<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly
period ended September 30, 1997 , 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 No. 0-10587
-------
FULTON FINANCIAL CORPORATION
-------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2195389
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Penn Square, P.O. Box 4887 Lancaster, Pennsylvania 17604
-------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(717) 291-2411
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(Registrant's telephone number, including area code)
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 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 [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value -- 40,613,608 shares outstanding as of
------------------------------------------------------------------------
November 4, 1997.
----------------
<PAGE>
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
-----
Description Page
- ----------- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
(a) Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996............................3
(b) Consolidated Statements of Income -
Three and nine months ended September 30, 1997 and 1996.............4
(c) Consolidated Statements of Cash Flows -
Nine months ended September 30, 1997 and 1996.......................5
(d) Notes to Consolidated Financial Statements -
September 30, 1997..................................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................16
SIGNATURES...............................................................17
2
<PAGE>
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per-share data)
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
----------------------------------
ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks............................................................................ $ 187,014 $ 180,691
Interest-bearing deposits with other banks......................................................... 1,225 2,077
Mortgage loans held for sale....................................................................... 1,502 125
Investment securities:
Held to maturity (Fair value: $292,456 in 1997 and $428,897 in 1996).............................. 292,483 429,138
Available for sale................................................................................ 574,221 349,092
Loans.............................................................................................. 3,245,082 3,035,147
Less: Allowance for loan losses.................................................................. (46,765) (44,792)
Unearned income.................................................................................. (7,998) (8,080)
------------- -----------
Net Loans..................................................................................... 3,190,319 2,982,275
------------- -----------
Premises and equipment............................................................................ 59,576 57,900
Accrued interest receivable....................................................................... 26,488 27,044
Other assets...................................................................................... 79,894 82,981
------------- -----------
Total Assets.................................................................................. $ 4,412,722 $ 4,111,323
============= ===========
LIABILITIES
- ----------------------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing.............................................................................. $ 542,895 $ 543,628
Interest-bearing................................................................................. 3,062,109 2,824,326
------------- -----------
Total Deposits................................................................................ 3,605,004 3,367,954
------------- -----------
Short-term borrowings:
Securities sold under agreements to repurchase................................................... 157,029 139,670
Federal funds purchased.......................................................................... 31,175 63,825
Demand notes of U.S. Treasury.................................................................... 5,792 5,544
------------- -----------
Total Short-Term Borrowings................................................................... 193,996 209,039
------------- -----------
Accrued interest payable.......................................................................... 28,557 20,667
Other liabilities................................................................................. 70,317 42,546
Long-term debt.................................................................................... 56,613 51,560
------------- -----------
Total Liabilities............................................................................. 3,954,487 3,691,766
------------- -----------
SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
Common stock ($2.50 par)
Shares: Authorized 200,000,000
Issued and Outstanding 40,628,608 (40,447,949 in 1996)................................. 101,572 92,174
Capital surplus................................................................................... 293,010 217,833
Retained earnings................................................................................. 45,164 100,160
Net unrealized holding gains on securities available for sale..................................... 18,489 9,390
------------- -----------
Total Shareholders' Equity.................................................................... 458,235 419,557
------------- -----------
Total Liabilities and Shareholders' Equity.................................................... $ 4,412,722 $ 4,111,323
============= ===========
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
3
<PAGE>
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per-share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------ ------------------------------
1997 1996 1997 1996
------------------------------------ ------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
- ----------------------------------------------------------------------------------------------------------------------------------
Loans, including fees......................................... $ 68,790 $ 62,699 $ 201,066 $ 182,287
Investment securities:
Taxable...................................................... 10,945 10,516 31,022 31,377
Tax-exempt................................................... 612 900 2,021 2,735
Dividends.................................................... 645 528 1,860 1,537
Federal funds sold............................................ 93 123 177 589
Interest-bearing deposits with other banks.................... 13 40 53 140
----------- -------- ----------- -----------
Total Interest Income.................................... 81,098 74,806 236,199 218,665
INTEREST EXPENSE
- --------------------------------------------------------------------------------------------------------------------------------
Deposits...................................................... 31,924 28,654 91,644 85,520
Short-term borrowings......................................... 2,252 2,417 6,390 5,842
Long-term debt................................................ 873 363 2,639 1,430
----------- -------- ----------- -----------
Total Interest Expense.................................... 35,049 31,434 100,673 92,792
----------- -------- ----------- -----------
Net Interest Income....................................... 46,049 43,372 135,526 125,873
PROVISION FOR LOAN LOSSES..................................... 1,930 1,669 5,389 3,442
----------- -------- ----------- -----------
Net Interest Income After
Provision for Loan Losses............................... 44,119 41,703 130,137 122,431
----------- -------- ----------- -----------
OTHER INCOME
- --------------------------------------------------------------------------------------------------------------------------------
Trust department.............................................. 2,050 1,900 6,684 5,714
Service charges on deposit accounts........................... 4,023 3,591 11,627 10,392
Other service charges and fees................................ 2,344 2,312 6,447 6,309
Gain on sale of mortgage loans................................ 361 281 875 715
Investment securities gains................................... 2,631 596 5,205 2,136
----------- -------- ----------- -----------
Total Other Income........................................ 11,409 8,680 30,838 25,266
OTHER EXPENSES
- --------------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits................................ 16,531 15,528 49,078 45,570
Net occupancy expense......................................... 2,557 2,468 7,774 7,537
Equipment expense............................................. 1,862 1,599 5,460 4,662
FDIC assessment expense....................................... 174 2,753 497 3,243
Special services.............................................. 1,729 1,766 5,043 5,015
Other......................................................... 8,740 7,712 23,136 22,717
----------- -------- ----------- -----------
Total Other Expenses...................................... 31,593 31,826 90,988 88,744
----------- -------- ----------- -----------
Income Before Income Taxes................................ 23,935 18,557 69,987 58,953
INCOME TAXES.................................................. 7,377 5,597 21,703 17,666
----------- -------- ----------- -----------
Net Income................................................ $ 16,558 $ 12,960 $ 48,284 $ 41,287
=========== ======== =========== ===========
- --------------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA:
Net income.................................................... $ 0.41 $ 0.32 $ 1.19 $ 1.02
Cash dividends................................................ $ 0.170 $ 0.152 $ 0.499 $ 0.441
Weighted average shares outstanding........................... 40,596,340 40,393,702 40,548,961 40,355,919
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
---------------------------------
1997 1996
---------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................................................. $ 48,284 $ 41,287
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses................................................................ 5,389 3,442
Depreciation and amortization of premises and equipment.................................. 5,306 4,624
Net amortization of investment security premiums......................................... 149 337
Gain on sale of investment securities.................................................... (5,205) (2,136)
Net (increase) decrease in mortgage loans held for sale.................................. (1,377) 103
Amortization of intangible assets........................................................ 1,159 1,152
Decrease in accrued interest receivable.................................................. 556 1,236
Increase in other assets................................................................. (2,837) (1,944)
Increase in accrued interest payable..................................................... 7,890 5,065
Increase (decrease) in other liabilities................................................. 3,699 (7,050)
--------------- --------------
Total adjustments..................................................................... 14,729 4,829
--------------- --------------
Net cash provided by operating activities............................................. 63,013 46,116
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale....................................... 113,568 40,079
Proceeds from maturities of securities held to maturity.................................... 138,321 179,109
Proceeds from maturities of securities available for sale.................................. 39,973 26,084
Purchase of securities held to maturity.................................................... (3,567) (99,026)
Purchase of securities available for sale.................................................. (335,144) (145,268)
Decrease in short-term investments......................................................... 852 2,347
Net increase in loans...................................................................... (213,433) (220,880)
Purchase of premises and equipment......................................................... (6,982) (9,495)
--------------- --------------
Net cash used in investing activities................................................. (266,412) (227,050)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits................................................ 5,361 879
Net increase in time deposits.............................................................. 231,689 144,710
Increase (decrease) in long-term debt...................................................... 5,053 (14,615)
(Decrease) increase in short-term borrowings............................................... (15,043) 108,342
Dividends paid............................................................................. (18,867) (17,020)
Net proceeds from issuance of common stock................................................. 1,529 1,717
Acquisition of treasury stock.............................................................. - (1,482)
--------------- --------------
Net cash provided by financing activities............................................. 209,722 222,531
--------------- --------------
Net Increase in Cash and Due From Banks.................................................... 6,323 41,597
Cash and Due From Banks at Beginning of Period............................................. 180,691 165,709
--------------- --------------
Cash and Due From Banks at End of Period................................................... $ 187,014 $ 207,306
=============== ==============
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest................................................................................. $ 92,783 $ 87,727
Income taxes............................................................................. $ 17,006 $ 14,686
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
NOTE B - Net Income Per Share
Net income per share is computed on the basis of the weighted average number of
common shares outstanding.
NOTE C - Stock Dividend
The Board of Directors declared a 10% stock dividend on May 1, 1997 which was
paid on June 13, 1997 to shareholders of record as of May 23, 1997. All share
and per-share information has been restated to reflect the effect of this stock
dividend.
NOTE D - Mergers and Acquisitions
The Woodstown National Bank & Trust Company - On February 28, 1997, the
Corporation completed its acquisition of The Woodstown National Bank & Trust
Company (Woodstown) of Woodstown, New Jersey. As provided under the terms of
the merger agreement, Woodstown became a wholly-owned subsidiary of the
Corporation and each of the outstanding shares of Woodstown common stock was
converted into 1.76 shares of the common stock of the Corporation. The
Corporation issued 3.2 million shares of its common stock in connection with the
merger. The transaction was accounted for as a pooling of interests and all
financial statements and financial information contained herein have been
restated to include the accounts and results of operations of Woodstown for all
periods presented. Woodstown has approximately $265 million in total assets and
operates seven branch offices in Salem and Gloucester Counties. As a result of
the merger, Woodstown became the Corporation's second banking subsidiary in the
state of New Jersey and tenth overall.
The Peoples Bank of Elkton - On August 31, 1997, the Corporation completed its
acquisition of The Peoples Bank of Elkton (Elkton) of Elkton, Maryland. As
provided under the terms of the Merger Agreement, each of the outstanding shares
of the common stock of Elkton was converted into 4.158 shares of the
Corporation's common stock. The Corporation issued 958,000 shares of its common
stock in connection with the merger. The transaction was accounted for as a
pooling of interests and all financial statements and financial information
contained herein have been restated to include the accounts and results of
operations of Elkton for all periods presented. Elkton has approximately $96
million in assets and operates two branch offices in Cecil County, Maryland. As
a result of the merger, Elkton became the Corporation's second banking
subsidiary in the State of Maryland and eleventh overall.
Keystone Heritage Group, Inc. - On August 15, 1997, the Corporation entered
into a Merger Agreement to acquire Keystone Heritage Group, Inc. (Keystone
Heritage) of Lebanon, PA. Keystone Heritage is a $650 million bank holding
company whose sole banking subsidiary is Lebanon Valley National Bank (Lebanon
Valley), which has 24 community banking offices in Lebanon, Lancaster, Dauphin,
Berks, and Schuylkill counties.
6
<PAGE>
Under the terms of the Merger Agreement, each of the 4.0 million shares of
Keystone Heritage's common stock will be exchanged for 1.83 shares of the
Corporation's common stock. The acquisition is subject to approval by bank
regulatory authorities and Keystone Heritage shareholders. The transaction is
expected to be completed in the first or second quarter of 1998 and will be
accounted for as a pooling of interests. As a result of the acquisition,
Keystone Heritage will be merged into the Corporation and Lebanon Valley will be
combined with one or more of the Corporation's existing banking affiliates
already operating in Lebanon Valley's markets.
NOTE E - New Accounting Standards
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
- ------------------------------------------------------------------------------
of Liabilities: Statement of Financial Accounting Standards No. 125, "Accounting
- --------------
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (Statement 125) was issued in 1996 and is effective for 1997.
Statement of Financial Accounting Standards No. 127 (Statement 127) was also
issued in 1996 and amended Statement 125 by deferring for one year the effective
date for certain provisions of Statement 125. The Corporation adopted the
applicable provisions of Statement 125, on January 1, 1997 and intends to adopt
the remaining provisions on January 1, 1998. No material financial statement
impact is expected.
Earnings Per Share: Statement of Financial Accounting Standards No. 128,
- ------------------
"Earnings Per Share" (Statement 128) was issued in February, 1997. Statement 128
simplifies the standards for computing earnings per share (EPS) previously found
in Accounting Principles Board Opinion No. 15 and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. It also requires a reconciliation of the numerator and denominator
of basic and diluted EPS. Statement 128 is effective for periods ending after
December 15, 1997 and requires restatement of all prior-period EPS data
presented. Statement 128 will not have a significant impact on the net income
per share of the Corporation.
Reporting Comprehensive Income: Statement of Financial Accounting Standards No.
- ------------------------------
130 "Reporting Comprehensive Income" (Statement 130) was issued in July, 1997.
Statement 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The objective of Statement 130 is to report a measure of all changes in equity
that result from economic events of the period other than transactions with
owners. Comprehensive income is the total of net income and all other non-owner
changes in equity. Statement 130 is effective for fiscal years beginning after
December 15, 1997. Adoption of the statement will require the Corporation to
include all non-owner changes in equity as components of comprehensive income.
Currently, such non-owner changes in equity include only unrealized gains and
losses on available for sale investment securities.
7
<PAGE>
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
MERGER AND ACQUISITIONS
- -----------------------
In recent years, the Corporation has engaged in the strategic acquisition of
banks with similar operating philosophies located in desirable suburban or rural
markets. This external growth strategy, as well as the continued internal growth
of the Corporation's existing franchise, is intended to increase the value of
the Corporation to customers, employees and shareholders.
The Woodstown National Bank & Trust Company - On February 28, 1997, the
Corporation completed its acquisition of The Woodstown National Bank & Trust
Company (Woodstown) of Woodstown, New Jersey. As provided under the terms of
the merger agreement, Woodstown became a wholly-owned subsidiary of the
Corporation and each of the outstanding shares of Woodstown common stock was
exchanged for 1.76 shares of the common stock of the Corporation. The
Corporation issued 3.2 million shares of its common stock in connection with the
merger. Woodstown, with approximately $265 million in assets, became the
Corporation's tenth banking subsidiary and second located in New Jersey. The
transaction was accounted for as a pooling of interests. All of the financial
information contained herein has been restated to include the accounts and
results of operations of Woodstown for all periods presented.
The Peoples Bank of Elkton - On August 31, 1997, the Corporation completed its
acquisition of The Peoples Bank of Elkton (Elkton) of Elkton, MD. As provided
under the terms of the Merger Agreement each of the outstanding shares of the
common stock of Elkton was converted into 4.158 shares of the Corporation's
common stock. The Corporation issued 958,000 shares of its common stock in
connection with the merger. The transaction was accounted for as a pooling of
interests and all financial information contained herein have been restated to
include the accounts and results of operations of Elkton for all periods
presented. Elkton has approximately $96 million in assets and operates two
branch offices in Cecil County, MD. As a result of the merger, Elkton became
Corporation's eleventh banking subsidiary and second in the State of Maryland.
Keystone Heritage Group, Inc. - On August 15, 1997, the Corporation entered
into a Merger Agreement to acquire Keystone Heritage Group, Inc. (Keystone
Heritage) of Lebanon, PA. Keystone Heritage is a $650 million bank holding
company whose sole banking subsidiary is Lebanon Valley National Bank (Lebanon
Valley), which has 24 community banking offices in Lebanon, Lancaster, Dauphin,
Berks, and Schuylkill counties.
Under the terms of the Merger Agreement, each of the 4.0 million shares of
Keystone Heritage's common stock will be exchanged for 1.83 shares of the
Corporation's common stock. The acquisition is subject to approval by bank
regulatory authorities and Keystone Heritage shareholders. The transaction will
be accounted for a pooling of interests and is expected to be completed in the
first or second quarter of 1998. As a result of the transaction, Keystone
Heritage will be merged into the Corporation and Lebanon Valley will be combined
with one or more of the Corporation's existing banking affiliates already
operating in Lebanon Valley's markets.
RESULTS OF OPERATIONS
- ---------------------
Quarter ended September 30, 1997 versus Quarter ended September 30, 1996
- -------------------------------------------------------------------------
The Corporation's net income for the third quarter of 1997 increased $3.6
million, or 27.8%, in comparison to net income for the third quarter of 1996.
Third quarter net income of $16.6 million, or $0.41 per share, represented an
annualized return on average assets (ROA) of 1.52% and a return on average
equity (ROE) of 14.69%. This compares to 1996 net income of $13.0 million, or
$0.32 per share (1.29% ROA and 12.72% ROE).
8
<PAGE>
The third quarter of 1996 was adversely impacted by the industry-wide assessment
by the Federal Deposit Insurance Corporation (FDIC) to recapitalize the Savings
Association Insurance Fund (SAIF). The Corporation's one-time SAIF assessment
of $2.5 million ($1.6 million, net of taxes) reduced 1996 net income by $0.04
per share. Excluding this one-time assessment, net income for the third quarter
of 1997 increased by 13.5% and net income per share increased 13.9% in
comparison to the same period of 1996.
The increase in net income in 1997 was a result of the continued steady growth
of both net interest income and non interest income. Increases in both income
categories continued to outpace the growth rate of operating expenses.
Net Interest Income
- -------------------
Net interest income increased $2.7 million, or 6.2%, for the quarter. Overall,
this increase was a result of growth in the Corporation's balance sheet offset
by a decrease in net interest margin. The following tables summarize the
components of this increase as well as the changes in average interest-earning
assets and interest-bearing liabilities and the average interest rates thereon.
All dollar amounts are in thousands.
<TABLE>
<CAPTION>
Change
-------------------------
1997 1996 Dollar Percent
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Interest income................ $ 81,098 $ 74,806 $ 6,292 8.4%
Interest expense............... 35,049 31,434 3,615 11.5
------------ ------------ ----------- ------------
Net interest income............ $ 46,049 $ 43,372 $ 2,677 6.2%
============ ============ =========== ============
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------
1997 1996 % Change
---------- ----------- -------------
<S> <C> <C> <C>
Average interest-earning assets.................... $3,991,775 $3,703,595 7.8%
Yield on interest-earning assets................... 8.13% 8.08% 0.6%
Average interest-bearing liabilities............... $3,250,629 $3,054,078 6.4%
Cost of interest-bearing liabilities............... 4.31% 4.12% 4.6%
Net interest margin (fully taxable-equivalent)..... 4.70% 4.78% (1.7)%
</TABLE>
The 8.4% increase in interest income was due to both an increase in average
interest-earning assets and an increase in yields. The majority of the growth
in interest-earning assets was realized in the loan portfolio, which grew 10.4%
compared to the third quarter of 1996. Loan growth occurred primarily in
consumer installment and home equity loans ($116 million, or 18.5%, increase),
and commercial mortgages ($80 million, or 22.4%, increase). Consumer loans
increased as a result of the expansion of indirect automobile lending to most of
the Corporation's subsidiary banks. Commercial loan growth resulted from
improved calling and marketing efforts and the economic stability in the
Corporation's markets.
The yield increase was a result of the Federal Reserve Board raising short-term
rates by 25 basis points in March, 1997. As a result, the prime lending rate of
the Corporation's banks was increased from 8.25% to 8.50%.
The 11.5% increase in interest expense was a result of an increase in average
interest-bearing liabilities and an increase in rates. Average interest-bearing
deposits increased $173 million, or 6.1%. Almost all of this growth was in
certificates of deposit with maturities of one to two years ($170 million, or
78%, increase). In the past
9
<PAGE>
year, the Corporation has focused on CD promotions to support deposit growth,
realizing greater success in the shorter maturities.
Many of these short-term CD's represent "new" money to the Corporation. The
Corporation's goal is to retain these funds when they mature and to introduce
the new customers to other bank products. Another deposit source which has
shown a significant increase is non-interest bearing core deposits ($54 million,
or 10%, increase). The growth in these deposits provides evidence that CD growth
has also supported core deposit growth.
The average rate on one to two year CD's remained consistent at approximately
5.65% over both periods. However, these CD's continue to grow as a percentage
of the Corporation's total sources of funds (12% in 1997 vs. 7% in 1996) and as
a result, the total cost of funds continues to rise. This situation is a
significant reason for the increase in total cost of funds from 4.12% in 1996 to
4.31% in 1997. In addition, the rates on short-term borrowings and certain
deposit products also increased as a result of the March, 1997 rate increase.
Offsetting these factors somewhat is the growth in interest-free deposits.
The Corporation continues to compete for deposits with banks and non-banks
alike. Continuing to grow deposits while maintaining a low cost of funds will
continue to be a challenge to the Corporation.
Provision and Allowance for Loan Losses
- ---------------------------------------
The following table summarizes the activity in the Corporation's allowance for
loan losses:
<TABLE>
<CAPTION>
Three Months Ended
September 30
---------------------
(In thousands) 1997 1996
--------- ----------
<S> <C> <C>
Balance, beginning of period... $46,183 $41,852
Provision for loan losses...... 1,930 1,669
Net (charge-offs) recoveries... (1,478) 281
Allowance purchased............ 130 -
--------- ----------
Balance, end of period......... $46,765 $43,802
========= ==========
</TABLE>
The provision for loan losses for the quarter ended September 30, 1997 was $1.9
million compared to $1.7 million for the same period in 1996. The increase in
the provision was primarily a result of growth in the Corporation's loan
portfolio. The allowance for loan losses as a percentage of gross loans (net of
unearned income) remained fairly stable from December 31, 1996 (1.48%) to
September 30, 1997 (1.44%). In addition, as shown by the following table, the
overall level of non-performing assets also remained consistent:
<TABLE>
<CAPTION>
Sept. 30 Dec. 31
(Dollars in thousands) 1997 1996
---------- ---------
<S> <C> <C>
Nonaccrual loans..................... $15,542 $15,183
Loans 90 days past due and accruing.. 8,812 7,055
Other real estate owned.............. 1,150 2,134
---------- ---------
$25,504 $24,372
========== =========
Non-performing assets/Total assets... 0.58% 0.59%
Non-performing loans/Gross loans..... 0.75% 0.73%
</TABLE>
10
<PAGE>
Other Income
- ------------
Other income for the quarter ended September 30, 1997 was $11.4 million. This
was an increase of $2.7 million, or 31.4%, over the comparable period in 1996.
Excluding security gains, other income was $8.8 million in 1997 as compared to
$8.1 million in 1996, a $694,000 or 8.6%, increase. Trust department income
($150,000, or 7.9%, increase) and service charges on deposit accounts ($432,000,
or 12.0%, increase) accounted for the majority of this increase due to the
expansion of investment management and trust services, changes in fee structures
and growth in deposits over the past year. The $2.0 million increase in
security gains resulted from the sale of certain investments in stocks of other
financial institutions. Management monitors the Corporation's available for
sale securities and makes periodic purchase and sale decisions based on current
and expected market conditions.
Other Expenses
- --------------
Total other expenses for the third quarter of 1997 decreased $233,000, or 0.7%,
to $31.6 million from $31.8 million in the comparable period of 1996. Excluding
the impact of the one-time SAIF assessment in 1996 of $2.5 million, total other
expenses increased $2.3 million, or 7.8%. The majority of this increase was in
salaries and benefits, which increased $1.0, or 6.5%, in comparison to the
third quarter of 1996. This increase was a result of normal merit increases,
which the Corporation has targeted at approximately 4.0% for 1997, and an
increase in average full-time equivalent employees from 1,915 in 1996 to 1,938
in 1997. This slight increase in number of employees has resulted from the
growth of certain affiliate banks.
Net occupancy and equipment expenses increased $352,000, or 8.7%, to support the
Corporation's technology initiatives as well as its branch network. The
Corporation continues to invest in technology to improve customer service and to
support new products. This technology investment has been carefully integrated
with the Corporation's existing branch network, which continues to be the
customers' preferred delivery channel in the Corporation's markets.
The Corporation uses software and other computer-related technologies throughout
its business that will be affected by the date change in the year 2000. An
internal study is currently in process to determine the full scope and related
costs to modify, update, or replace existing systems and software to ensure that
the Corporation will continue to meet its internal needs and those of its
customers. Although final cost estimates have yet to be determined, it is
expected that these costs will result in an increase in expenses during 1998 and
1999.
Other non-interest expense increased by $1.0 million, or 13.3%, in the third
quarter of 1997 as compared to the same period in 1996. This was mainly due to
certain non-recurring expenses. Approximately $300,000 of professional fees
were incurred in the third quarter of 1997 related to the acquisition of Elkton.
In addition, the increase in the cash surrender value of officers life insurance
was reduced by $350,000 as a result of certain changes in the plan. Excluding
these items, other expense increased 4.9%.
Income Taxes
- ------------
Income tax expense for the quarter was $7.4 million as compared to $5.6 million
for the comparable period in 1996. This translates to an effective tax rate of
30.8% in 1997 and 30.2% in 1996. In general, the increase in the effective tax
rate was a result of fewer investments in tax-free municipal securities.
Nine months ended September 30, 1997 versus Nine months ended September 30,
- ----------------------------------------------------------------------------
1996
- ----
The Corporation's net income for the first nine months of 1997 increased $7.0
million, or 16.9%, in comparison to net income for the same period in 1996. Net
income of $48.3 million, or $1.19 per share, represented an ROA of 1.54% and an
ROE of 14.83%. This compares to 1996 net income of $41.3 million, or $1.02 per
share
11
<PAGE>
(1.41% ROA and 13.89% ROE). Excluding the impact of the $1.6 million after tax
SAIF assessment recorded in the third quarter of 1996,net income for the first
nine months of 1997 increased $5.4 million,or 12.5%.
Net Interest Income
- -------------------
Net interest income increased $9.7 million, or 7.7%, for the first nine months
of 1997 as compared to 1996. This increase was a result of the growth in the
Corporation's balance sheet and a slightly higher net interest margin. The
following tables summarize the components of this increase as well as the
changes in average interest-earning assets and interest-bearing liabilities and
the average interest rates thereon. All dollar amounts are in thousands.
<TABLE>
<CAPTION>
Change
-------------------------
1997 1996 Dollar Percent
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Interest income................. $ 236,199 $ 218,665 $ 17,534 8.0%
Interest expense................ 100,673 92,792 7,881 8.5%
------------ ------------ ----------- ------------
Net interest income............. $ 135,526 $ 125,873 $ 9,653 7.7%
============ ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
1997 1996 % Change
---------- ----------- -----------
<S> <C> <C> <C>
Average interest-earning assets............... $3,895,842 $3,635,582 7.2%
Yield on interest-earning assets.............. 8.08% 8.02% 0.7%
Average interest-bearing liabilities.......... $3,173,163 $2,995,326 5.9%
Cost of interest-bearing liabilities.......... 4.23% 4.13% 2.4%
Net interest margin
(fully taxable equivalent).................. 4.74% 4.72% 0.4%
</TABLE>
The 8.0% increase in interest income was due primarily to an increase in average
interest-earning assets during the period and an increase in yields. The
average balance of the loan portfolio grew 11.3% compared to the same period in
1996. As with the third quarter, loan growth was realized generally in consumer
installment and home equity loans ($140 million, or 24%, increase), and
commercial mortgages ($83 million, or 24%, increase).
The 8.5% increase in interest expense was a result of an increase in average
interest-bearing liabilities and a small increase in rates. Average deposits
increased $182 million, or 5.6%. Most of this growth has been in certificates of
deposit with maturities one to two years ($144 million, or 69%, increase) and
non-interest bearing demand deposits ($50 million, or 11.6%, increase).
The impact of the increase in short-term rates was not as pronounced over the
first nine months of 1997 as it was in the third quarter. Since the rate change
occurred in March, the third quarter was fully affected whereas only the last
six months of the nine-month period were impacted.
12
<PAGE>
Provision and Allowance for Loan Losses
- ---------------------------------------
The following table summarizes the activity in the Corporation's allowance for
loan losses:
<TABLE>
<CAPTION>
Nine Months Ended
September 30
---------------------
(In thousands) 1997 1996
---------- ---------
<S> <C> <C>
Balance, beginning of period..... $ 44,792 $ 41,134
Provision for loan losses........ 5,389 3,442
Net charge-offs.................. (3,546) (774)
Allowance purchased.............. 130 -
---------- ---------
Balance, end of period........... $ 46,765 $ 43,802
========== =========
</TABLE>
The provision for loan losses for the first nine months of 1997 was $5.4 million
compared to $3.4 million for the same period of 1996. The increase in the
provision was primarily a result of the growth in the Corporation's loan
portfolio. Overall asset quality during the first half of the year continued to
be strong. Nonperforming assets to total assets were 0.58% at September 30, 1997
as compared to 0.59% at December 31, 1996.
Other Income
- ------------
Other income for the nine months ended September 30, 1997 was $30.8 million.
This was an increase of $5.6 million, or 22.1%, over the comparable period in
1996. Of this increase, $3.1 million was a result of higher investment security
gains. In the first nine months of 1997, certain investments in stocks of other
financial institutions were sold due to management's assessment of current
market conditions.
Excluding investment security gains, other income increased $2.5 million, or
10.8%. Trust department income ($970,000, or 17.0%, increase) and service
charges on deposit accounts ($1.2 million, or 11.9%, increase) accounted for
almost all of this increase as a result of the growth of investment management
and trust services,changes in deposit fee structures and growth in deposits
over the past year.
Other Expenses
- --------------
Total other expenses for the first nine months of 1997 increased $2.2 million,
or 2.5%, to $91.0 million from $88.7 million in the first nine months of 1996.
The majority of this increase was in salaries and benefits, which increased $3.5
million, or 7.7%. This increase was due to several unusual items. In 1996,
accruals of expense for certain employee benefit plans were reduced, resulting
in a reduction of 1996 benefits expenses of approximately $250,000. In 1997, the
Corporation accrued an additional expense of approximately $600,000 related to
certain post-employment benefits plans accounted for under the provisions of
Statement of Financial Accounting Standards No. 112. Excluding these two
factors, salaries and benefits expenses increased $2.7 million, or 5.8%. This
growth rate was consistent with management's goals and reflects the continued
growth of the Corporation.
Excluding the increase in salaries and benefits expenses, and the one-time SAIF
assessment, other expenses increased $1.3 million, or 3.1%, to $41.9 million in
1997 from $40.7 million in 1996. This increase is attributable to growth.
13
<PAGE>
Income Taxes
- ------------
Income tax expense for the nine months ended September 30, 1997 was $21.7
million as compared to $17.7 million for the comparable period in 1996,
resulting in an effective tax rate of 31.0% in 1997 and 30.0% in 1996. In
general, this effective tax rate increase was due to fewer investments tax-in
free municipal securities.
FINANCIAL CONDITION
- -------------------
At September 30, 1997, the Corporation had total assets of $4.4 billion, an
increase of $301 million, or 7.3%, over $4.1 billion in assets December 31,
1996. This growth was primarily driven by an increase in loans.
Loans, net of unearned income and the allowance for loan losses, increased $208
million, or 7.0%, to $3.2 billion. As noted in the net interest income
discussion, this increase was attributable primarily to installment loans and
commercial mortgages.
In the first nine months of 1997, investment security purchases were generally
classified as available for sale in order to provide the Corporation with more
flexibility for liquidity purposes. Funds for investment security purchases were
mainly provided by maturities and sales of existing investments. At September
30, 1997, approximately $22.7 million in security purchases which did not settle
until after the end of the quarter were recorded in other liabilities.
Loan growth was funded primarily through the growth in deposits. Since
December 31, 1996, deposits increased $237 million, or 7.0%, primarily in
certificates of deposit with maturities of less than two years.
Liquidity and Interest Rate Sensitivity Management
- --------------------------------------------------
The goals of the Corporation's asset/liability management function are to ensure
adequate liquidity while maintaining an appropriate balance between the relative
sensitivity of interest-earning assets and interest-bearing liabilities.
Adequate liquidity is provided by cash, short-term investments, securities
available for sale and scheduled payments and maturities of loans receivable and
securities held to maturity. Liquidity is also provided by deposits and short-
term borrowings.
While the interest rate sensitivity gap (the difference between repricing
opportunities available for interest-earning assets and interest-bearing
liabilities) must be managed over all periods, the Corporation focuses on the
six-month period as the key interval affecting net interest income. This
shorter period is monitored as a large percentage of the Corporation's assets
and liabilities reprice within this period. In addition, short-term rate swings
can be more pronounced and provide a shorter time for reaction and strategy
adjustment.
The Corporation's policy provides for the six-month gap position to be
maintained between 0.85 and 1.15. The Corporation was positioned within this
range throughout the first nine months of 1997.
Capital Resources
- -----------------
Shareholders' equity increased $38.7 million or 9.2% during the first nine
months of 1997. This growth is a result of net income offset by normal quarterly
dividends to shareholders. In addition, the appreciation in the value of the
Corporation's available for sale investments contributed $9.1 million to the
increase in shareholders' equity. As a result of the 10% stock dividend paid on
June 13, 1997, approximately $83 million of the Corporation's retained earnings
was transferred to common stock and capital surplus.
14
<PAGE>
Current capital guidelines measure the adequacy of a bank holding company's
capital by taking into consideration the differences in risk associated with
holding various types of assets as well as exposure to off-balance sheet
commitments. The guidelines call for a minimum risk-based Tier I capital
percentage of 4.0% and a minimum risk-based total capital of 8.0%. Tier I
capital includes common shareholders' equity less goodwill and non-qualified
intangible assets. Total capital includes all Tier I capital components plus
the allowance for loan losses.
The Corporation is also subject to a "leverage capital" requirement, which
compares capital (using the definition of Tier I capital) to total balance sheet
assets and is intended to supplement the risk based capital ratios in measuring
capital adequacy. The minimum acceptable leverage capital ratio is 3% for
institutions which are highly-rated in terms of safety and soundness and which
are not experiencing or anticipating any significant growth. Other institutions
are expected to maintain capital levels at least one or two percent above the
minimum.
As of September 30, 1997, the Corporation's capital ratios exceeded all of the
minimum ratios as set forth above.
15
<PAGE>
PART II -- OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits -- The following is a list of the exhibits required by Item
601 of Regulation S-K and filed as part of this report:
(1) Articles of incorporation as amended on April 13, 1990 and
Bylaws of Fulton Financial Corporation as amended on April 17,
1990 -Incorporated by reference from Exhibits 19(a) and 19(b)
of the Fulton Financial Corporation Quarterly Report on Form
10-Q for the quarter ended March 31, 1990.
(2) Instruments defining the right of securities holders,
including indentures:
(a) Rights Agreement dated June 20, 1989 between Fulton
Financial Corporation and Fulton Bank - Incorporated by
reference to Exhibit 1 of the Fulton Financial Corporation
Current Report on Form 8-K dated June 21, 1989.
(3) Material Contracts - Executive Compensation Agreements and
Plans:
(a) Severance Agreements entered into as of April 17, 1984 and
as of May 17, 1988 between Fulton Financial Corporation
and the following executive officers: Robert D. Garner,
Rufus A. Fulton, Jr., James K. Sperry and R. Scott Smith,
Jr. - Incorporated by reference from Exhibit 28(a) of the
Fulton Financial Corporation Quarterly Report on Form 10-Q
for the quarter ended March 31, 1990.
(b) Incentive Stock Option Plan adopted September 19, 1995 -
Incorporated by reference from Exhibit A of Fulton
Financial Corporation's 1996 Proxy Statement.
(c) Severance Agreement entered into as of November 19, 1992
between Fulton Financial Corporation and Charles J.
Nugent, Executive Vice President and Chief Financial
Officer, incorporated by reference from Exhibit 10(c) to
the Fulton Financial Corporation Annual Report on
10-Form K for the year ended December 31, 1992.
(4) Financial Data Schedule - September 30, 1997
(b) Reports on Form 8-K:
(1) Form 8-K dated August 28, 1997, reporting execution of a Merger
Agreement between Fulton Financial Corporation and Keystone
Heritage Group, Inc.
(2) Form 8-K dated September 15, 1997 reporting the merger of Fulton
Financial Corporation and The Peoples Bank of Elkton.
16
<PAGE>
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
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.
FULTON FINANCIAL CORPORATION
Date: November 7, 1997 /s/ Rufus A. Fulton, Jr.
---------------- -----------------------------
Rufus A. Fulton, Jr.
President and Chief Executive Officer
Date: November 7, 1997 /s/ Beth Ann L. Chivinski
------------------- -----------------------------
Beth Ann L. Chivinski
Senior Vice President-Controller
(Chief Accounting Officer)
17
<PAGE>
EXHIBIT INDEX
Exhibits Required Pursuant
to Item 601 of Regulation S-K
-----------------------------
3. Articles of Incorporation as amended on April 30, 1990, and Bylaws of
Fulton Financial Corporation as amended on April 17, 1990 - Incorporated
by reference from Exhibits 19(a) and 19(b) of the Fulton Financial
Corporation Quarterly Report on Form 10-Q for the quarter ended March 31,
1990.
4. Instruments defining the rights of security holders, including
indentures.
(a) Rights Agreement dated June 20, 1989 between Fulton Financial
Corporation and Fulton Bank- Incorporated by reference to Exhibit 1
of the Fulton Financial Corporation Current Report on Form 8-K dated
June 21, 1989.
10. Material Contracts
(a) Severance Agreements entered into as of April 17, 1984 and as of May
17, 1988 between Fulton Financial Corporation and the following
executive officers: Robert D. Garner, Rufus A. Fulton, Jr., James K.
Sperry and R. Scott Smith, Jr. - Incorporated by reference from
Exhibit 28(a) of the Fulton Financial Corporation Quarterly Report on
Form 10-Q for the quarter ended March 31, 1990.
(b) Incentive Stock Option Plan adopted September 19, 1995 - Incorporated
by reference from Exhibit A of Fulton Financial Corporation's 1996
Proxy Statement.
(c) Severance Agreement entered into as of November 19, 1992 between
Fulton Financial Corporation and Charles J. Nugent, Executive Vice
President and Chief Financial Officer, filed as Exhibit 10(c) to the
Fulton Financial Corporation Annual Report on Form 10-K for the year
ended December 31, 1992.
27. Financial data schedule - September 30, 1997.
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FULTON
FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30,1997 AND THE
RELATED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30
1997 AND OTHER FINANCIAL DATA INCLUDED WITHIN MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AS OF AND FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 187,014
<INT-BEARING-DEPOSITS> 1,225
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 574,221
<INVESTMENTS-CARRYING> 292,483
<INVESTMENTS-MARKET> 292,456
<LOANS> 3,245,082
<ALLOWANCE> 46,765
<TOTAL-ASSETS> 4,412,722
<DEPOSITS> 3,605,004
<SHORT-TERM> 193,996
<LIABILITIES-OTHER> 98,874
<LONG-TERM> 56,613
0
0
<COMMON> 101,572
<OTHER-SE> 356,663
<TOTAL-LIABILITIES-AND-EQUITY> 4,412,722
<INTEREST-LOAN> 201,066
<INTEREST-INVEST> 34,903
<INTEREST-OTHER> 230
<INTEREST-TOTAL> 236,199
<INTEREST-DEPOSIT> 91,644
<INTEREST-EXPENSE> 100,673
<INTEREST-INCOME-NET> 135,526
<LOAN-LOSSES> 5,389
<SECURITIES-GAINS> 5,205
<EXPENSE-OTHER> 90,988
<INCOME-PRETAX> 69,987
<INCOME-PRE-EXTRAORDINARY> 48,284
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,284
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.19
<YIELD-ACTUAL> 4.74
<LOANS-NON> 15,542
<LOANS-PAST> 8,812
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 44,792
<CHARGE-OFFS> 5,436
<RECOVERIES> 1,890
<ALLOWANCE-CLOSE> 46,765
<ALLOWANCE-DOMESTIC> 46,765
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
