarter compared to the same quarter of a year ago.
As mentioned in the notes to consolidated financial statements, the Company
selected an amortization method which recognizes a higher percentage of
compensation cost in the earlier years than in the later years of the service
period. The three months ended December 31, 1997 was the first quarter for MRDP.
The $20,000 increase in the provision for loan losses reflected management's
judgment of the provision necessary to maintain an adequate loan reserve balance
based upon loan growth and the quality of the loan portfolio.
The $23,000 decrease in income tax expense primarily reflected decreased pre-tax
income. The Company's effective income tax rate for the three months ended
December 31, 1998 was 36.6% compared to 37.3% for the same period last year.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------
Net income for the six months ended December 31, 1998 decreased $59,000 or 8.9%
compared to the six months ended December 31, 1997, and diluted earnings per
share decreased 3 cents or 7.3% to 38 cents per share for the current six
months. Net interest income increased $98,000 and income taxes decreased
$36,000. However, those favorable variances were more than offset by a $135,000
increase in non-interest expense, a $48,000 decrease in non-interest income,
and a $10,000 increase in the provision for loan losses.
The $98,000 or 4.8% increase in net interest income reflected a $10.8 million or
10.6% increase in average total earning assets. Average mortgage loans
increased $9.0 million or 11.3%, and all other interest earning assets increased
$1.8 million in the aggregate. Net interest margin was 3.74% of average earning
assets for the six months ended December 31, 1998 compared to 3.95% for the same
period last fiscal year. The decline in net interest margin primarily reflected
an increase in the proportion of earning assets supported by higher cost Federal
Home Loan Bank advances, plus a 10 basis point decrease in interest earning
asset yields. Approximately $7.7 million of the increase in average total
earning assets was funded by Federal Home Loan Bank advances.
The $135,000 or 10.2% increase in non-interest expense primarily reflected a
$109,000 increase in employee salaries and benefits plus an increase in data
processing costs. Employee salaries and benefits, the largest component of non-
interest expense increased 14.7% due primarily to a $98,000 increase in MRDP
expense. MRDP expense was first incurred starting in the three months ended
December 31, 1997. Accordingly, the six month period ended December 31, 1997
included only three months of MRDP expense, while the six month period ended
December 31, 1998 included six months of MRDP expense.
The $48,000 or 12.0% decrease in non-interest income primarily reflected
decreases in loan servicing fees and income from sales of loans, which were
partially offset by a decrease in loss from foreclosed assets. The decline in
loan servicing fees was due to the amortization of servicing assets pursuant to
SFAS No. 125 adopted January 1, 1997, while the decline in gain
13
<PAGE>
on sale of loans reflected management's decision to increase leverage of the
Company's equity by retaining more loan production in the Company's portfolio
and not selling as many mortgage loans to the secondary market.
The $10,000 increase in the provision for loan losses reflected management's
judgment of the provision necessary to maintain an adequate loan reserve balance
based upon loan growth and the quality of the loan portfolio.
The $36,000 decrease in income tax expense primarily reflected decreased pre-tax
income. The Company's effective income tax rate was 36.8% for the six months
ended December 31, 1998 compared to 36.9% for the six months ended December 31,
1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Bank's primary sources of funds are deposits, proceeds from principal and
interest payments on loans, mortgage-backed securities, investment securities
and net operating income. While maturities and scheduled amortization of loans
and mortgage-backed securities are a somewhat predictable source of funds,
deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. The Bank utilizes advances
from the Federal Home Loan Bank to supplement its supply of lendable funds. At
December 31, 1998, FHLB advances totaled $18,549,000.
The Bank must maintain an adequate level of liquidity to ensure availability of
sufficient funds to support loan growth and deposit withdrawals, satisfy
financial commitments and to take advantage of investment opportunities. At
December 31, 1998, the Bank had approved loan commitments totaling $9.3 million
and had undisbursed loans in process of $9.6 million.
Liquid funds necessary for normal daily operations are maintained in a working
checking account and a daily time account with the Federal Home Loan Bank of Des
Moines. It is the Bank's current policy to maintain adequate collected balances
in those deposit accounts to meet daily operating expenses, customer
withdrawals, and fund loan demand. Funds received from daily operating
activities are deposited on a daily basis in the checking account and
transferred, when appropriate, to the daily time account to enhance income.
At December 31, 1998, certificates of deposit amounted to $54.4 million or 76.2%
of total deposits, including $34.6 million of fixed rate certificates scheduled
to mature within twelve months. Historically, the Bank has been able to retain
a significant amount of its deposits as they mature. Management believes it has
adequate resources to fund all loan commitments from savings deposits, loan
payments, maturities of investment securities and the ability to obtain advances
from the Federal Home Loan Bank of Des Moines.
The Office of Thrift Supervision requires a thrift institution to maintain an
average daily balance of liquid assets (cash and eligible investments) equal to
at least 4% of the average daily balance of its net withdrawable deposits and
short-term borrowing. The Bank's liquidity ratio was 9.70% at December 31,1998.
The Bank consistently maintains liquidity levels in excess of regulatory
requirements, and believes this is an appropriate strategy for proper asset and
liability management.
14
<PAGE>
The Office of Thrift Supervision requires institutions such as the Bank to meet
certain tangible, core, and risk-based capital requirements. Tangible capital
generally consists of stockholders' equity minus certain intangible assets.
Core capital generally consists of stockholders' equity. The risk-based capital
requirements presently address risk related to both recorded assets and off-
balance sheet commitments and obligations. The following table summarizes the
Bank's capital ratios and the ratios required by regulation (dollars in
thousands) at December 31, 1998.
<TABLE>
<CAPTION>
Percent of
Adjusted
Amount Total Assets
---------- ------------
(Unaudited)
<S> <C> <C>
Tangible capital $19,396 16.7%
Tangible capital requirement 2,328 2.0
------- ----
EXCESS $17,068 14.7%
======= ====
Core capital $19,396 16.7%
Core capital requirement 4,657 4.0
------- ----
EXCESS $14,739 12.7%
======= ====
Risk-based capital $20,261 29.3%
Risk-based capital requirement 5,524 8.0
------- ----
EXCESS $14,737 21.3%
======= ====
</TABLE>
YEAR 2000 ISSUE
- ---------------
The year 2000 issue concerns computer software programs which use only two
digits to identify the calendar year in date fields. Software applications
utilizing two digit date fields could produce erroneous results at the turn of
the century. The year 2000 issue presents several potential risks to the
Company.
The banking transactions of the Company's customers are processed by one or more
computer systems provided by a third-party data processing service. Failure of
one or more of those systems to function as a result of the year 2000 date
change could result in the Company's inability to properly process customer
transactions. If that were to occur, the Company could lose customers to other
financial institutions, resulting in a loss of revenue.
A number of the Company's borrowers utilize computers and computer software to
varying degrees in conjunction with the operation of their businesses. The
customers and suppliers of the businesses may utilize computers as well. Should
the Company's borrowers, or the businesses on which they depend, experience year
2000 related computer problems, such borrowers' cash flow could be disrupted,
adversely effecting their ability to repay their loans with the Company.
Concern on the part of certain depositors that the year 2000 related problems
could impair access to their deposit account balances following the year 2000
date change could result in the Company experiencing a deposit outflow prior to
December 31, 1999. Should the year 2000 related problems occur which cause any
of the Bank's systems, or the systems of the third-party service bureau upon
which the Company depends, to become inoperative, increased personnel costs
could be incurred if additional staff is required to perform functions that the
inoperative systems would have other wise performed.
15
<PAGE>
Management believes it is not possible to estimate the potential lost revenue
due to the year 2000 issue, as the extent and longevity of such potential
problems cannot be predicted.
The Company has a Year 2000 Action Plan which management has used to identify
and correct Year 2000 compliance issues. The Company has reviewed all services
and operational components to identify technical and non-technical areas of
concern. Having identified these internal and external components, the Company
has replaced some of its computer hardware with Year 2000 compliant equipment.
The Company has requested third party providers to insure Year 2000 compliance
by requiring them to test their own systems and services. All third party
vendors have identified Year 2000 issues and are compliant or are completing
revisions to systems and software to become Year 2000 complaint in the first
quarter of 1999. Testing schedules have been established with each provider. The
primary service provider for the Company is Fiserv, which provides data
processing services. Fiserv has indicated that it is Year 2000 compliant.
Further, the Company has tested all of its internal computer software and has
determined that they are Year 2000 compliant.
A number of the Company's borrowers utilize computers and computer software to
varying degrees in conjunction with the operation of their businesses. Should
the Company's borrowers, or the businesses on with they depend, experience Year
2000 related computer problems, these borrowers may experience cash flow
disruptions which could adversely affect their ability to repay their loans to
the Company. The Company has contacted these borrowers to determine their status
relating to compliance with Year 2000 issues. Responses received from these
borrowers indicate that they are aware of the Year 2000 problem and are
compliant or taking the necessary steps to be compliant. The Company is
requiring new borrowers to be Year 2000 compliant before granting any extensions
of credit.
The Company has developed a business resumption and contingency plan. This plan
takes into account the actions the Company will implement if there is a
disruption caused by Year 2000 related computer problems. The Company feels that
the probability of an extended disruption is unlikely. Nevertheless, the
contingency plans being developed take into account disruptions caused by the
loss utilities such as power, water or telecommunications. The Company is
preparing to handle its business transactions off-line for a short period of
time.
16
<PAGE>
FULTON BANCORP, INC AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to any material legal proceedings at
this time. From time to time the Bank is involved in various claims and legal
actions arising in the ordinary course of business.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
At the Annual Meeting of Shareholders of Fulton Bancorp, Inc. ("Meeting") held
on October 20, 1998, the shareholders re-elected two Directors, namely, Bonnie
K. Smith and David W. West to serve for three-year terms, or until their
respective successors have been elected and qualified. The terms of Directors
Billy M. Conner, Kermit D. Gohring, Clifford E. Hamilton, Jr., Richard W.
Gohring, and Dennis Adrian continued after the meeting.
The following is a summary of votes cast. No broker non-votes were received.
Vote For Vote Withheld
-------- -------------
Bonnie K. Smith 1,363,014 7,768
David W. West 1,362,900 7,882
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
--------
27 -- Financial Data Schedule
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FULTON BANCORP, INC
February 16, 1999 /s/ Kermit D. Gohring
Date___________________ By:___________________________
Kermit D. Gohring
President
February 16, 1999 /s/ Bonnie K. Smith
Date___________________ By:___________________________
Bonnie K. Smith
Secretary - Treasurer
(Principal Accounting Officer)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF FULTON BANCSHARES, INC. FOR THE THREE MONTHS ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 631
<INT-BEARING-DEPOSITS> 7,225
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,700
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 103,775
<ALLOWANCE> 1,032
<TOTAL-ASSETS> 116,522
<DEPOSITS> 71,760
<SHORT-TERM> 0
<LIABILITIES-OTHER> 957
<LONG-TERM> 18,549
0
0
<COMMON> 18
<OTHER-SE> 25,238
<TOTAL-LIABILITIES-AND-EQUITY> 116,522
<INTEREST-LOAN> 4,031
<INTEREST-INVEST> 64
<INTEREST-OTHER> 325
<INTEREST-TOTAL> 4,420
<INTEREST-DEPOSIT> 1,770
<INTEREST-EXPENSE> 2,288
<INTEREST-INCOME-NET> 2,132
<LOAN-LOSSES> 70
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,460
<INCOME-PRETAX> 954
<INCOME-PRE-EXTRAORDINARY> 603
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 603
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.38
<YIELD-ACTUAL> 3.74
<LOANS-NON> 233
<LOANS-PAST> 220
<LOANS-TROUBLED> 633
<LOANS-PROBLEM> 404
<ALLOWANCE-OPEN> 971
<CHARGE-OFFS> 12
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 1,032
<ALLOWANCE-DOMESTIC> 977
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 55
</TABLE>
