<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
---------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 Number: 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
----------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each Exchange
Title of each class on which registered
----------------------------- -------------------
Common Stock, $2.50 Par Value None
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 [_].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [_]
1
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The aggregate market value of 37,139,237 shares of common stock held by
non-affiliates, calculated based on the average of the bid and asked prices on
March 12, 1998, was $1,180,331,363.
As of March 12, 1998 there were 40,647,044 shares of Fulton Financial
Corporation common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference:
Part of Form 10-K into
Document which incorporated
-------- ----------------------
Definitive Proxy Statement of Part III
Fulton Financial Corporation
dated March 6, 1998
2
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PART I
Item 1. Description of Business
- --------------------------------
Fulton Financial Corporation (the Corporation) is a Pennsylvania
business corporation which was organized on February 8, 1982 and became a bank
holding company through the acquisition of all of the outstanding stock of
Fulton Bank on June 30, 1982. Fulton Financial Corporation provides a wide
variety of retail and commercial banking and investment management and trust
services to customers located primarily in central and eastern Pennsylvania,
southern New Jersey, northern Maryland and southern Delaware through its eleven
wholly-owned banking subsidiaries: Fulton Bank, Farmers Trust Bank, Swineford
National Bank, Lafayette Bank, FNB Bank, N.A., Great Valley Bank, Hagerstown
Trust Company, Delaware National Bank, The Bank of Gloucester County, The
Woodstown National Bank & Trust Company, and The Peoples Bank of Elkton.
In addition, Fulton Financial Corporation owns all of the outstanding
stock of four nonbank subsidiaries: (i) Fulton Financial Realty Company, which
holds title to or leases certain properties upon which Fulton Bank and Farmers
Trust Bank branch offices and other Fulton Bank facilities are located; (ii)
Fulton Life Insurance Company, which engages in the business of reinsuring
credit life and accident and health insurance directly related to extensions of
credit by the banking subsidiaries of the Corporation; (iii) Central
Pennsylvania Financial Corporation which owns certain limited partnership
interests in partnerships invested in low and moderate income housing projects
and two nonbank companies in various stages of liquidation; and (iv) FFC
Management, Inc. which owns certain investment securities and other passive
investments.
Fulton Financial Corporation is registered with the Federal Reserve
Board in accordance with the requirements of the Federal Bank Holding Company
Act of 1956, as amended, and is subject to regulation by the Federal Reserve
Board, the Office of the Comptroller of the Currency, the Pennsylvania
Department of Banking, the State of Maryland and the New Jersey Department of
Banking.
The common stock of Fulton Financial Corporation is listed for
quotation on the National Market System of the National Association of
Securities Dealers Automated Quotation System under the symbol FULT.
All of the banking subsidiaries face significant competition from
commercial banks, savings banks, credit unions and various nonbank providers of
financial services. None of the Corporation's banking subsidiaries is dependent
upon any single customer, and the loss of any single customer or a few customers
would not have a material adverse impact on any of the banking subsidiaries. The
table below summarizes selected information about the Corporation and its
banking subsidiaries.
<TABLE>
<CAPTION>
No. of Employees
---------------------
Main Office Total Total Full- Part-
Banking Subsidiary Location Assets Deposits time time
---------------------------------------- --------------------- ---------- ---------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
Fulton Bank Lancaster, PA $ 1,883.3 $ 1,442.1 661 236
Farmers Trust Bank Lebanon, PA 181.5 150.2 57 20
Swineford National Bank Hummels Wharf, PA 222.2 185.2 79 41
Lafayette Bank Easton, PA 451.7 394.1 163 75
FNB Bank, N.A. Danville, PA 283.2 245.0 86 28
Great Valley Bank Reading, PA 287.5 225.7 83 15
Hagerstown Trust Company Hagerstown, MD 373.6 309.1 169 19
Delaware National Bank Georgetown, DE 132.5 120.0 65 11
The Bank of Gloucester County Woodbury, NJ 276.9 235.2 99 39
The Woodstown National Bank & Trust Co. Woodstown, NJ 267.3 240.3 83 44
The Peoples Bank of Elkton Elkton, MD 99.1 86.7 42 0
Fulton Financial (Parent Company) Lancaster, PA N/A N/A 83 4
------- -------
1,670 532
======= =======
</TABLE>
3
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Fulton Financial Corporation maintains branch offices in twenty
counties across four mid-Atlantic states. In nine of these counties, the
Corporation ranks in the top three in deposit market share (based on deposits as
of June 30, 1997). The following table summarizes information about the counties
in which the Corporation has branch offices and its market position in each
county.
<TABLE>
<CAPTION>
No. of Financial Deposit Market
Institutions Share (6/30/97)
Population ------------------- ---------------
(1997 Banking Banks/ Credit
County State Estimate) Subsidiary Thrifts Unions Rank %
- -------------------- ----- ------------ ---------------------- --------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Lancaster PA 453,000 Fulton Bank 18 13 1 21.0%
Dauphin PA 248,000 Fulton Bank 23 15 8 3.5
Cumberland PA 208,000 Fulton Bank 17 11 11 1.9
York PA 371,000 Fulton Bank 22 25 19 0.6
Chester PA 415,000 Fulton Bank 35 11 25 0.8
Lebanon PA 117,000 Farmers Trust Bank 12 2 4 11.1
Snyder PA 38,000 Swineford National 5 0 1 35.7
Union PA 41,000 Swineford National 8 1 6 4.8
Northumberland PA 96,000 Swineford National 17 3 13 2.4
FNB Bank, N.A. 3 8.5
Montour PA 18,000 FNB Bank, N.A. 4 3 1 40.0
Lycoming PA 119,000 FNB Bank, N.A. 12 14 12 0.8
Columbia PA 64,000 FNB Bank, N.A. 11 0 6 6.2
Northampton PA 259,000 Lafayette Bank 21 19 3 10.1
Berks PA 354,000 Great Valley Bank 19 21 8 4.4
Montgomery PA 712,000 Great Valley Bank 41 40 44 0.1
Washington MD 128,000 Hagerstown Trust Company 10 3 1 21.5
Cecil MD 80,000 Peoples Bank of Elkton 8 3 2 14.0
Sussex DE 133,000 Delaware National Bank 11 4 7 1.3
Gloucester NJ 246,000 Bank of Gloucester County 23 6 3 9.6
Woodstown National 12 3.1
Salem NJ 68,000 Woodstown National 9 5 1 19.3
</TABLE>
Fulton Bank
-----------
Fulton Bank (Fulton) is a full-service commercial bank which was
originally chartered as a national banking association on February 8, 1882, and
converted to a Pennsylvania bank and trust company on July 1, 1974. As a
state-chartered bank whose deposits are insured by the Federal Deposit Insurance
Corporation (FDIC) and which is not a member of the Federal Reserve System,
Fulton is subject to regulation and periodic examination by the FDIC and the
Pennsylvania Department of Banking.
Fulton offers a full range of general retail and commercial banking
services, including the following: demand, savings and time deposits;
commercial, consumer and mortgage loans; vehicle and equipment leasing and
financing; VISA and MasterCard credit cards; VISA debit cards; and a wide range
of international services such as letters of credit and currency exchange.
Fulton maintains a network of automated teller machines, which is integrated
with the MAC(tm) regional and CIRRUS(tm) national automated teller systems, as
well as telephone banking services through the Bank-By-Phone system.
Fulton has trust powers and maintains a staff of investment, trust and
financial professionals. Personal services available through the Investment
Management and Trust Services Department of Fulton include trust and estate
planning, investment management, estate settlement, private banking, investments
and brokerage services, a mutual fund asset allocation program, and IRA
rollovers. Institutional services available include full service
4
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retirement plan management and 401(k) programs, cash reserve investment
management accounts, administrative and investment services for Foundations and
Endowments and comprehensive corporate trust services.
Fulton maintains correspondent relationships with major banks in New
York, Philadelphia, Pittsburgh, Baltimore and Charlotte and through them offers
a variety of collection and funds transfer services. Fulton is a member of the
Federal Home Loan Bank of Pittsburgh.
Fulton's market area consists of the south-central region of
Pennsylvania, primarily Lancaster County, Dauphin County, and portions of
Cumberland, Chester and York Counties. For marketing purposes, the Fulton Bank
trade area is divided into two primary regions -- the Lancaster County Region
and the Capital Region (consisting of Dauphin and Cumberland Counties) -- and
two secondary regions (York County and Chester County).
Approximately 70 percent of the business of Fulton is derived from the
Lancaster County Region, where its administrative headquarters, 27 branch
offices and six remote service facilities are located. Approximately 30 percent
of the business of Fulton is derived from its other regions, where its remaining
fifteen branch offices are located. Fulton's market areas have exhibited stable
economies and have experienced low unemployment rates. Diversity is the key to
the economic well-being of the Lancaster County Region. There are over 25
manufacturing companies located in the Lancaster Region having 500 or more
employees. The Lancaster County Region also ranks as one of the top agricultural
production areas in the country.
While the Capital Region also has a wide range of industry, its economy
is anchored by the thousands of workers who are employed by the state government
in the capitol city of Harrisburg and by the employees of several large service
organizations, including Capital Blue Cross/Pennsylvania Blue Shield which is
located in Cumberland County. Government employment figures are fairly constant
and are therefore an important factor in the below-average unemployment rate
experienced in the Capital Region.
Farmers Trust Bank
------------------
Farmers Trust Bank (Farmers) is a full-service commercial bank which
was chartered under the laws of the Commonwealth of Pennsylvania in 1892.
Farmers is a member of the Federal Reserve System and its deposits are insured
by the FDIC. Farmers is subject to regulation and periodic examination by the
Federal Reserve Bank of Philadelphia and by the Pennsylvania Department of
Banking. In addition to its administrative headquarters located in Lebanon,
Pennsylvania, Farmers maintains seven branch offices and one remote service
facility. The market area of Farmers consists of Lebanon County, Pennsylvania.
Farmers offers a full range of general retail and commercial banking
services, including demand, savings and time deposits, and commercial, consumer,
and mortgage loans. Farmers maintains automated teller machines which are
integrated with the MAC(tm) regional and CIRRUS(tm) national automated teller
systems. Farmers maintains correspondent relationships with major banks in New
York and Philadelphia and through them offers a variety of collection and funds
transfer services. Farmers is a member of the Federal Home Loan Bank of
Pittsburgh.
Farmers has trust powers and offers a variety of services through its
Trust Department, including estate planning, executorships, estate
administration, living trusts, life insurance trusts, testamentary trusts,
custodianships, guardianships, investment management accounts, escrow accounts
and mutual fund asset allocation accounts.
Swineford National Bank
-----------------------
Swineford National Bank (Swineford) is a national banking association
which was chartered in 1903. Swineford is a member of the Federal Reserve System
and its deposits are insured by the FDIC. As a national banking association,
Swineford is subject to regulation and periodic examination by the Office of the
Comptroller of the Currency. In addition to its administrative headquarters
located in Hummels Wharf, Pennsylvania, Swineford maintains six branch offices.
Swineford's market area is located entirely in Pennsylvania and includes Snyder,
Northumberland and Union Counties.
5
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Swineford offers a full range of general retail and commercial banking
services, including demand, savings and time deposits and commercial, consumer
and mortgage loans. Swineford maintains automated teller machines which are
integrated with the MAC(tm) regional and CIRRUS(tm) national automated teller
systems. Swineford maintains a correspondent relationship with major banks in
New York, Philadelphia and Pittsburgh and through them offers a variety of
collection and funds transfer services. Swineford is a member of the Federal
Home Loan Bank of Pittsburgh.
Lafayette Bank
--------------
Lafayette Bank (Lafayette) is a full-service commercial bank which was
originally chartered under the laws of the Commonwealth of Pennsylvania in 1922
as Lafayette Trust Bank. During 1988, Lafayette Trust Bank and Pen Argyl
National Bank, both wholly-owned subsidiaries of Fulton Financial Corporation,
merged to form Lafayette Bank. During 1991, Second National Bank of Nazareth, a
wholly-owned subsidiary of Fulton Financial Corporation serving the same market
area, was merged into Lafayette Bank.
As a state-chartered bank whose deposits are insured by the FDIC and
which is not a member of the Federal Reserve System, Lafayette is subject to
regulation and periodic examination by the FDIC and by the Pennsylvania
Department of Banking. In addition to its administrative headquarters located in
the City of Easton, Lafayette currently maintains twelve branch offices, all of
which are located in Northampton County, Pennsylvania.
Lafayette offers a full range of general retail and commercial banking
services, including demand, savings and time deposits, and commercial, consumer
and mortgage loans. Lafayette maintains automated teller machines which are
integrated with the MAC(tm) regional and CIRRUS(tm) national automated teller
systems. Lafayette maintains correspondent relationships with major banks in New
York, Philadelphia, Pittsburgh and Charlotte and through them offers a variety
of collection and funds transfer services. Lafayette Bank is a member of the
Federal Home Loan Bank of Pittsburgh.
Lafayette has trust powers and offers a variety of services through its
Trust Department, including estate planning, estate administration, living
trusts, life insurance trusts, testamentary trusts, custodianships,
guardianships, investment management accounts, escrow accounts, and IRA rollover
accounts.
FNB Bank, N.A.
--------------
FNB Bank, N.A. (FNB) is a national banking association which was
chartered in 1864. FNB is a member of the Federal Reserve System and its
deposits are insured by the FDIC. As a national banking association, FNB is
subject to regulation and periodic examination by the Office of the Comptroller
of the Currency. In addition to its administrative headquarters located in
Danville, Pennsylvania, FNB currently maintains eight branch offices. The market
area of FNB is located entirely in Pennsylvania and includes Montour, Lycoming,
Northumberland and Columbia Counties.
FNB offers a full range of general retail and commercial banking
services, including demand, savings and time deposits and commercial, consumer
and mortgage loans. FNB maintains automated teller machines which are integrated
with the MAC(tm) regional automated teller system. FNB maintains a correspondent
relationship with major banks in New York, Philadelphia and Pittsburgh and
through them offers a variety of collection and funds transfer services. FNB is
a member of the Federal Home Loan Bank of Pittsburgh.
FNB has trust powers and offers a variety of services including estate
planning, executorships, estate administration, living trusts, life insurance
trusts, testamentary trusts, agency accounts, guardianships and asset management
accounts.
Great Valley Bank
-----------------
Great Valley Bank (Great Valley) was organized as a Pennsylvania
chartered mutual savings association in 1974. During 1991, Great Valley
converted to a Pennsylvania chartered stock savings bank. As a state-chartered
savings bank whose deposits are insured by the FDIC and which is not a member of
the Federal Reserve System, Great Valley is subject to regulation and periodic
examination by the FDIC and by the Pennsylvania Department of Banking. In
addition to its administrative headquarters located in the City of Reading,
Great Valley maintains
6
<PAGE>
eight branch offices. The market area of Great Valley includes Berks County,
Pennsylvania and a portion of Montgomery County, Pennsylvania.
Great Valley offers retail banking services, principally in the form of
demand, savings and time deposits, as well as commercial, mortgage and consumer
loans. Great Valley maintains a correspondent banking relationship with a major
bank in Philadelphia and is a member of the Federal Home Loan Bank of
Pittsburgh.
Hagerstown Trust Company
------------------------
Hagerstown Trust Company (Hagerstown) is a full-service commercial bank
which was chartered under the laws of the State of Maryland in 1933. As a
state-chartered bank whose deposits are insured by the FDIC and which is not a
member of the Federal Reserve System, Hagerstown is subject to regulation and
periodic examination by the FDIC and by the Bank Commissioner of the State of
Maryland. In addition to its administrative headquarters located in Hagerstown,
Maryland, Hagerstown maintains thirteen branch offices, all of which are within
Washington County, Maryland.
Hagerstown offers a full range of general retail and commercial banking
services, including demand, savings and time deposits and commercial, consumer
and mortgage loans. Hagerstown maintains automated teller machines which are
integrated with MAC(tm) and HONOR(tm) regional and CIRRUS(tm) national automated
teller systems. Hagerstown maintains correspondent relationships with major
banks in Philadelphia, New York, Richmond, Baltimore and Charlotte. Hagerstown
is a member of the Federal Home Loan Bank of Atlanta.
Hagerstown has trust powers and offers a variety of services including
estate administration, estate planning, living trusts, life insurance trusts,
testamentary trusts, custodianships, guardianships, investment management
accounts, agency accounts, escrow accounts, employee benefits, pension and
profit sharing accounts, and mutual fund accounts.
Delaware National Bank
----------------------
Delaware National Bank (Delaware) is a national banking association
chartered in 1979. Delaware is a member of the Federal Reserve System and its
deposits are insured by the FDIC. Delaware is subject to regulation and periodic
examination by the Office of the Comptroller of the Currency. Delaware maintains
six branch offices in addition to an operations and administrative facility, all
of which are located within Sussex County, Delaware.
Delaware offers a full range of banking services including retail and
commercial checking, savings and time deposits, and consumer, mortgage, and
commercial loans. At this time, Delaware does not have trust powers and does not
offer investment or discount brokerage services. Delaware currently maintains
automated teller machines on the MAC(tm) regional automated teller system.
Delaware maintains a correspondent relationship with major banks in New York,
Baltimore and Wilmington and is a member of the Federal Home Loan Bank of
Pittsburgh.
The Bank of Gloucester County
-----------------------------
The Bank of Gloucester County (Gloucester) is a state bank chartered by
the State of New Jersey in 1989. The deposits of Gloucester are insured by the
FDIC and the bank is subject to regulation and periodic examinations by both the
State of New Jersey and the FDIC. Gloucester maintains eight branch offices in
addition to an operations facility and operates solely within Gloucester County,
New Jersey.
Gloucester offers a full range of banking services including retail and
commercial checking, savings and time deposits, and consumer, mortgage and
commercial loans. At this time, Gloucester does not have trust powers and does
not offer investment or discount brokerage services. Currently, Gloucester has
automated teller machines on the MAC(tm) regional automated teller system.
Gloucester maintains correspondent relationships with major banks in
Philadelphia and Pittsburgh and is a member of the Federal Home Loan Bank of New
York.
7
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The Woodstown National Bank & Trust Company
-------------------------------------------
The Woodstown National Bank & Trust Company (Woodstown) is a national
banking association which was chartered in 1920. Woodstown is a member of the
Federal Reserve System and its deposits are insured by the FDIC. As a national
banking association, Woodstown is subject to regulation and periodic examination
by the Office of the Comptroller of the Currency. Woodstown maintains seven full
service branch offices located in Salem and Gloucester Counties, New Jersey.
Woodstown offers a full range of banking services, including retail and
commercial checking, savings and time deposits, and consumer, mortgage and
commercial loans. Through its trust operations, Woodstown provides investment
management, estate settlement and planning and trust management services.
Woodstown maintains automated teller machines on the MAC(tm) regional automated
teller system. Woodstown maintains correspondent relationships with major banks
in Philadelphia, Pittsburgh and Charlotte and is a member of the Federal Home
Loan Bank of New York.
The Peoples Bank of Elkton
--------------------------
The Peoples Bank of Elkton (Elkton) is a state bank chartered by the
State of Maryland in 1924. The deposits of Elkton are insured by the FDIC and
the Bank is subject to regulation and periodic examinations by both the FDIC and
the State of Maryland. Elkton maintains two branch offices within Cecil County,
Maryland.
Elkton offers a full range of banking services, including retail and
commercial checking, savings and time deposits, and consumer, mortgage and
commercial loans. Elkton maintains automated teller machines on the MAC(tm)
regional automated teller system. At this time, Elkton does not have trust
powers and does not offer investment or discount brokerage services. Elkton
maintains correspondent relationships with major banks in Philadelphia,
Baltimore and Charlotte and is a member of the Federal Home Loan Bank of
Atlanta.
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,
Pennsylvania. 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 approximately 4.0
million shares of Keystone Heritage's common stock will be exchanged for 1.83
shares of the Corporation's common stock. In addition, each of the 84,000
options to acquire Keystone Heritage stock will be converted to options to
purchase the Corporation's stock. The transaction is expected to be completed in
the first 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 Farmers Trust Bank, of
Lebanon, Pennsylvania to become Lebanon Valley Farmers Bank. Concurrently with
the merger, deposits, loans and branches located in Lancaster and Dauphin
Counties will be transferred to Fulton Bank.
Based upon June 30, 1997 deposit market share information, Lebanon
Valley ranked first in Lebanon County with approximately 24% of the county's
total deposits. Upon merging with Farmers, the combined banks will have
approximately 35% of the deposit market share in Lebanon County. Lebanon
Valley's share of deposits in Lancaster County was approximately 2%, ranking it
twelfth. Upon completion of the merger, Fulton Bank will remain first in terms
of market share with approximately 23% of total deposits.
Ambassador Bank of the Commonwealth
-----------------------------------
On January 26, 1998, the Corporation entered into a merger agreement to
acquire Ambassador Bank of the Commonwealth (Ambassador) of Allentown,
Pennsylvania. Ambassador is a $275 million bank, which operates eight community
banking offices in Lehigh and Northampton counties.
Under the terms of the merger agreement, each of the 1.9 million shares
of Ambassador's common stock will be exchanged for 1.12 shares of the
Corporation's common stock. In addition, the 417,000 options and warrants to
acquire Ambassador stock will be exchanged for approximately 327,000 shares of
the Corporation's common stock. The
8
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acquisition is subject to approval by bank regulatory authorities and Ambassador
shareholders. The transaction is expected to be completed in the third quarter
of 1998 and will be accounted for as a pooling of interests. As a result of the
acquisition, Ambassador will be merged with and into Lafayette Bank.
Based upon June 30, 1997 deposit market share information, Ambassador
ranked sixth in Lehigh County with approximately 4.5% of the county's total
deposits. Ambassador's share of deposits in Northampton County was approximately
0.9%, ranking it sixteenth. Upon completion of the merger, the combined
Lafayette/Ambassador entity would rank third in Northampton County, with
approximately 11% of total deposits.
Certain additional statistical information relating to the business of
Fulton Financial Corporation is set forth in the following tables.
9
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FULTON FINANCIAL CORPORATION
COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------------------------
(Dollars in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
ASSETS Balance Interest Rate Balance Interest Rate
- ----------------------------------------- ------------- ----------- ------ ----------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases (1)................... $ 3,163,610 $ 271,791 8.59% $ 2,854,139 $ 246,579 8.64%
Taxable investment securities (2)...... 684,616 42,348 6.19 704,443 41,653 5.91
Tax-exempt investment securities (2)... 45,537 2,603 5.72 61,808 3,607 5.84
Equity securities (2).................. 51,779 2,599 5.02 40,880 2,101 5.14
Short-term investments................. 5,579 287 5.14 15,958 909 5.70
-------------- ------------ ------ ------------ ---------- ------
Total interest-earning assets............ 3,951,121 319,628 8.09 3,677,228 294,849 8.02
Noninterest-earning assets:
Cash and due from banks................ 162,296 156,501
Premises and equipment................. 59,232 55,291
Other assets(2)........................ 124,598 114,148
Less: Allowance for loan losses........ (46,337) (42,759)
-------------- -------------
Total Assets................... $ 4,250,910 $ 3,960,409
============== =============
<CAPTION>
Year Ended December 31
--------------------------------
(Dollars in thousands) 1995
- -----------------------------------------------------------------------------
Average Yield/
ASSETS Balance Interest Rate
- ----------------------------------------- ----------- --------- ------
<S> <C> <C> <C>
Interest-earning assets:
Loans and leases (1)................... $ 2,612,438 $ 230,201 8.81%
Taxable investment securities (2)...... 646,878 35,722 5.52
Tax-exempt investment securities (2)... 84,544 5,166 6.11
Equity securities (2).................. 37,731 2,072 5.49
Short-term investments................. 51,064 2,983 5.84
------------ ---------- ------
Total interest-earning assets............ 3,432,655 276,144 8.04
Noninterest-earning assets:
Cash and due from banks................ 154,283
Premises and equipment................. 50,715
Other assets(2)........................ 109,488
Less: Allowance for loan losses........ (41,004)
------------
Total Assets................... $ 3,706,137
============
<CAPTION>
Year Ended December 31
-----------------------------------------------------------------------------
(Dollars in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
LIABILITIES AND SHAREHOLDERS' EQUITY Balance Interest Rate Balance Interest Rate
- ----------------------------------------- ------------- ----------- ------ ----------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing liabilities:
Demand deposits........................ $ 400,938 $ 7,427 1.85% $ 410,159 $ 8,081 1.97%
Savings deposits....................... 827,637 20,346 2.46 843,463 20,819 2.47
Time deposits.......................... 1,740,840 97,013 5.57 1,554,375 85,714 5.51
Short-term borrowings.................. 186,843 8,836 4.73 179,805 8,569 4.77
Long-term debt......................... 56,135 3,396 6.05 31,407 1,994 6.35
-------------- ------------- ------ ------------- ----------- ------
Total interest-bearing liabilities....... 3,212,393 137,018 4.27 3,019,209 125,177 4.15
Noninterest-bearing liabilities:
Demand deposits........................ 522,439 474,692
Other.................................. 74,125 65,436
-------------- -------------
Total Liabilities.............. 3,808,957 3,559,337
Shareholders' equity..................... 441,953 401,072
-------------- -------------
Total Liabilities and
Shareholders' Equity......... $ 4,250,910 $ 3,960,409
============== =============
Net interest income...................... 182,610 169,672
Net yield on interest-earning assets..... 4.62% 4.61%
Tax equivalent adjustment (3)............ 3,823 3,896
------------- ------ ----------- ------
Net interest margin...................... $ 186,433 4.72% $ 173,568 4.72%
============= ====== =========== ======
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31
------------------------------------
(Dollars in thousands) 1995
- ---------------------------------------------------------------------------------
Average Yield/
LIABILITIES AND SHAREHOLDERS' EQUITY Balance Interest Rate
- ----------------------------------------- ------------ ----------- ------
<S> <C> <C> <C>
Interest-bearing liabilities:
Demand deposits........................ $ 423,670 $ 8,810 2.08%
Savings deposits....................... 831,165 22,950 2.76
Time deposits.......................... 1,422,677 78,709 5.53
Short-term borrowings.................. 125,613 6,428 5.12
Long-term debt......................... 36,531 2,233 6.11
------------- ------------ ------
Total interest-bearing liabilities....... 2,839,656 119,130 4.20
Noninterest-bearing liabilities:
Demand deposits........................ 431,767
Other.................................. 68,326
-------------
Total Liabilities.............. 3,339,749
Shareholders' equity..................... 366,388
-------------
Total Liabilities and
Shareholders' Equity......... $ 3,706,137
=============
Net interest income...................... 157,014
Net yield on interest-earning assets..... 4.57%
Tax equivalent adjustment (3)............ 4,671
------------- ------
Net interest margin...................... $ 161,685 4.71%
============ ======
- ----------------------------------------------------------------------------------
</TABLE>
(1) Includes nonperforming loans.
(2) Balances include amortized historical cost for available for sale
securities. The related unrealized holding gains on securities of $19,214
in 1997, $10,281 in 1996 and $6,315 in 1995 are included in other assets.
(3) Based on marginal Federal income tax rate and statutory interest expense
disallowances.
10
<PAGE>
FULTON FINANCIAL CORPORATION
RATE/VOLUME TABLE
The following table sets forth for the periods indicated a summary of
changes in interest income and interest expense resulting from corresponding
volume and rate changes:
<TABLE>
<CAPTION>
1997 vs. 1996 1996 vs. 1995
Increase (decrease) due Increase (decrease) due
to change in to change in
------------------------------------- -------------------------------------
Volume Rate Net Volume Rate Net
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income on:
Loans and leases ............................... $ 26,736 $(1,524) $ 25,212 $ 21,298 $(4,920) $ 16,378
Taxable investment securities .................. (1,172) 1,867 695 3,179 2,752 5,931
Tax-exempt investment securities ............... (950) (54) (1,004) (1,389) (170) (1,559)
Equity securities .............................. 560 (62) 498 173 (144) 29
Short-term investments ......................... (591) (31) (622) (2,051) (23) (2,074)
Total interest-earning assets ................ $ 24,583 $ 196 $ 24,779 $ 21,210 $(2,505) $ 18,705
Interest expense on:
Demand deposits ................................ $ (182) $ (472) $ (654) $ (281) $ (448) $ (729)
Savings deposits ............................... (391) (82) (473) 340 (2,471) (2,131)
Time deposits .................................. 10,282 1,017 11,299 7,286 (281) 7,005
Short-term borrowings .......................... 335 (68) 267 2,773 (632) 2,141
Long-term debt ................................. 1,570 (168) 1,402 (313) 74 (239)
Total interest-bearing liabilities ........... $ 11,614 $ 227 $ 11,841 $ 9,805 $(3,758) $ 6,047
</TABLE>
Note: The rate/volume variances are allocated in the table above by applying
the changes in volume times the prior period rate and by applying the
changes in rate times the current period volume on a consistent basis
throughout.
11
<PAGE>
FULTON FINANCIAL CORPORATION
INVESTMENT PORTFOLIO
The following table sets forth the carrying amount of investment securities
held to maturity (HTM) and available for sale (AFS) as of the dates shown:
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
HTM AFS Total HTM AFS Total HTM AFS Total
-------- -------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States Treasury and U.S.
Government agencies and
corporations ............... $ 43,617 $185,515 $229,132 $133,778 $177,335 $311,113 $253,678 $161,571 $415,249
State and municipal ............. 33,473 5,499 38,972 52,224 5,990 58,214 67,441 832 68,273
Other securities ................ 483 -- 483 1,326 150 1,476 12,670 778 13,448
Equity securities ............... -- 98,890 98,890 -- 63,161 63,161 -- 58,618 58,618
Mortgage-backed securities ...... 179,554 307,544 487,098 241,810 102,456 344,266 226,505 56,202 282,707
-------- -------- -------- -------- -------- -------- -------- -------- --------
Totals .................... $257,127 $597,448 $854,575 $429,138 $349,092 $778,230 $560,294 $278,001 $838,295
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
12
<PAGE>
FULTON FINANCIAL CORPORATION
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
The following tables set forth the maturities of investment securities at
December 31, 1997 and the weighted average yields of such securities (calculated
based upon historical cost).
HELD TO MATURITY (at amortized cost)
- ----------------
<TABLE>
<CAPTION>
MATURING
---------------------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
---------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- -------- ----- -------- ----- -------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States Treasury and
U.S. Government
agencies and corporations ................. $ 24,434 5.63% $ 15,898 5.98% $ 2,849 6.19% $ 436 7.38%
State and municipal (1) ........................ 8,506 8.22 12,731 8.54 8,937 8.65 3,299 9.71
Other securities ............................... 250 8.50 55 7.18 178 6.52 -- --
-------- ----- -------- ----- -------- ----- -------- -----
Totals ...................................... $ 33,190 6.31% $ 28,684 7.12% $ 11,964 8.03% $ 3,735 9.44%
======== ===== ======== ===== ======== ===== ======== =====
Mortgage-backed securities (2) ................ $179,554 6.06%
======== =====
</TABLE>
AVAILABLE FOR SALE (at estimated fair value)
- ------------------
<TABLE>
<CAPTION>
MATURING
---------------------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
---------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- -------- ----- -------- ----- -------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States Treasury and
U.S. Government
agencies and corporations ................. $ 47,657 5.64% $123,967 6.53% $ 13,644 6.36% $ 247 7.03%
State and municipal (1) ........................ 1,342 5.92 2,372 6.39 1,429 7.65 356 8.40
-------- ----- -------- ----- -------- ----- -------- -----
Totals ...................................... $ 48,999 5.65% $126,339 6.53% $ 15,073 6.48% $ 603 7.83%
======== ===== ======== ===== ======== ===== ======== =====
Mortgage-backed securities (2) ................. $307,544 6.46%
======== =====
</TABLE>
(1) Weighted average yields on tax-exempt securities have been computed on a
fully tax-equivalent basis assuming a tax rate of 35 percent.
(2) Maturities for mortgage-backed securities are dependent upon the interest
rate environment and prepayments on the underlying loans. For the purpose of
this table, the entire balance and weighted average rate is shown in one
period.
13
<PAGE>
FULTON FINANCIAL CORPORATION
LOAN PORTFOLIO BY TYPE
The following table sets forth the amount of loans outstanding
(including unearned income) as of the dates shown (1):
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural ............. $ 417,434 $ 389,377 $ 381,875 $ 367,032 $ 377,968
Real estate - construction ......................... 136,775 118,131 101,594 101,433 70,196
Real estate - mortgage ............................. 2,100,079 1,934,030 1,758,749 1,674,352 1,357,799
Consumer ........................................... 609,244 549,647 455,972 400,903 307,897
Leasing and other .................................. 53,698 43,962 33,699 25,205 18,428
---------- ---------- ---------- ---------- ----------
Totals .......................................... $3,317,230 $3,035,147 $2,731,889 $2,568,925 $2,132,288
========== ========== ========== ========== ==========
</TABLE>
(1) At December 31, 1997, Fulton Financial Corporation did not have any loan
concentrations to borrowers engaged in the same or similar industries that
exceeded 10% of total loans.
MATURITY & SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES
The following table summarizes the maturity and sensitivity of loans to
changes in interest rates as of December 31, 1997:
<TABLE>
<CAPTION>
One
One Year Through More Than
or Less Five Years Five Years Total
---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Floating rate ............. $ 645,620 $ 237,004 $ 381,308 $ 1,263,932
Fixed rate ................ 461,010 1,048,301 543,987 2,053,298
----------- ----------- ---------- -----------
Totals................ $ 1,106,630 $ 1,285,305 $ 925,295 $ 3,317,230
=========== =========== ========== ===========
</TABLE>
14
<PAGE>
FULTON FINANCIAL CORPORATION
RISK ELEMENTS IN LOAN PORTFOLIO
The following table presents information concerning the aggregate amount of
nonaccrual, past due and restructured loans and other nonperforming assets (4):
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans (1) (2) (3) ....................... $ 15,225 $ 15,183 $ 15,346 $ 19,326 $ 17,771
Accruing loans past due 90 days or more ............ 9,580 7,055 8,816 6,658 6,997
Other real estate .................................. 1,177 2,134 2,106 3,175 2,756
-------- -------- -------- -------- --------
Totals ........................................ $ 25,982 $ 24,372 $ 26,268 $ 29,159 $ 27,524
======== ======== ======== ======== ========
</TABLE>
(1) Includes impaired loans as defined by Statement of Financial Accounting
Standards No. 114 of approximately $12.9 million at December 31, 1997.
(2) As of December 31, 1997, the gross interest income that would have been
recorded during 1997 if nonaccrual loans had been current in accordance
with their original terms was approximately $1.4 million. The amount of
interest income on those nonaccrual loans that was included in 1997 net
income was approximately $892,000. At December 31, 1997, $13.5 million of
nonaccrual loans are considered to be adequately secured.
(3) Accrual of interest is generally discontinued when a loan becomes 90 days
past due as to principal and interest. When interest accruals are
discontinued, interest credited to income is reversed. Nonaccrual loans are
restored to accrual status when all delinquent principal and interest
becomes current or the loan is considered secured and in the process of
collection. Certain loans, primarily residential mortgages, that are
determined to be sufficiently collateralized may continue to accrue
interest after reaching 90 days past due.
(4) Excluded from the amounts presented above at December 31, 1997 are $15.8
million in domestic commercial loans for which payments were current, but
as to which the borrowers were experiencing significant financial
difficulties. These loans are subject to constant management attention and
their classification is reviewed monthly.
15
<PAGE>
FULTON FINANCIAL CORPORATION
SUMMARY OF LOAN LOSS EXPERIENCE
An analysis of the Corporation's loss experience is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans outstanding at end of year ................... $3,307,759 $3,027,067 $2,722,584 $2,558,544 $2,121,116
========== ========== ========== ========== ==========
Daily average balance of loans and leases .......... $3,163,610 $2,854,139 $2,612,438 $2,262,734 $2,051,532
========== ========== ========== ========== ==========
Balance of allowance for loan losses
at beginning of year .......................... $ 44,792 $ 41,134 $ 40,377 $ 32,874 $ 32,675
Loans charged-off:
Commercial, financial and agricultural ......... 2,397 1,629 1,875 1,825 3,694
Real estate - construction ..................... -- 30 -- 144 --
Real estate - mortgage ......................... 1,604 1,268 2,366 1,333 3,897
Consumer ....................................... 4,164 2,513 1,796 1,154 1,736
Leasing and other .............................. 70 50 59 33 51
---------- ---------- ---------- ---------- ----------
Total loans charged-off ........................ 8,235 5,490 6,096 4,489 9,378
---------- ---------- ---------- ---------- ----------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural ......... 790 1,204 1,462 1,207 2,146
Real estate - construction ..................... -- -- -- 58 --
Real estate - mortgage ......................... 708 1,378 530 593 242
Consumer ....................................... 1,211 983 843 561 816
Leasing and other .............................. 15 22 20 29 62
---------- ---------- ---------- ---------- ----------
Total recoveries ............................... 2,724 3,587 2,855 2,448 3,266
---------- ---------- ---------- ---------- ----------
Net loans charged-off .............................. 5,511 1,903 3,241 2,041 6,112
Provision for loan losses .......................... 7,742 5,561 3,998 3,074 6,311
Allowance purchased ................................ 130 -- -- 6,470 --
---------- ---------- ---------- ---------- ----------
Balance at end of year ............................. $ 47,153 $ 44,792 $ 41,134 $ 40,377 $ 32,874
========== ========== ========== ========== ==========
Ratio of net charge-offs during period to
average loans ................................. 0.17% 0.07% 0.12% 0.09% 0.30%
========== ========== ========== ========== ==========
Ratio of allowance for loan losses to loans
outstanding at end of year .................... 1.43% 1.48% 1.51% 1.58% 1.55%
========== ========== ========== ========== ==========
</TABLE>
16
<PAGE>
FULTON FINANCIAL CORPORATION
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses has been allocated as follows to provide for
the possibility of losses being incurred within the following categories of
loans at the dates indicated:
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------ ------------------
(dollars in thousands)
% of % of % of % of % of
loans in loans in loans in loans in loans in
each each each each each
Allowance category Allowance category Allowance category Allowance category Allowance category
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
& agriculture ............. $ 10,087 12.6% $ 10,154 12.8% $ 11,615 14.0% $ 14,741 14.3% $ 14,484 17.7%
Real estate - construction
& mortgages ............... 10,889 67.4 13,975 67.6 13,744 68.1 14,472 69.1 12,679 67.0
Consumer, leasing
& other ................... 6,156 20.0 2,881 19.6 2,909 17.9 2,652 16.6 2,959 15.3
Unallocated .................... 20,021 -- 17,782 -- 12,866 -- 8,512 -- 2,752 --
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Totals .................... $ 47,153 100.0% $ 44,792 100.0% $ 41,134 100.0% $ 40,377 100.0% $ 32,874 100.0%
========= ======== ========= ======== ========= ======== ========= ======== ========= ========
</TABLE>
(1) The Corporation allocates the allowance for loan losses in three
components: (1) specific accounts; (2) 50% of doubtful, 15% of substandard
and 10% of fair internally risk rated loans (excluding those subject to
specific allocation under (1)); and (3) based upon historical averages for
the remaining balances. As of December 31, 1997, the Corporation has
allocated $27.1 million based on four-year historical averages, as follows:
$3.5 million commercial, $6.1 million consumer, $3.6 million mortgage, and
$104,000 leasing. Additional allocations of the allowance for loan losses
include: $512,000 for specific accounts; $7.7 million for fair rated loans;
$5.1 million for substandard rated loans; $444,000 for doubtful rated
loans; and $149,000 for off-balance sheet risk for standby letters of
credit.
(2) Charge-offs for 1998 are not anticipated to exceed $4.9 million: commercial
- $1.3 million; consumer - $2.6 million; and mortgage - $1.0 million. The
overall risk factors in the portfolio are best evidenced by a 30 day and
over delinquency rate in the 2.00% to 2.50% range and overall credit risk
ratings of satisfactory and above for 75% of the commercial and real estate
portfolios.
17
<PAGE>
FULTON FINANCIAL CORPORATION
DEPOSITS
The average daily balances of deposits and rates paid on such deposits
are summarized for the periods indicated in the following table:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
Amount Rate Amount Rate Amount Rate
---------- ------ ---------- ------ ---------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits ............... $ 522,439 - % $ 474,692 - % $ 431,767 - %
Interest-bearing demand deposits .................. 400,938 1.85 410,159 1.97 423,670 2.08
Savings deposits .................................. 827,637 2.46 843,463 2.47 831,165 2.76
Time deposits ..................................... 1,740,840 5.57 1,554,375 5.51 1,422,677 5.53
---------- ------ ---------- ------ ---------- ------
Totals ............................................ $3,491,854 3.57% $3,282,689 3.49% $3,109,279 3.55%
========== ====== ========== ====== ========== ======
</TABLE>
Maturities of time deposits of $100,000 or more outstanding at December
31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
Time Deposits
$100,000
or more
--------------
(in thousands)
<S> <C>
Three months or less .................... $ 98,236
Over three through six months ........... 47,634
Over six through twelve months .......... 30,285
Over twelve months ...................... 76,917
--------------
Totals ............................ $ 253,072
==============
</TABLE>
FULTON FINANCIAL CORPORATION
SHORT-TERM BORROWINGS
The following table presents information related to Federal funds
purchased and securities sold under agreements to repurchase. No other
categories of short-term borrowings exceeded 30% of shareholders' equity at
December 31, 1997.
<TABLE>
<CAPTION>
December 31
------------------------------
1997 1996 1995
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Amount outstanding at December 31 .............. $231,101 $203,495 $115,239
Weighted average interest rate at year end ..... 4.70% 4.86% 4.88%
Maximum amount outstanding at any month end .... $231,101 $233,564 $216,650
Average amount outstanding during the year ..... $186,843 $179,805 $125,613
Weighted average interest rate during the year.. 4.73% 4.77% 5.12%
</TABLE>
18
<PAGE>
FULTON FINANCIAL CORPORATION
RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders' equity and to average
total assets and certain other ratios are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------
1997 1996 1995 1994 1993(1)
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Percentage of net income to:
Average shareholders' equity ............................ 14.75% 13.90% 14.09% 13.85% 12.62%
Average total assets .................................... 1.53 1.41 1.39 1.38 1.21
Percentage of dividends declared per common
share to basic net income per share ..................... 41.6 43.0 39.2 38.3 42.2
Percentage of average shareholders' equity
to average total assets ................................. 10.4 10.1 9.9 9.9 9.6
</TABLE>
(1) Percentage of income before cumulative effect of changes in accounting
principles to average shareholders' equity and average total assets was
13.76% and 1.32%, respectively.
19
<PAGE>
Item 2. Properties
- ------------------
The administrative headquarters of Fulton Financial Corporation and Fulton
Bank is located in a six-story brick building at the northeast corner of Penn
Square in the City of Lancaster, Pennsylvania. This building, together with
fourteen properties upon which Fulton Bank branch offices are located, are owned
in fee by Fulton Bank, free and clear of encumbrances. Five properties upon
which Fulton Bank branch offices are located and four properties upon which
remote service facilities are located are leased by Fulton Bank from
nonaffiliated persons. Twenty-two properties upon which Fulton Bank branch
offices are located and two properties upon which remote service facilities are
located are owned or leased by Fulton Financial Realty Company and subleased to
Fulton Bank. Office space is leased by Fulton Financial Realty Company and
subleased to Fulton Financial Corporation and Fulton Bank. The foregoing leases
expire intermittently over the years through the year 2023 and most are subject
to one or more renewal options. The Fulton Bank Administrative Service Center is
located on property which is owned free and clear of encumbrances by Fulton
Financial Realty Company.
The administrative headquarters of Farmers Trust Bank is located in a five-
story building at 817 Cumberland Street in Lebanon, Pennsylvania. This building
and three branch offices are owned in fee by Farmers Trust Bank, free and clear
of encumbrances. One of the properties upon which a Farmers Trust Bank branch
office is located is leased by Fulton Financial Realty Company and subleased to
Farmers Trust Bank, while three additional properties are owned by Fulton
Financial Realty Company and leased to Farmers Trust Bank for branch offices.
Farmers Trust Bank has two remote service facilities, which are leased from
nonaffiliated persons. These leases expire intermittently over the years through
the year 2009 and are subject to two renewal options.
National Bank are located in a one-story brick building on Routes 11 and 15
in Hummels Wharf, Pennsylvania. In addition to a branch located at the site of
the operations center, Swineford National Bank operates five other branch
offices. The Hummels Wharf property and four branch offices are owned free and
clear of encumbrances by Swineford National Bank. One additional property used
for a branch office is leased by Swineford National Bank from a non-affiliated
person. This lease expires in 2002.
The administrative headquarters of Lafayette Bank is located in a three-
story brick building at 360 Northampton Street, Easton, Pennsylvania. Lafayette
Bank maintains two other sites housing administrative operations of the bank. In
addition to these three buildings, which are owned in fee by Lafayette Bank,
free and clear of encumbrances, six branch offices and another structure are
also owned in fee by Lafayette Bank, free and clear of encumbrances. Seven
additional properties are leased by Lafayette Bank from nonaffiliated persons;
these leases expire intermittently over the years through the year 2024 and are
subject to one or more renewal options. Six of these leased properties are used
as branch offices and one of these properties is a branch that was relocated and
is no longer used as a branch office.
The administrative headquarters of FNB Bank, N.A. is located at 354 Mill
Street, Danville, Pennsylvania. This building and five branch offices are owned
in fee by FNB Bank, N.A. free and clear of encumbrances. Two other branch
facilities are leased by FNB Bank, N.A. from nonaffiliated persons. These leases
expire intermittently over the years through the year 2014 and are subject to
one or more options.
The administrative headquarters of Great Valley Bank is located in a two-
story building at 210 North Fifth Street, Reading, Pennsylvania. This building
and two branches are owned in fee by Great Valley Savings Bank, free and clear
of encumbrances. Five branch offices are leased by Great Valley Bank from
nonaffiliated persons. These leases expire intermittently over the years through
the year 2023 and are subject to two or more options.
The administrative headquarters of Hagerstown Trust Company is located in a
three story brick building at 83 West Washington Street, Hagerstown, Maryland.
This building and eleven branch offices are owned in fee by Hagerstown Trust
Company, free and clear of encumbrances. Two branch offices and seven remote
facilities are leased by Hagerstown Trust Company from non-affiliated persons.
These leases expire intermittently over the years through the year 2006 and are
subject to one or more options.
The administrative headquarters and operations center for Delaware National
Bank are located at 9 South Dupont Highway, Georgetown, in Sussex County,
Delaware. The facility is approximately 8,000 square feet on the first and
second floors of a former bank operations facility leased from a non-affiliated
entity. Two bank branch offices are leased from non-affiliated entities. These
leases expire intermittently over the years through the year 2012 and are
subject to one or more renewal options. Four branch offices are owned free and
clear of encumbrances by Delaware National Bank.
20
<PAGE>
The administrative headquarters of The Bank of Gloucester County is located
at 100 Park Avenue, Woodbury, in Gloucester County, New Jersey. This building
and five branch offices are owned by the bank, free and clear of encumbrances.
The operations center and two branch offices are leased from non-affiliated
entities at market rates for varying terms.
The administrative headquarters of The Woodstown National Bank & Trust
Company is located at 1 South Main Street, Woodstown, in Salem County, New
Jersey. This building and five branch offices are owned by the bank, free and
clear of encumbrances. A sixth branch office is located on land leased by the
bank from a non-affiliated entity. This lease will expire in 2002 and the bank
has a buyout option to purchase the land upon the expiration of the lease.
The administrative headquarters of The Peoples Bank of Elkton is located at
130 North Street, Elkton, in Cecil County, Maryland. This building is owned by
the bank, free and clear of encumbrances. The bank's other branch office is
operated under a lease agreement which expires in 2000.
Item 3. Legal Proceedings
- --------------------------
There are no legal proceedings pending against Fulton Financial Corporation
or any of its subsidiaries which are expected to have a material impact upon the
financial position and/or the operating results of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders of Fulton Financial
Corporation during the fourth quarter of 1997.
21
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The information appearing under the heading "Capital Resources" and "Common
Stock" in Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
FULTON FINANCIAL CORPORATION
5-YEAR CONSOLIDATED SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
For the Year
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(Dollars in thousands, except per-share data)
<S> <C> <C> <C> <C> <C>
SUMMARY OF INCOME
- -----------------
Interest income............................. $ 319,628 $ 294,849 $ 276,144 $ 231,325 $ 218,591
Interest expense............................ 137,018 125,177 119,130 86,341 85,575
------------ ------------ ------------ ------------ ------------
Net interest income......................... 182,610 169,672 157,014 144,984 133,016
Provision for loan losses................... 7,742 5,561 3,998 3,074 6,311
Other income................................ 41,055 34,983 31,691 28,018 31,508
Other expenses.............................. 122,293 119,883 112,878 105,616 102,101
------------ ------------ ------------ ------------ ------------
Income before income taxes.................. 93,630 79,211 71,829 64,312 56,112
Income taxes................................ 28,431 23,464 20,217 17,747 14,310
------------ ------------ ------------ ------------ ------------
Income before cumulative effect of changes
in accounting principles............... 65,199 55,747 51,612 46,565 41,802
Cumulative effect of changes
in accounting principles............... - - - - (3,457)
------------ ------------ ------------ ------------ ------------
Net income.................................. $ 65,199 $ 55,747 $ 51,612 $ 46,565 $ 38,345
============ ============ ============ ============ ============
PER-SHARE DATA (1)
- ------------------
Income before cumulative effect of changes
in accounting principles (basic)....... $ 1.61 $ 1.38 $ 1.28 $ 1.16 $ 1.05
Income before cumulative effect of changes
in accounting principles (diluted)..... $ 1.60 $ 1.37 $ 1.27 $ 1.15 $ 1.05
Net income (basic).......................... 1.61 1.38 1.28 1.16 0.96
Net income (diluted)........................ 1.60 1.37 1.27 1.15 0.96
Cash dividends.............................. 0.669 0.594 0.502 0.444 0.405
PERIOD-END BALANCES
- -------------------
Total assets................................ $ 4,460,823 $ 4,111,323 $3,851,897 $3,645,453 $3,239,002
Net loans................................... 3,260,606 2,982,275 2,681,428 2,517,597 2,088,122
Deposits.................................... 3,621,569 3,367,954 3,217,206 3,007,183 2,748,828
Long-term debt.............................. 47,695 51,560 37,689 30,283 16,051
Shareholders' equity........................ 475,294 419,557 386,266 348,972 325,581
AVERAGE BALANCES
- ----------------
Average shareholders' equity................ $ 441,953 $ 401,072 $ 366,388 $ 336,312 $ 303,827
Average total assets........................ 4,250,910 3,960,409 3,706,137 3,385,613 3,165,658
</TABLE>
(1) Adjusted for stock dividends and stock splits.
22
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
This discussion concerns Fulton Financial Corporation (the
Corporation), a bank holding company incorporated under the laws of the
Commonwealth of Pennsylvania in 1982, and its wholly-owned subsidiaries. This
discussion and analysis should be read in conjunction with the consolidated
financial statements and other financial information presented in this report.
The Corporation has made, and may continue to make, certain
forward-looking statements with respect to market risk, expenses, the effect of
competition on net interest margin and net interest income, investment strategy
and income growth, deposit growth and other financial business matters for
future periods. The Corporation cautions that these forward-looking statements
are subject to various assumptions, risks and uncertainties. Because of the
possibility of change in the underlying assumptions, actual results could differ
materially from forward-looking statements.
In addition to the factors identified herein, the following could cause
actual results to differ materially from such forward looking statements:
pricing pressures on loan and deposit products, actions of bank and nonbank
competitors, changes in local and national economic conditions, changes in
regulatory requirements, actions of the Federal Reserve Board, the Corporation's
success in merger and acquisition integration and customers' acceptance of the
Corporation's products and services.
The Corporation's forward-looking statements are relevant only as of
the date on which such statements are made. By making any forward-looking
statements, the Corporation assumes no duty to update them to reflect new,
changing or unanticipated events or circumstances.
MERGER ACTIVITY
- ---------------
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, balanced with the
growth of the Corporation's existing franchise, is intended to increase the
value of the Corporation to customers, employees and shareholders.
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, Elkton became a
wholly-owned subsidiary of the Corporation and 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 959,000 shares of its common stock in
connection with the merger. Elkton, with approximately $99 million in assets as
of December 31, 1997, operates two branch offices in Cecil County, Maryland. As
a result of the merger, Elkton became the Corporation's second banking
subsidiary in Maryland and eleventh overall.
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 Corporation's common stock. The Corporation issued 3.2
million shares of its common stock in connection with the merger. Woodstown,
with approximately $267 million in total assets as of December 31, 1997,
operates seven branch offices in Salem and Gloucester Counties. As a result of
the merger, Woodstown became the Corporation's second banking subsidiary in New
Jersey and tenth overall.
Gloucester County Bankshares, Inc. - On February 29, 1996, the
Corporation completed its acquisition of Gloucester County Bankshares, Inc.
(Gloucester) of Woodbury, New Jersey. As provided under the terms of the merger
agreement, Gloucester was merged with and into the Corporation and each of the
outstanding shares of the common stock of Gloucester was converted into 1.91
shares of the Corporation's common stock. The Corporation issued 2.0 million
shares of its common stock in connection with the merger. Through this
transaction, the Corporation acquired ownership of The Bank of Gloucester
County, its first banking subsidiary in New Jersey. The Bank of Gloucester
County, with approximately $277 million in assets as of December 31, 1997,
operates eight branch offices in Gloucester County, New Jersey.
The acquisitions of Elkton, Woodstown and Gloucester were accounted for
as poolings of interests and all financial statements and financial information
contained herein have been restated to include the accounts and results of
operations of these companies for all periods presented
23
<PAGE>
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, Pennsylvania. 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 approximately 4.0
million shares of Keystone Heritage's common stock will be exchanged for 1.83
shares of the Corporation's common stock. In addition, each of the 84,000
options to acquire Keystone Heritage stock will be converted to options to
purchase the Corporation's stock. The transaction is expected to be completed in
the first 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 Farmers Trust Bank, one of
the Corporation's existing affiliate banks, to become Lebanon Valley Farmers
Bank. Concurrently with the merger, deposits, loans and branches located in
Lancaster and Dauphin Counties will be transferred to Fulton Bank.
Ambassador Bank of the Commonwealth. - On January 26, 1998, the
Corporation entered into a merger agreement to acquire Ambassador Bank of the
Commonwealth (Ambassador) of Allentown, Pennsylvania. Ambassador is a $275
million bank, which operates eight community banking offices in Lehigh and
Northampton counties.
Under the terms of the merger agreement, each of the 1.9 million shares
of Ambassador's common stock will be exchanged for 1.12 shares of the
Corporation's common stock. In addition, the 417,000 options and warrants to
acquire Ambassador stock will be exchanged for approximately 327,000 shares of
the Corporation's common stock. The acquisition is subject to approval by bank
regulatory authorities and Ambassador shareholders. The transaction is expected
to be completed in the third quarter of 1998 and will be accounted for as a
pooling of interests. As a result of the acquisition, Ambassador will be merged
with and into Lafayette Bank, one of the Corporation's existing affiliate banks.
RESULTS OF OPERATIONS
- ---------------------
Overview
The Corporation's net income for 1997 was a record $65.2 million or
$1.61 per share (basic). This compares to 1996 net income of $55.7 million or
$1.38 per share (basic) and 1995 net income of $51.6 million or $1.28 per share
(basic).
Over the past three years, the Corporation has generated steady
earnings growth through its focus on core banking business, strategic
acquisitions and controlling expenses. Net income as reported for 1997 was 17.0%
higher than 1996, while 1996 net income was 8.0% higher than 1995. Reported net
income includes certain unusual income and expense items which distort the
earnings growth rate over the past three years. The following table adjusts net
income for significant unusual items. The adjustments shown reflect the
after-tax impact on income:
1997 1996 1995
---------- ---------- ----------
(Dollars in thousands, except per-share amounts)
Net income (as reported) ...... $ 65,199 $ 55,747 $ 51,612
Investment securities gains ... (3,790) (2,031) (2,083)
SAIF charge ................... -- 1,634 --
---------- ---------- ----------
Adjusted income ............... $ 61,409 $ 55,350 $ 49,529
========== ========== ==========
% increase over prior year .... 10.9% 11.8% 9.6%
========== ========== ==========
Adjusted income per-share:
Basic .................... $ 1.51 $ 1.37 $ 1.23
% increase over prior year 10.2% 11.4% 8.8%
========== ========== ==========
Diluted .................. $ 1.50 $ 1.36 $ 1.22
% increase over prior year 10.3% 11.5% 8.9%
========== ========== ==========
24
<PAGE>
The SAIF charge in 1996 represents the Corporation's share of the
industry-wide FDIC assessment to recapitalize the underfunded Savings
Association Insurance Fund (SAIF). The table also adjusts for investment
security gains to remove the impact of varying levels of gains. However, as
discussed in the "Other Income" section, the Corporation does have a history of
recurring income from investment security gains.
The table illustrates the steady core earnings growth that the
Corporation has realized over the past three years. The Corporation also
continued to achieve strong returns on average assets (ROA) and average
shareholders' equity (ROE) over the period. ROA was 1.53% in 1997 compared to
1.41% in 1996 and 1.39% in 1995. ROE increased in 1997 to 14.75% from 13.90% in
1996 and 14.09% in 1995.
Net Interest Income
Net interest income is the most significant component of net income.
The ability to manage net interest income over a variety of interest rate
environments is critical to the success of a banking entity. As with overall net
income, the Corporation has demonstrated consistent growth in net interest
income over the past three years. In addition, the Corporation was able to
maintain a stable net interest margin (fully taxable equivalent) over the
period: 4.72% in both 1997 and 1996 and 4.71% in 1995. The Corporation's net
interest margin has historically placed it in the top third of its self-defined
peer group.
During 1997, net interest income increased 7.6% to $182.6 million
compared to increases of 8.1% and 8.3% during 1996 and 1995, respectively. The
"Comparative Average Balance Sheets and Net Interest Income Analysis" on page 19
and the "Rate/Volume Table" on page 20 summarize the components of net interest
income and illustrate increases as a result of changes in interest rates versus
growth in assets and liabilities. In general, the increases in net interest
income in both 1997 and 1996 were a result of balance sheet growth.
Interest income increased $24.8 million or 8.4% from $294.8 million in
1996 to $319.6 million in 1997. This increase reflects the growth in average
interest-earning assets, which increased $273.9 million or 7.4% during 1997,
after increasing $244.6 million or 7.1% during 1996 and $297.7 million or 9.5%
during 1995. The majority of this growth in interest-earning assets was in
loans. Average loans increased $309.5 million (10.8%), $241.7 million (9.3%) and
$345.6 million (15.2%) during 1997, 1996 and 1995, respectively. In recent
years, consumer and commercial lending have driven this growth.
Average annual yields on interest-earning assets over the past three
years have remained fairly stable (8.09% in 1997, 8.02% in 1996 and 8.04% in
1995) and have had little impact on overall interest income. In March, 1997 the
Federal Reserve Board raised short-term interest rates by 25 basis points. As a
result, the Corporation's affiliate banks raised their prime lending rates from
8.25% to 8.50% and the average prime rate increased to 8.44% in 1997 from 8.27%
in 1996. This prime rate increase contributed to the 7 basis point increase in
the Corporation's overall yield in 1997. The 1997 yield on the Corporation's
loans, however, actually declined by 5 basis points to 8.59%. This decrease was
due to: a) increased competition caused more aggressive pricing of certain new
loans; and b) the mix of the Corporation's loan portfolio to a larger percentage
of consumer loans and fixed rate loans reduced the percentage of floating rate
loans which are affected by short-term rate fluctuations.
Offsetting the decrease in the loan yield was an increase in yields on
investments, primarily taxable investment securities. This was a result of the
Corporation shifting its investment focus from U.S. Treasury and agency issues
to mortgage-backed securities. In general, funds from maturing investments were
reinvested in mortgage-backed securities to achieve a higher return with only
moderate increases in credit risk. As a result, yields on the portfolio steadily
improved.
Interest expense increased $11.8 million or 9.5% in 1997, reflecting
the growth in interest-bearing liabilities. Interest-bearing liabilities
increased $193.2 million or 6.4% during 1997, after increasing $179.6 million or
6.3% during 1996 and $241.3 million or 9.3% during 1995. Average
interest-bearing deposits provided much of this growth, increasing $161.4
million (5.7%), $130.5 million (4.9%) and $241.2 million (9.9%) during 1997,
1996 and 1995, respectively.
As with interest-earning assets, changes in the cost of
interest-bearing liabilities had a lesser impact on interest expense than
changes in volume. The average annual cost of funds was 4.27% in 1997, 4.15% in
1996 and 4.20% in 1995. The cost of funds, however, did rise faster than the
yield on interest-earning assets in 1997 as a result of the growth of the
Corporation's time deposits as a percentage of total deposits.
25
<PAGE>
Provision for Loan Losses
The provision for loan losses for 1997 totaled $7.7 million, compared
to the 1996 and 1995 provisions of $5.6 million and $4.0 million, respectively.
The $2.2 million increase in the provision in 1997 was a result of loan growth
and a higher rate of net charge-offs experienced during the year. Net
charge-offs as a percentage of average loans outstanding were 0.17% in 1997,
0.07% in 1996 and 0.12% in 1995. The increase in charge-offs in 1997 was due to
certain large accounts at newly acquired affiliate banks as well as an increase
in charge-offs on the Corporation's consumer loan portfolio. Despite this
increase, however, the Corporation's low charge-off levels continued to rank it
among the best in its peer group.
Nonperforming assets (including accruing loans greater than 90 days
past due) as of December 31, 1997 were $26.0 million. This was a $1.6 million or
6.6% increase over the December 31, 1996 total of $24.4 million. This increase
was due to the growth in the loan portfolio during 1997.
Nonperforming assets as a percentage of total assets decreased to 0.58%
at the end of 1997 as compared to 0.59% at the end of 1996. At December 31,
1997, the allowance for loan losses as a percentage of loans (net of unearned
income) stood at 1.43%, as compared to 1.48% and 1.51% at December 31, 1996 and
1995, respectively. As a percentage of total nonperforming loans, the allowance
was 190%, 201% and 170% at December 31, 1997, 1996 and 1995, respectively. The
detail of non-performing assets as of December 31, and net charge-offs by loan
type for 1997 and 1996 follows:
<TABLE>
<CAPTION>
Nonperforming Assets Net Charge-Offs
---------------------- -----------------------
1997 1996 1997 1996
--------- ---------- --------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Real Estate Loans ............. $ 15,107 $ 13,555 $ 896 $ (80)
Commercial &
Industrial Loans ......... 4,850 5,220 1,607 425
Consumer Loans ................ 4,848 3,463 3,008 1,558
Other Real Estate Owned ....... 1,177 2,134 -- --
---------- ---------- ---------- ----------
Total ......................... $ 25,982 $ 24,372 $ 5,511 $ 1,903
========== ========== ========== ==========
</TABLE>
Nonperforming assets include all loans 90 days or more past due as to
principal or interest, nonaccrual loans and other real estate owned. The
majority of the nonperforming real estate loans were residential real estate
loans which, in the opinion of management, are adequately secured.
Management considers various factors in assessing the adequacy of the
allowance for loan losses and determining the provision for the period. Among
these are the mix and risk characteristics of loan types in the portfolio,
charge-off history, risk classification of significant credits, adequacy of
collateral, the amount of the allowance that is not specifically allocated to
individual loans, and the balance of the allowance relative to total and
nonperforming loans. In management's opinion, based on its consideration of
these factors, the allowance for loan losses of $47.2 million at December 31,
1997 is adequate.
Other Income
Noninterest income was $41.1 million for 1997. This represents an
increase of $6.1 million or 17.4% over the 1996 total of $35.0 million, which,
in turn, was 10.4% higher than the 1995 total of $31.7 million. Excluding the
impact of higher security gains in 1997, other income increased $3.4 million or
10.6%. Almost all noninterest income categories increased during 1997, mainly as
a result of the Corporation's growth.
Investment management and trust services income reached a record level
of $9.0 million in 1997, an increase of $1.1 million or 14.6%, following a 1996
increase of $437,000 or 5.9%. The growth during 1997 and 1996 was due to
increased marketing of traditional trust services as well as the continued
success of several new investment management products. The customized Cash
Reserve Investment Management product continued to grow as an important vehicle
for companies, municipalities, and not-for-profit institutions looking to
enhance the short-term return on their invested funds. Likewise, Private
Banking, which integrates personalized investment portfolio management with
traditional commercial bank deposit and loan services, continued to attract new
clients. In 1997,
26
<PAGE>
the Corporation also introduced Investment Brokerage Services. An expanded,
full-service 401(k) program was introduced toward the end of 1995 which
contributed to trust revenue growth during 1996.
Service charges on deposit accounts increased $1.6 million or 11.6%
during 1997, after increasing $2.4 million or 20.2% in 1996. The increase in
1997 was due to changes in fee structures on some of the Corporation's deposit
products and services, as well as growth in fee-based deposits. The 1996
increase was generated by the introduction of foreign ATM charges. The
Corporation uses a product review and development process through which all
products and services provided by the Corporation's subsidiary banks are
reviewed on a rotating basis. This review allows the Corporation to formally
assess product features and pricing in comparison to its competitors.
Other service charges and fees increased $444,000 or 5.2% during 1997
after increasing $460,000, or 5.6% in 1996. The increases in both 1997 and 1996
were a result of growth.
Investment security gains increased $2.7 million or 86.7% to $5.8
million in 1997. The majority of the gains realized during 1997, $5.7 million,
were generated from the sale of equity securities. Management monitors the
Corporation's available for sale securities and makes periodic sale and
investment decisions based on current and expected market conditions. During the
past three years, certain investments were sold as a result of management's
assessment of market conditions. The increase in 1997 was due to the strong
performance of the equity markets, which made realizing certain gains
appropriate.
Other Expenses
Noninterest expenses for 1997 increased $2.4 million or 2.0% to $122.3
million, from the 1996 total of $119.9 million, after increasing $7.0 million or
6.2% during 1996. Excluding the pre-tax impact of the one-time SAIF assessment
of $2.5 million recorded in 1996, other expenses increased $4.9 million or 4.2%
in 1997 and $4.5 million or 4.0% in 1996. The Corporation's efficiency ratio,
which is the ratio of noninterest expenses to fully taxable equivalent revenues
(excluding investment securities gains), improved from 57.1% in 1996 (excluding
the impact of the SAIF assessment) to 55.2% in 1997. This improvement
illustrates the Corporation's success in controlling expenses.
Salaries and employee benefits expense, which accounts for the largest
portion of other expenses, increased $3.7 million or 6.0% during 1997 as
compared to an increase of $2.5 million or 4.2% in 1996. The salary portion of
the increase in 1997 was $2.6 million or 5.7%, which exceeded the Corporation's
average merit increase budget of 4%. The increase in excess of budget was due to
an increase in the total number of employees. The average number of full-time
equivalent employees in 1997 rose to 1,907 from 1,873 in 1996, resulting in an
increase in cost of approximately $850,000.
The salaries component of the 1996 increase was $1.5 million or 3.4%.
This lower increase rate is reflected in a stable employee base, with average
full-time equivalent employees of 1,873 in both 1996 and 1995. The Corporation
manages its staffing levels to function at the highest level of efficiency while
maintaining quality customer service.
Employee benefits increased $1.1 million or 7.0% in 1997 and $940,000
or 6.6% in 1996. The 1997 increase was due to establishing a $300,000 accrual
for certain post-employment benefits. Excluding this accrual, benefits increased
only 5.0%.
Despite the overall cost increases, the Corporation has seen
improvement in salaries and benefits expense measures. The salaries and benefits
efficiency ratio improved from 29.9% in 1996 to 29.4% in 1997 and salaries and
benefits to average assets improved from 1.55% in 1996 to 1.53% in 1997.
Net occupancy expense increased $485,000 or 4.9% during 1997, compared
to an increase of $544,000 or 5.8% in 1996. Equipment expense increased $937,000
or 14.9% in 1997, after increasing $476,000 or 8.2% in 1996. The increases in
occupancy and equipment expenses reflect the growth in the Corporation's branch
network and investment in necessary technology initiatives. The increase in
equipment expense in 1997 was due, in part, to the roll-out of Fulton Bank's
check-imaging product, which became available to customers in the latter part of
1997.
Investments in technology have been carefully balanced with the
Corporation's commitment to its branch network, which continues to be the
customers' preferred delivery channel in the Corporation's markets. The
27
<PAGE>
Corporation will continue to face the challenge of developing and offering
modern conveniences to customers while maintaining its community and branch
banking focus.
Expenses incurred to address the Year 2000 computer problem have been,
and are expected to be, immaterial to the Corporation. The significant loans and
deposits data processing functions of the Corporation are outsourced to an
independent third party, which is in the process of ensuring that the
Corporation's systems will be Year 2000 compliant. The costs associated with
this process will be absorbed by the service provider. The Corporation, however,
does recognize the business risks posed by the Year 2000 and has been working
closely with the third party to address its specific needs.
The Corporation would incur expenses to replace, modify or upgrade
other computer hardware and software that it employs in the normal course of its
business. Such equipment and software includes items processing readers/sorters,
branch terminals and networks, other personal computers and networks, security
systems, and certain other processing systems. Based on its review of this
equipment and software, the Corporation has determined that the costs to be
incurred will be immaterial.
FDIC assessment expense decreased $2.6 million or 79.1% in 1997 after
decreasing $553,000 or 14.6% in 1996. The decrease in 1997 was due to the
one-time SAIF assessment of $2.5 million recorded in 1996. The $675,000 expense
for 1997 was based on an assessment rate of 0.0644% on the Corporation's
approximately $400 million of SAIF-insured deposits and 0.0129% for
Bank-insurance fund (BIF) deposits, which represent all other deposits. These
rates will be in effect for the next two years. FDIC expense will increase in
the future as the Corporation's deposits grow.
From January 1, 1996 through September 30, 1996, the rate on the
Corporation's BIF-insured deposits was reduced to zero, with a requirement for a
minimum premium of $2,000 per institution. The savings from this rate reduction,
which approximated $2.8 million in 1996, were offset by the one-time assessment
on SAIF-insured deposits. On September 30, 1996, legislation was enacted to
adequately fund the SAIF, which remained undercapitalized as a result of the
savings and loan crisis in the late 1980s. The legislation called for a one-time
assessment on SAIF-insured deposits. As a result of this special one-time
assessment, the SAIF became fully funded, and the new insurance rates noted
above were implemented.
Special services expense, which represents the cost of data processing,
increased $203,000 or 3.0% during 1997 after increasing $1.0 million or 18.1% in
1996. The Corporation has generally been able to control this cost by
maintaining common systems for all subsidiaries under a corporate contract. The
1997 and 1996 increases are due to growth in trust operations and loans,
resulting in larger transaction volumes and costs.
Other expenses decreased $365,000 or 1.1% during 1997 after increasing
$3.0 million or 10.5% during 1996. Expenses in this category include stationery
and supplies, postage, audits, telecommunications, Pennsylvania shares tax,
advertising, insurance, legal fees and goodwill amortization. The decrease in
1997 was due mainly to fewer operating risk losses (decrease of $694,000 or
51.5%) and a decrease in the cost of the Corporate-owned life insurance plan due
to a change in the underlying contracts (decrease in expense of $708,000 or
400%). These decreases were offset by increases in state taxes ($603,000 or
32.7%); telephone expense (244,000 or 11.7% increase); and advertising (224,000
or 6.2% increase).
Income Taxes
Income tax expense continued to increase both in absolute dollars and
as a percentage of pretax income. The effective tax rate was 30.4% in 1997
compared to 29.6% and 28.1% in 1996 and 1995, respectively. The increase in the
effective tax rate reflects the reduction in the beneficial effect of tax-exempt
income as the Corporation's investments in tax-free securities continued to
decline. The Corporation continued to invest in low and moderate income housing
partnerships which generate federal income tax credits. Net credits earned from
these investments totaled $2.3 million, $2.5 million and $1.8 million in 1997,
1996 and 1995, respectively.
28
<PAGE>
FULTON FINANCIAL CORPORATION
AVERAGE CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Month Ended December 31
-----------------------------------------------------
1997 1996 1995
------------- ------------------ --------------
ASSETS (in thousands)
- ------
<S> <C> <C> <C>
Cash and due from banks .......................................... $ 164,812 $ 153,856 $ 156,149
Interest-bearing deposits with other banks ....................... 1,040 2,059 4,302
Federal funds sold ............................................... 1,548 9,307 18,297
Investment securities ............................................ 847,297 782,781 807,997
Loans, including loans held for sale ............................. 3,289,577 3,015,231 2,702,689
Less: Allowance for loan losses .................................. (47,273) (45,140) (41,071)
----------- ----------- -----------
Net Loans ............................................... 3,242,304 2,970,091 2,661,618
----------- ----------- -----------
Premises and equipment ........................................... 61,504 57,250 51,810
Other assets ..................................................... 108,558 109,798 105,668
----------- ----------- -----------
Total Assets ............................................ $ 4,427,063 $ 4,085,142 $ 3,805,841
=========== =========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C>
Deposits:
Noninterest-bearing ............................................ $ 535,729 $ 507,319 $ 453,826
Interest-bearing ............................................... 3,071,803 2,816,705 2,737,062
----------- ----------- -----------
Total Deposits .......................................... 3,607,532 3,324,024 3,190,888
----------- ----------- -----------
Short-term borrowings ............................................ 224,128 233,570 118,094
Long-term debt ................................................... 47,776 42,667 37,692
Other liabilities ................................................ 81,511 68,324 75,126
----------- ----------- -----------
Total Liabilities ....................................... 3,960,947 3,668,585 3,421,800
----------- ----------- -----------
Total Shareholders' Equity .............................. 466,116 416,557 384,041
----------- ----------- -----------
Total Liabilities and Shareholders' Equity .............. $ 4,427,063 $ 4,085,142 $ 3,805,841
=========== =========== ===========
</TABLE>
FINANCIAL CONDITION
- -------------------
The Corporation functions as a financial intermediary and its financial
condition is analyzed in terms of its sources and uses of funds. The table on
page 23 highlights the trends in the balance sheet over the past two years.
Because annual averages tend to conceal trends and ending balances can be
distorted by one-day fluctuations, the December monthly averages for each of the
last three years are provided to give a better indication of trends in the
balance sheet. All references within the discussion that follows are to these
December average balances unless specifically noted otherwise.
The Corporation's assets continued to grow during 1997, reaching $4.4
billion, an increase of $341.9 million or 8.4% as compared to 1996. The 1997
increase was due to strong loan demand throughout the Corporation's markets that
resulted in loan growth of approximately $274.3 million or 9.1% for the year.
This loan growth was funded primarily through an increase in deposits.
Loans
Loans outstanding (net of unearned income) increased $274.3 million or
9.1% for 1997, compared to a 1996 increase of $312.5 million or 11.6%.
Commercial loans and commercial mortgages increased $134.2 million or
11.9% in 1997, reflecting the strength of the local economy. The increase in
1997 was evident primarily in fixed rate categories, as customers locked in the
relatively low rates in effect throughout the period. Fixed rate commercial
mortgages increased $67.7 million or 17.5% and fixed rate commercial loans
increased $32.6 million or 23.8%.
29
<PAGE>
Demand for consumer credit also provided a significant share of loan
growth during 1997, with such loans increasing $102.7 million or 11.0%. This
increase was largely due to the Corporation continuing to expand its indirect
lending operations. This expansion, coupled with strong demand for automobiles,
resulted in an installment loan increase of approximately $74.6 million or
10.8%. Also contributing to the increase in consumer loans were student loans
(increase of $8.3 million or 13.7%), and leasing (increase of $11.5 million or
37.9%).
The Corporation engages in the origination and sale of conforming
fixed-rate residential mortgage loans primarily to the Federal National Mortgage
Association (FNMA). In general, fixed rate mortgages are underwritten to salable
criteria and are sold to FNMA through forward sales commitments to limit risk.
The Corporation generally retains servicing rights for such loans and receives a
standard servicing fee of 25 basis points on the outstanding principal. In 1997
and 1996, the Corporation originated approximately $87.2 million and $78.9
million, respectively, of such loans for sale into the secondary market. At
December 31, 1997, the Corporation had servicing rights on approximately $520.1
million of sold mortgage loans. As a result of its secondary market activity,
residential mortgage loans outstanding increased only $23.0 million or 2.7% in
1997. The majority of this increase was in adjustable rate mortgages.
Investment Securities
Investment securities increased $64.5 million or 8.2% during 1997,
compared to a decrease of $25.2 million or 3.1% during 1996. In general, the
1997 increase resulted from strong deposit growth, while maturing investments
were used to fund loan growth during 1996.
In 1997, the Corporation continued two shifts in its investment
strategy. One of these was the classification of almost all new purchases as
available for sale rather than held to maturity to increase flexibility in
managing the Corporation's funding needs (see further discussion below). The
second was in investing in mortgage-backed securities (MBS) rather than U.S.
Treasury securities. At December 31, 1997, MBS investments had an amortized cost
of $486.1 million, a $140.4 million or 40.6% increase over 1996. Conversely, U.
S. Treasuries decreased $119.1 million or 49.0% to $124.2 million. Investments
in MBS have become more attractive to the Corporation due to their higher
yields, with little increase in relative risk.
The Corporation's investment in equity securities was $60.2 million
(amortized cost basis) at December 31, 1997, of which approximately $16.0
million represented holdings of stock issued by the Federal Home Loan Bank
(FHLB). As of December 31, 1997, all subsidiary banks were members of the FHLB
and therefore eligible for its funding programs. The Corporation continued to
follow an equity securities investment strategy of seeking and maintaining
long-term investment positions in regional financial institutions which, in
management's view, represent solid investment value. At December 31,1997, the
Corporation's equity portfolio had unrealized gains of $38.7 million, which
increased the overall investment balance, but used no additional funds.
Investments in tax-exempt municipal securities decreased to $38.9
million at December 31, 1997 from $58.2 million in 1996. This continued decrease
reflects the effect of the Tax Reform Act of 1986, which sharply reduced the tax
benefit of the majority of tax-exempt securities acquired subsequent to its
passage and thus reduced the Corporation's incentive to invest in them.
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" requires that all investment
securities be classified as either (i) held to maturity, (ii) available for
sale, or (iii) a trading security. The Corporation possesses both the intent,
subject to credit impairment, and ability to hold debt security in its
investment portfolio to maturity. Management does, however, recognize the
portfolio to be an important potential source of liquidity. Therefore at
December 31, 1997, $496.6 million or 65.9% (amortized cost basis) of all debt
securities were classified as available for sale. This compares to $287.0
million or 40.1% classified as available for sale at December 31, 1996.
At December 31, 1997, securities available for sale had an estimated
fair value of $597.4 million and an amortized cost of $556.8 million, compared
to an estimated fair value of $349.1 million and an amortized cost of $334.6
million at December 31, 1996. The increase in the aggregate unrealized
appreciation is primarily a result of the favorable performance of the
Corporation's equity portfolio, offset by the gains realized during 1997.
At December 31, 1997, securities held to maturity had an estimated fair
value of $257.5 million, $391,000 above their amortized cost, compared to an
estimated fair value of $428.9 million, or $240,000 below their amortized cost
at December 31, 1996.
30
<PAGE>
Short-term investments, which include Federal funds sold, money market
investments and interest-bearing deposits with other banks, have decreased over
the past several years in order to fund loan growth. Short-term investments
decreased $8.8 million during 1997 after decreasing $11.2 million during 1996.
Other Assets
Noninterest earning assets increased $3.0 million or 1.8% in 1997 after
increasing $9.6 million or 6.1% in 1996. The increases in both years were due
mainly to new expenditures for premises and equipment
Capital expenditures on premises and equipment totaled $10.8 million
during 1997, compared to $12.1 million and $7.7 million during 1996 and 1995,
respectively. Capital expenditures were made for branches and improvements, as
well as investments in technology to strengthen the Corporation's competitive
position in its markets.
During 1997, the Corporation continued its participation in affordable
housing and community development projects through investments in partnerships.
Equity commitments totaling $7.3 million were made to six new projects. The
Corporation made its initial investment of this type during 1989 and is now
involved in 29 projects, all located in the various communities served by its
subsidiary banks. The carrying value of such investments was approximately $25.6
million at December 31, 1997. With these investments, the Corporation not only
improves the quantity and quality of available housing for low and moderate
income individuals in its service area in support of its subsidiary bank's
Community Reinvestment Act compliance effort, but also becomes eligible for tax
credits under federal and, in some instances, state programs.
Deposits
The Corporation has historically been able to rely on deposit growth as
a relatively low-cost funding source for loans. In recent years, increased
competition from other financial services providers has made attracting deposits
more difficult. In 1997, deposit growth was strong, with a $283.5 million or
8.5% increase, which was sufficient to support the loan growth of $274.3
million. In 1996, however, deposits increased only $133.1 million or 4.2%, as
compared to loan growth of $312.5 million. The Corporation used higher-cost
borrowings as an alternative funding source.
Management believes that its community banking focus and merger
strategy will result in lower-cost deposits continuing to be its primary funding
source over the long term. However, the occasional use of borrowings for
additional funds may be necessary at times. The use of borrowings in recent
years has not had a detrimental impact on the Corporation's net interest margin
(4.72% in 1997 and 1996 and 4.71% in 1995), and management believes that there
will be no material adverse impact on the net interest margin in the near
future.
Despite the overall increase in deposits in 1997, there was a shift in
the composition. Core deposits, including non-interest bearing deposits and
interest-bearing NOW, checking and savings accounts increased $40.8 million or
2.3%. Time deposits (certificates and IRA's) increased $242.7 million or 15.3%.
As a result, core deposits accounted for 49.2% of total deposits at December 31,
1997 as compared to 52.2% a year ago.
Total interest-bearing deposits grew $255.1 million or 9.1% in 1997
compared to growth of $79.6 million or 2.9% in 1996. A large portion of this
increase was realized in short-term certificates of deposit, those with initial
maturities of less than two years, which increased $139.1 million or 18.3% in
1997. The Corporation has been much more successful attracting deposits with
shorter terms, indicating a preference by customers to maintain liquidity in
their accounts.
Noninterest-bearing demand deposit accounts increased during 1997 and
1996, growing $28.4 million or 5.6% and $53.5 million or 11.8%, respectively. In
the future, the Corporation must continue to focus on retaining time deposits
and generating additional core deposit relationships.
Borrowings
Short-term borrowings, consisting of Federal funds purchased,
securities sold under agreements to repurchase (repurchase agreements), and
treasury, tax and loan notes, decreased $9.4 million or 4.0% in 1997 after
increasing $115.5 million or 97.8% in 1996. As noted above, the decrease in 1997
was a result of strong deposit growth while the increase in 1996 was necessary
to fund new loans.
31
<PAGE>
Long-term debt increased $5.1 million or 12.0% during 1997 after
increasing $5.0 million or 13.2% during 1996. During 1997 and 1996, the
Corporation took advantage of certain FHLB funding programs. FHLB advances
represent the majority of the long-term debt balances.
Shareholders' Equity
Shareholders' equity continued to be an important funding source, with
a 1997 balance of $466.1 million, an increase of $49.6 million or 11.9% from
$416.6 million in 1996. In spite of increasing dividends, the Corporation
maintained a strong rate of internal capital generation (net income less
dividends paid divided by beginning equity). This internal capital growth was
9.1% in 1997 and 8.2% 1996. Growth in capital is dependent upon strong earnings
and a prudent dividend policy, represented by payout ratios of 41.6% for 1997
and 43.0% for 1996.
In March, 1997, the Board of Directors approved a plan to repurchase up
to 80,000 shares of the Corporation's common stock through March, 1998. The
stock to be repurchased is to be used for various purposes, including the
Corporation's Incentive Stock Option Plan, Employee Stock Purchase Plan and
Profit Sharing Plan. During 1997, a total of 42,000 shares were repurchased
under this plan at a total cost of $1.2 million. All of these shares were held
in treasury at December 31, 1997.
The Corporation and its subsidiary banks are subject to various
regulatory capital requirements administered by banking regulators. Failure to
meet minimum capital requirements can initiate certain actions by regulators
that could have a material effect on the Corporation's financial statements. The
regulations require that banks maintain minimum amounts and ratios of total and
Tier I capital (as defined in the regulations) to risk weighted assets (as
defined), and Tier I capital to average assets (as defined). As of December 31,
1997, the Corporation and each of its subsidiaries met the minimum capital
requirements. In addition, the Corporation and each of its subsidiaries' capital
ratios exceeded the amounts required to be considered "well-capitalized" as
defined in the regulations.
The Corporation's total and Tier I risk-based capital ratios have
generally placed the Corporation near the middle of its self-defined peer group
over the past year. The Corporation's ratio of Tier 1 capital to average assets,
however, has generally placed it in the top quartile in comparison to its peers.
MARKET RISK
- -----------
The types of market risk exposures generally faced by banking entities
include interest rate risk, equity market price risk, foreign currency risk and
commodity price risk. Due to the nature of its operations, only equity market
price risk and interest rate risk are significant to the Corporation.
Equity Market Price Risk:
Equity market price risk is the risk that changes in the values of
equity investments could have a material impact on the financial position or
results of operations of the Corporation. The Corporation's equity investments
consist of common stocks of publicly traded financial institutions (cost basis
of approximately $44.2 million) and U.S. Government and agency stock (cost basis
of approximately $16.0 million). The Corporation's equity investments had a
total estimated fair value of $98.9 million at December 31, 1997. The $38.7
million unrealized gain is attributable to the financial institutions stock.
Although the book value of equity investments accounted for only 1.4%
of the Corporation's total assets, the unrealized gains on the portfolio
represent a potential source of revenue. The Corporation has a history of
periodically realizing gains from this portfolio and, if values were to decline
significantly, this revenue source could be lost.
The Corporation manages its equity market price risk by investing only
in regional financial institutions. Management continuously monitors the fair
value of its equity investments and evaluates current market conditions and
operating results of the companies. Periodic sale and purchase decisions are
made based on this monitoring process. None of the Corporation's equity
securities are classified as trading. Future cash flows from these investments
are not provided here since none of them have maturity dates.
Interest Rate Risk:
Interest rate risk creates exposure in two primary areas. First of all,
changes in rates have an impact on the Corporation's liquidity position and
could affect its ability to meet obligations and continue to grow. Secondly,
movements in interest rates can create fluctuations in the Corporation's net
income.
32
<PAGE>
The Corporation employs various management techniques to minimize its
exposure to interest rate risk. An Asset/Liability Management Committee (ALCO),
consisting of key financial and Senior Management personnel, meets on a weekly
basis. This committee's primary responsibility is to address the liquidity and
net income risks noted above.
The goals of the Corporation's asset/liability management function are
to ensure adequate liquidity and to maintain an appropriate balance between the
relative rate sensitivity of interest-earning assets and interest-bearing
liabilities. The Corporation must maintain a sufficient level of liquid assets
to meet the ongoing cash flow requirements of customers, who, as depositors, may
want to withdraw funds or who, as borrowers, need credit availability.
Liquidity sources are found on both sides of the balance sheet.
Liquidity is provided on a continuous basis through scheduled and unscheduled
principal reductions and interest payments on outstanding loans and investments.
Liquidity is also provided through the availability of deposits and borrowings.
At December 31, 1997, liquid assets (defined as cash and due from
banks, short-term investments, securities available for sale, and
non-mortgage-backed securities held to maturity due in one year or less) totaled
$804.1 million or 18.0% of total assets. This represents an increase from the
December 31, 1996 total of $628.8 million or 15.3% of total assets. Liquidity is
also provided by non-mortgage-backed securities held to maturity due from one to
five years, which totaled $28.7 million and $89.6 million at December 31, 1997
and 1996, respectively. Principal payments received on the held to maturity
mortgage-backed securities portfolio also provide liquidity. The Corporation had
$179.6 million of such mortgage-backed securities at December 31, 1997 and
$241.8 million at December 31, 1996.
The loan portfolio provides an additional source of liquidity due to
the Corporation's ability to participate in the secondary mortgage market. Sales
of residential mortgages into the secondary market of $87.5 million and $80.5
million in 1997 and 1996, respectively, provided the necessary funding which
allowed the Corporation to meet the needs of its customers for new mortgage
financing.
From a funding standpoint, the Corporation has been able to rely over
the years on a stable base of "core" deposits. Even though the Corporation has
experienced notable changes in the composition and interest sensitivity of this
deposit base, it has been able to rely on the steady growth of this base to
provide needed liquidity.
The Corporation also has access to sources of large denomination or
jumbo time deposits and repurchase agreements as potential sources of liquidity.
However, the Corporation has attempted to minimize its reliance upon these more
volatile short-term funding sources and to use them primarily to meet the
requirements of its existing customer base or when it is profitable to do so.
Each of the Corporation's subsidiary banks are members of the Federal
Home Loan Bank, which provides them access to FHLB overnight and term credit
facilities. At December 31, 1997, the Corporation had $47.3 million in term
advances from the FHLB with an additional $765 million of borrowing capacity
(including both short-term funding on its lines of credit and long-term
borrowings). This availability, along with Federal funds lines at various
correspondent commercial banks, provides the Corporation with additional
liquidity.
The following table provides information about the Corporation's
interest rate sensitive financial instruments. The table provides expected cash
flows and weighted average rates for each significant interest rate sensitive
financial instrument, by expected maturity period. None of the Corporation's
financial instruments are classified as trading.
33
<PAGE>
FULTON FINANCIAL CORPORATION
INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
(dollars in thousands) Expected Maturity Period
------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Beyond
---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate loans (1) ........ $ 461,010 $ 361,909 $ 303,096 $ 224,184 $ 159,112 $ 534,516
Average rate ............ 8.31% 8.26% 8.19% 8.15% 8.21% 8.14%
Floating rate loans (2) ..... 645,620 78,377 65,471 42,190 50,966 381,308
Average rate ............ 7.17% 8.71% 8.64% 8.73% 8.81% 8.37%
Fixed rate investments (3) .. 196,291 136,340 105,780 117,227 86,901 105,891
Average rate ............ 5.94% 6.00% 6.40% 6.12% 6.51% 6.87%
Floating rate investments (3) -- 977 -- -- -- 4,301
Average rate ............ -- 6.46% -- -- -- 7.46%
Other interest-earning assets 1,042 -- -- -- -- --
Average rate ............ 5.75% -- -- -- -- --
-------------------------------------------------------------------------------------------
Total ....................... $1,303,963 $ 577,603 $ 474,347 $ 383,601 $ 296,979 $1,026,016
Average rate ............ 7.39% 7.78% 7.85% 7.59% 7.82% 8.09%
-------------------------------------------------------------------------------------------
Fixed rate deposits (4) ..... $ 945,007 $ 448,086 $ 257,217 $ 57,205 $ 61,355 $ 20,347
Average rate ............ 5.31% 5.87% 6.11% 6.00% 6.01% 5.48%
Floating rate deposits (5) .. 543,262 67,955 43,032 43,032 43,032 541,024
Average rate ............ 2.46% 1.60% 1.81% 1.81% 1.81% 1.86%
Fixed rate borrowings (6) ... 17,672 9,431 20,063 22 -- 507
Average rate ............ 5.84% 6.00% 6.21% 4.45% -- 5.16%
Floating rate borrowings (7) 236,762 -- -- -- -- --
Average rate ............ 4.83% -- -- -- -- --
-------------------------------------------------------------------------------------------
Total ....................... $1,742,703 $ 525,472 $ 320,312 $ 100,259 $ 104,387 $ 561,878
Average rate ............ 4.36% 5.32% 5.54% 4.20% 4.28% 1.99%
--------------------------------------------------------------------------------------------
<CAPTION>
(dollars in thousands)
Estimated
Fair
Total Value
- ----------------------------- ------------ ----------
<S> <C> <C>
Fixed rate loans (1) ........ $2,043,827 $2,074,285
Average rate ............ 8.21%
Floating rate loans (2) ..... 1,263,932 1,257,332
Average rate ............ 7.82%
Fixed rate investments (3) .. 748,430 750,798
Average rate ............ 6.24%
Floating rate investments (3) 5,278 5,278
Average rate ............ 7.46% 7.27%
Other interest-earning assets 1,042 1,042
Average rate ............ 5.75%
---------------------------
Total ....................... $4,062,509 $4,088,735
Average rate ............ 7.72%
---------------------------
Fixed rate deposits (4) ..... $1,789,217 $1,798,138
Average rate ............ 5.61%
Floating rate deposits (5) .. 1,281,337 1,281,337
Average rate ............ 2.10%
Fixed rate borrowings (6) ... 47,695 47,740
Average rate ............ 5.16% 6.02%
Floating rate borrowings (7) 236,762 236,762
Average rate ............ 4.83%
---------------------------
Total ....................... $3,355,011 $3,363,977
Average rate ............ 4.22%
---------------------------
</TABLE>
Assumptions:
1) Amounts are based on contractual maturities, adjusted for expected
prepayments.
2) Amounts are based contractual maturities, adjusted for expected prepayments.
Balance in 1998 consists of: commercial lending arrangements which are due
on demand; commercial floor plan loans; and lines of credit with remaining
maturity of less than one year.
3) Amounts are based on contractual maturities, adjusted for expected
prepayments on mortgage-backed securities.
4) Amounts are based on contractual maturities of time deposits.
5) Money market deposits are shown in first year. NOW and savings accounts are
spread based on history of deposit flows.
6) Amounts are based on contractual maturities of Federal Home Loan Bank
advances.
7) Amounts are Federal Funds purchased and securities sold under agreements to
repurchase, which mature in less than 90 days.
34
<PAGE>
The preceding table and discussion addressed the liquidity implications
of interest rate risk and focused on expected contractual cash flows from
financial instruments. Expected contractual maturities, however, do not
necessarily estimate the net income impact of interest rate changes. Certain
financial instruments, such as adjustable rate loans, have repricing periods
that differ from contractual cash flows.
In order to manage the risk that changes in interest rates could have a
significant impact on net income, the Corporation, through its ALCO function,
relies on certain analytical tools, including "static gap" analyses and net
interest income forecasting. As required by banking regulators, the Corporation
also employs certain interest sensitivity, income volatility and market value of
equity analyses.
Static gap illustrates the expected repricing periods for all
rate-sensitive assets and liabilities and shows the difference (or gap) for each
period. Despite the fact that static gap only addresses rate risk at a point in
time and is not as sophisticated as certain modeling and forecasting methods, it
remains a popular tool in the industry and for the Corporation.
Interest rate sensitivity varies widely with different types of
interest-earning assets and interest-bearing liabilities. At the short end of
the asset spectrum are overnight Federal funds, on which rates change daily, and
loans, whose rates float with the prime rate or a similar index. At the other
end are long-term investment securities and fixed-rate loans. On the liability
side, jumbo time deposits and short-term borrowings are much more interest rate
sensitive than passbook savings and FHLB advances.
While the interest rate sensitivity gap (the difference between
repricing opportunities for interest-earning assets and interest-bearing
liabilities) must be managed over all time periods, the Corporation focuses on
the 6-month period as the key interval affecting net interest income. This
shorter period is monitored because a large percentage of the Corporation's
interest-earning assets and interest-bearing liabilities are subject to
repricing within this period. In addition, short-term interest rate swings can
be more pronounced and provide a shorter time for reaction or strategy
adjustment.
The following is a summary of the interest sensitivity gaps for four
different time intervals as of December 31, 1997:
Daily 0-90 91-180 181-365
Adjustable Days Days Days
------------ ------ -------- ---------
GAP ........................ 1.09 0.78 1.01 1.15
CUMULATIVE GAP ............. 1.09 0.98 0.99 1.02
The Corporation's policy provides for the 6-month cumulative gap to be
maintained between .85 and 1.15. The Corporation was positioned within this
range throughout 1997 and as of December 31, 1997.
In addition to static gap analysis, the Corporation also performs
periodic net interest income forecasts using a "rate shock" approach. Rate
shocks measure the impact of severe interest rate changes on a static balance
sheet over a one year period. The Corporation's policy, as approved by the Board
of Directors, is for the Corporation and each individual affiliate to experience
no more than a 10% decline in net interest income and market value of equity for
every 100 basis point change in interest rates. This policy is reviewed and
updated on an annual basis.
The rate shocks employ various assumptions about the magnitude of rate
changes on individual rate sensitive financial instruments. In addition, the
beginning point for these shocks is a historical or static balance sheet
position. Variations from the static position could result in significant
variance from the models. The assumptions used are reviewed and updated on a
periodic basis. For the rate shocks performed during 1997, each affiliate bank
was within the policy limits.
Common Stock
- ------------
As of December 31, 1997, the Corporation had 40,602,088 shares of $2.50
par value common stock outstanding held by 12,600 shareholders. The common stock
of the Corporation is traded on the national market system of the National
Association of Securities Dealers Automated Quotation System (NASDAQ) under the
symbol FULT.
35
<PAGE>
The following table presents the quarterly high and low prices of the
Corporation's common stock and per-share cash dividends declared for each of the
quarterly periods in 1997 and 1996. Per-share amounts have been retroactively
adjusted to reflect the effect of stock dividends declared.
Price Range Per-Share
------------ -----------
High Low Dividend
------------ ----------- ------------
1997
- ----
First Quarter....... 23 3/16 18 41/64 0.159
Second Quarter...... 28 22 17/64 0.170
Third Quarter....... 30 1/4 26 7/8 0.170
Fourth Quarter...... 32 1/2 28 0.170
1996
First Quarter....... 18 25/64 16 47/64 0.137
Second Quarter...... 18 55/64 17 3/64 0.152
Third Quarter....... 18 55/64 16 15/16 0.152
Fourth Quarter...... 19 35/64 17 1/2 0.153
36
<PAGE>
Item 8. Financial Statements and Supplementary Data
- --------------------------------------------------------------------------------
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Dollars in thousands, except per-share data)
<TABLE>
<CAPTION>
December 31
---------------------------------
1997 1996
------------- -------------
Assets
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks ........................................................... $ 172,392 $ 180,691
Interest-bearing deposits with other banks ........................................ 1,042 2,077
Mortgage loans held for sale ...................................................... 1,118 125
Investment securities:
Held to maturity (estimated fair value- $257,518 in 1997 and $428,898 in 1996) 257,127 429,138
Available for sale ........................................................... 597,448 349,092
Loans ............................................................................. 3,317,230 3,035,147
Less: Allowance for loan losses ............................................. (47,153) (44,792)
Unearned income .................................................... (9,471) (8,080)
------------- -------------
Net Loans ................................................ 3,260,606 2,982,275
------------- -------------
Premises and equipment ............................................................ 61,647 57,900
Accrued interest receivable ....................................................... 26,771 27,044
Other assets ...................................................................... 82,672 82,981
------------- -------------
Total Assets ............................................. $ 4,460,823 $ 4,111,323
============= =============
Liabilities
- ------------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing .......................................................... $ 551,015 $ 543,628
Interest-bearing ............................................................. 3,070,554 2,824,326
------------- -------------
Total Deposits ........................................... 3,621,569 3,367,954
------------- -------------
Short-term borrowings:
Securities sold under agreements to repurchase................................ 160,290 139,670
Federal funds purchased....................................................... 70,811 63,825
Demand notes of U.S. Treasury ................................................ 5,661 5,544
------------- -------------
Total Short-Term Borrowings .............................. 236,762 209,039
------------- -------------
Accrued interest payable .......................................................... 25,618 20,667
Other liabilities ................................................................. 53,885 42,546
Long-term debt .................................................................... 47,695 51,560
------------- -------------
Total Liabilities ........................................ 3,985,529 3,691,766
------------- -------------
Shareholders' Equity
- ------------------------------------------------------------------------------------------------------------------------
Common stock ($2.50 par)
Shares: Authorized 200,000,000
Issued 40,644,088 (40,447,949 in 1996)
Outstanding 40,602,088 (40,447,949 in 1996) ..................... 101,610 92,174
Capital surplus ................................................................... 293,308 217,833
Retained earnings ................................................................. 55,163 100,160
Net unrealized holding gains on securities available for sale...................... 26,409 9,390
Less: Treasury stock (42,000 shares in 1997)....................................... (1,196) -
------------- -------------
Total Shareholders' Equity ............................... 475,294 419,557
------------- -------------
Total Liabilities and Shareholders' Equity ............... $ 4,460,823 $ 4,111,323
============= =============
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
37
<PAGE>
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(Dollars in thousands, except per-share data)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------
1997 1996 1995
----------- ----------- ------------
Interest Income
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans, including fees ................................................ $ 271,791 $ 246,579 $ 230,201
Investment securities:
Taxable ......................................................... 42,348 41,653 35,722
Tax-exempt ...................................................... 2,603 3,607 5,166
Dividends ....................................................... 2,599 2,101 2,072
Federal funds sold ................................................... 215 730 2,711
Interest-bearing deposits with other banks ........................... 72 179 272
----------- ----------- -----------
Total Interest Income ...................... 319,628 294,849 276,144
Interest Expense
- ----------------------------------------------------------------------------------------------------------------------------
Deposits ............................................................. 124,786 114,614 110,469
Short-term borrowings ................................................ 8,836 8,569 6,428
Long-term debt ....................................................... 3,396 1,994 2,233
----------- ----------- -----------
Total Interest Expense ...................... 137,018 125,177 119,130
----------- ----------- -----------
Net Interest Income ......................... 182,610 169,672 157,014
Provision for Loan Losses ............................................ 7,742 5,561 3,998
----------- ----------- -----------
Net Interest Income After
Provision for Loan Losses ............ 174,868 164,111 153,016
----------- ----------- -----------
Other Income
- ----------------------------------------------------------------------------------------------------------------------------
Trust department ..................................................... 9,019 7,872 7,435
Service charges on deposit accounts .................................. 15,803 14,164 11,787
Other service charges and fees ....................................... 9,063 8,619 8,159
Gain on sale of mortgage loans ....................................... 1,339 1,204 1,105
Investment securities gains .......................................... 5,831 3,124 3,205
----------- ----------- -----------
41,055 34,983 31,691
Other Expenses
- ----------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits ....................................... 65,220 61,520 59,060
Net occupancy expense ................................................ 10,460 9,975 9,431
Equipment expense .................................................... 7,218 6,281 5,805
FDIC assessment expense .............................................. 675 3,225 3,778
Special services ..................................................... 6,967 6,764 5,727
Other ................................................................ 31,753 32,118 29,077
----------- ----------- -----------
122,293 119,883 112,878
----------- ----------- -----------
Income Before Income Taxes .................. 93,630 79,211 71,829
Income Taxes ......................................................... 28,431 23,464 20,217
----------- ----------- -----------
Net Income .................................. $ 65,199 $ 55,747 $ 51,612
=========== =========== ===========
- ----------------------------------------------------------------------------------------------------------------------------
Per-Share-Data:
Net Income (Basic) ................................................... $ 1.61 $ 1.38 $ 1.28
Net Income (Diluted) ................................................. $ 1.60 $ 1.37 $ 1.27
Cash Dividends ....................................................... $ 0.669 $ 0.594 $ 0.502
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
38
<PAGE>
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Common Capital Retained Holding Gains Treasury
(Dollars in thousands, except per-share data) Stock Surplus Earnings on Securities Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 ............................... $ 78,689 $ 135,607 $ 138,810 $ 340 $ (4,474) $ 348,972
Net income .......................................... 51,612 51,612
Stock dividends issued - 10% (3,047,783 shares,
including 342,980 shares of treasury stock) ...... 5,591 34,656 (45,397) 4,934 (216)
Stock issued (253,499 shares, including 210,817
shares of treasury stock) ........................ 244 355 3,331 3,930
Acquisition of treasury stock (364,555 shares) ...... (5,979) (5,979)
Net unrealized holding gain on securities ........... 8,202 8,202
Cash dividends - $0.502 per share ................... (20,255) (20,255)
------------------------------------------------------------------------
Balance at December 31, 1995 ............................. 84,524 170,618 124,770 8,542 (2,188) 386,266
Net income .......................................... 55,747 55,747
Stock dividends issued - 10% (3,302,042 shares
including 123,271 shares of treasury stock) ...... 7,225 46,859 (56,364) 2,206 (74)
Stock issued (280,945 shares, including 83,072
shares of treasury stock) ........................ 425 356 1,464 2,245
Acquisition of treasury stock (83,875 shares) ....... (1,482) (1,482)
Net unrealized holding gain on securities ........... 848 848
Cash dividends - $0.594 per share ................... (23,993) (23,993)
------------------------------------------------------------------------
Balance at December 31, 1996 ............................. 92,174 217,833 100,160 9,390 -- 419,557
Net income .......................................... 65,199 65,199
Stock dividends issued - 10% (3,595,654 shares) ..... 8,989 73,962 (83,046) (95)
Stock issued (196,325 shares) ....................... 447 1,513 1,960
Net unrealized holding gain on securities ........... 17,019 17,019
Acquisition of treasury stock (42,000 shares) ....... (1,196) (1,196)
Cash dividends - $0.669 per share ................... (27,150) (27,150)
------------------------------------------------------------------------
Balance at December 31, 1997 ............................. $ 101,610 $ 293,308 $ 55,163 $ 26,409 $ (1,196) $ 475,294
========================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
39
<PAGE>
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------
1997 1996 1995
---------- ---------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income ................................................ $ 65,199 $ 55,747 $ 51,612
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Provision for loan losses ................................ 7,742 5,561 3,998
Depreciation and amortization of premises and equipment .. 7,020 6,257 5,663
Net amortization of investment security premiums ......... 204 649 1,793
Deferred income tax expense .............................. 1,624 103 1,343
Gain on sale of investment securities .................... (5,831) (3,124) (3,205)
Gain on sale of mortgage loans ........................... (1,339) (1,204) (1,105)
Proceeds from sale of mortgage loans ..................... 87,498 80,548 83,955
Originations of mortgage loans held for sale ............. (87,152) (78,856) (83,346)
Amortization of intangible assets ........................ 1,571 1,536 1,622
Decrease (increase) in accrued interest receivable ....... 273 700 (3,915)
Increase in other assets ................................. (11,914) (3,432) (7,466)
Increase in accrued interest payable ..................... 4,951 365 6,607
Increase (decrease) in other liabilities ................. 8,008 (4,749) 2,636
------------- ------------- -------------
Total adjustments .................................. 12,655 4,354 8,580
------------- ------------- -------------
Net cash provided by operating activities ....... 77,854 60,101 60,192
------------- ------------- -------------
Cash Flows from Investing Activities:
Proceeds from sales of securities available for sale ..... 120,713 47,149 14,918
Proceeds from maturities of securities held to maturity .. 176,338 213,545 222,901
Proceeds from maturities of securities available for sale. 75,180 58,099 69,357
Purchase of securities held to maturity .................. (4,695) (106,721) (256,396)
Purchase of securities available for sale ................ (410,177) (171,852) (75,039)
Decrease (increase) in short-term investments ............ 1,035 2,348 (1,886)
Net increase in loans .................................... (286,073) (306,408) (167,224)
Purchase of premises and equipment, net .................. (10,767) (12,116) (7,662)
------------- ------------- -------------
Net cash used in investing activities ........... (338,446) (275,956) (201,031)
------------- ------------- -------------
Cash Flows from Financing Activities:
Net increase (decrease) in demand and savings deposits ... 9,770 55,036 (8,421)
Net increase in time deposits ............................ 243,845 95,712 218,443
Addition to long-term debt ............................... 13,747 27,878 8,383
Repayment of long-term debt .............................. (17,612) (14,007) (977)
Increase (decrease) in short-term borrowings ............. 27,723 88,742 (57,965)
Dividends paid ........................................... (25,849) (23,213) (19,838)
Net proceeds from issuance of common stock ............... 1,865 2,171 3,714
Acquisition of treasury stock ............................ (1,196) (1,482) (5,979)
------------- ------------- -------------
Net cash provided by financing activities ....... 252,293 230,837 137,360
------------- ------------- -------------
Net (Decrease) increase in Cash and Due From Banks ....... (8,299) 14,982 (3,479)
Cash and Due From Banks at Beginning of Year ............. 180,691 165,709 169,188
------------- ------------- -------------
Cash and Due From Banks at End of Year ................... $ 172,392 $ 180,691 $ 165,709
============= ============= =============
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest ........................................ $ 132,067 $ 124,812 $ 112,523
Income taxes .................................... $ 23,788 $ 19,763 $ 16,910
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
40
<PAGE>
FULTON FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Business: Fulton Financial Corporation (Parent Company) provides a full
range of banking and financial services to businesses and consumers through its
wholly-owned banking subsidiaries: Fulton Bank, Farmers Trust Bank, Swineford
National Bank, Lafayette Bank, FNB Bank, N.A., Great Valley Bank, Hagerstown
Trust Company, Delaware National Bank, The Bank of Gloucester County, The
Woodstown National Bank & Trust Company and The Peoples Bank of Elkton. In
addition, the Parent Company owns four non-banking subsidiaries: Fulton
Financial Realty Company, Fulton Life Insurance Company, Central Pennsylvania
Financial Corporation and FFC Management, Inc. Collectively, the Parent Company
and its subsidiaries are referred to as the Corporation.
The Corporation's primary source of revenue is interest income on loans and
investment securities and fee income on its products and services. Its expenses
consist of interest expense on deposits and borrowed funds and other operating
expenses. The Corporation is subject to competition from other financial
services providers operating in its region. The Corporation is also subject to
the regulations of certain federal and state agencies and undergoes periodic
examinations by such regulatory authorities.
The Corporation offers, through its eleven banking subsidiaries, a full
range of retail and wholesale banking services throughout fifteen central and
eastern Pennsylvania counties, two Maryland counties, one Delaware county and
two New Jersey counties. Approximately 50% of the Corporation's business is
conducted in the south central Pennsylvania region. Industry diversity is the
key to the economic well-being of this region and the Corporation is not
dependent upon any single customer or industry.
Basis of Financial Statement Presentation: The consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles (GAAP) and include the accounts of the Parent Company and all
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The preparation of GAAP-basis financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the financial
statements as well as revenues and expenses during the period. Actual results
could differ from those estimates.
Investments: Debt securities acquired are classified as held to
maturity at the time of purchase when the Corporation has both the intent and
ability to hold these investments until they mature. Such debt securities are
carried at cost adjusted for amortization of premiums and accretion of discounts
using the effective yield method. The Corporation does not engage in trading
activities, however, since the investment portfolio serves as a source of
liquidity, certain specific debt securities and all marketable equity securities
are classified as available for sale. Securities available for sale are carried
at estimated fair value with the related unrealized holding gains and losses
reported as a separate component of shareholders' equity, net of tax. Realized
security gains and losses are computed using the specific identification method
and are recorded on a trade date basis.
Revenue Recognition: Loan and lease financing receivables are stated at
their principal amount outstanding, except for mortgages held for sale which are
carried at the lower of aggregate cost or market value. Interest income on loans
is accrued as earned. Unearned income on installment loans is recognized on a
basis which approximates the interest method.
Accrual of interest income is generally discontinued when a loan
becomes 90 days past due as to principal or interest. When interest accruals are
discontinued, unpaid interest credited to income is reversed. Nonaccrual loans
are restored to accrual status when all delinquent principal and interest become
current or the loan is considered secured and in the process of collection.
Loan Origination Fees and Costs: Loan origination fees and the related
direct origination costs are offset and the net amount is deferred and amortized
over the life of the loan as an adjustment to interest income. For mortgage
loans sold, the net amount is included in gain (loss) upon the sale of the
related mortgage loan.
Allowance for Loan Losses: The allowance for loan losses is increased
by charges to income and decreased by charge-offs, net of recoveries.
Management's periodic evaluation of the adequacy of the allowance for loan
losses is based on the Corporation's past loan loss experience, known and
inherent risks in the portfolio, adverse
41
<PAGE>
situations that may affect the borrowers' ability to repay, the estimated fair
value of the underlying collateral, and current economic conditions. Management
believes that the allowance for loan losses is adequate, however, future
additions to the allowance may be necessary based on changes in economic
conditions.
Impaired loans, as defined by Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," are
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate, or at the loan's observable market price or
fair value of the collateral if the loan is collateral dependent. A loan is
considered to be impaired when, based on current information and events, it is
probable that the Corporation will be unable to collect all amounts due
according to the contractual terms of the loan agreement.
Premises and Equipment: Premises and equipment are stated at cost, less
accumulated depreciation and amortization. The provision for depreciation and
amortization is generally computed using the straight-line method over the
estimated useful lives of the related assets, which are a maximum of 39 years
for buildings and improvements and eight years for furniture and equipment.
Interest costs incurred during the construction of major bank premises are
capitalized.
Other Real Estate Owned: Assets acquired in settlement of mortgage loan
indebtedness are recorded as other real estate owned and are included in other
assets initially at the lower of the estimated fair value of the asset or the
carrying amount of the loan. Costs to maintain the assets and subsequent gains
and losses on sales are included in other income and other expense.
Income Taxes: The provision for income taxes is based upon the results
of operations, adjusted primarily for the effect of tax-exempt income and net
credits received as a result of investments in low and moderate income housing
partnerships. Certain items of income and expense are reported in different
periods for financial reporting and tax return purposes. The tax effects of
these temporary differences are recognized currently in the deferred income tax
provision or benefit. Deferred tax assets or liabilities are computed based on
the difference between the financial statement and income tax bases of assets
and liabilities using the applicable enacted marginal tax rate. Deferred income
tax expenses or benefits are based on the changes in the deferred tax asset or
liability from period to period.
Net Income Per Share: The Corporation adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (Statement 128), on December
31, 1997. Statement 128 requires dual presentation of basic and diluted earnings
per share on the face of the income statement for all entities with complex
capital structures. The Corporation's basic net income per share is calculated
as net income divided by the weighted average number of shares outstanding. For
diluted net income per share, net income is divided by the weighted average
number of shares outstanding plus the incremental number of shares added as a
result of converting common stock equivalents, calculated using the treasury
stock method. The Corporation's common stock equivalents consist solely of
outstanding stock options (See Note J).
A reconciliation of the weighted average shares outstanding used to
calculate basic net income per share and diluted net income per share follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average shares outstanding (basic)........ 40,564 40,372 40,333
Impact of common stock equivalents................. 306 250 278
------------ ------------ ------------
Weighted average shares outstanding (diluted)...... 40,870 40,622 40,611
============ ============ ============
</TABLE>
Accounting for Mortgage Servicing Rights: The Corporation adopted
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights" (Statement 122), on January 1, 1996. This statement requires
capitalization of the cost of the rights to service mortgage loans when
originated mortgages are sold and servicing is retained, and for that cost to be
amortized over the period of estimated net servicing income. In addition, the
mortgage servicing rights must be periodically evaluated for impairment based on
their fair value. There has been no material financial statement impact as a
result of adopting Statement 122.
Accounting for Stock-Based Compensation: In 1995, the FASB issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (Statement 123). This statement requires a fair
42
<PAGE>
value approach to valuing compensation expense associated with stock options and
employee stock purchase plans. This statement encourages, but does not require,
the use of this method for financial statement purposes. Companies that do not
elect to adopt this statement for financial statement purposes are required to
present pro-forma footnote disclosures of net income and earnings per share as
if the fair value approach were used. Statement 123 became effective for the
Corporation in 1996 and is applicable to all options granted after January 1,
1995. Management has adopted the disclosure requirements of this statement only
and, accordingly, there has been no impact on the consolidated financial
statements other than additional disclosures as provided in Note J.
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 the remaining provisions on January 1, 1998. There was no material
financial statement impact as a result of adopting Statement 125.
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 the 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.
Reclassifications: Certain amounts in the 1996 and 1995 consolidated
financial statements and notes have been reclassified to conform to the 1997
presentation.
NOTE B - RESTRICTIONS ON CASH AND DUE FROM BANKS
- --------------------------------------------------------------------------------
The Corporation's subsidiary banks are required to maintain reserves,
in the form of cash and balances with the Federal Reserve Bank, against their
deposit liabilities. The average amount of such reserves during 1997 and 1996
was approximately $34.5 million and $43.9 million, respectively.
NOTE C - INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
The following summarizes the amortized cost and estimated fair values
of investment securities as of December 31 (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1997 Held to Maturity Cost Gains Losses Value
- -------------------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. Government and
agency securities ................. $ 43,617 $ 184 $ (94) $ 43,707
State and municipal securities....... 33,473 744 (32) 34,185
Debt securities issued
by foreign governments ............ 405 1 (3) 403
Corporate debt securities ........... 78 -- (6) 72
Mortgage-backed securities .......... 179,554 319 (722) 179,151
--------- ---------- ----------- -----------
$ 257,127 $ 1,248 $ (857) $ 257,518
========= ========== =========== ===========
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1997 Available for Sale Cost Gains Losses Value
- ------------------------------------ --------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Equity securities .................. $ 60,238 $ 38,680 $ (28) $ 98,890
U.S. Government and
agency securities ................ 184,619 1,229 (333) 185,515
State and municipal securities...... 5,406 93 -- 5,499
Mortgage-backed securities ......... 306,556 1,806 (818) 307,544
--------- ---------- ----------- ----------
$ 556,819 $ 41,808 $ (1,179) $ 597,448
========= ========== =========== ==========
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1996 Held to Maturity Cost Gains Losses Value
- ------------------------------------ --------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. Government and
agency securities ................ $ 133,778 $ 466 $ (331) $ 133,913
State and municipal securities...... 52,224 1,232 (64) 53,392
Debt securities issued
by foreign governments ........... 410 1 (3) 408
Corporate debt securities .......... 916 -- (9) 907
Mortgage-backed securities ......... 241,810 389 (1,921) 240,278
--------- ---------- ----------- ----------
$ 429,138 $ 2,088 $ (2,328) $ 428,898
========= ========== =========== ===========
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1996 Available for Sale Cost Gains Losses Value
- ------------------------------------ --------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Equity securities .................. $ 47,649 $ 15,843 $ (331) $ 63,161
U.S. Government and
agency securities ................ 176,975 785 (425) 177,335
State and municipal securities...... 5,959 37 (6) 5,990
Corporate debt securities .......... 150 -- -- 150
Mortgage-backed securities ......... 103,913 184 (1,641) 102,456
--------- ---------- ----------- ----------
$ 334,646 $ 16,849 $ (2,403) $ 349,092
========= ========== =========== ==========
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1997 by contractual maturity are shown in the following table.
Actual maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
---------------------------- --------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
------------ ------------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Due in one year or less ................ $ 33,190 $ 33,632 $ 49,060 $ 48,999
Due from one year to five years ........ 28,684 28,725 125,231 126,339
Due from five years to ten years ....... 11,964 12,138 15,142 15,073
Due after ten years .................... 3,735 3,872 592 603
------------ ------------ ----------- -----------
77,573 78,367 190,025 191,014
Mortgage-backed securities ............. 179,554 179,151 306,556 307,544
------------ ------------ ----------- -----------
$ 257,127 $ 257,518 $ 496,581 $ 498,558
============ ============ =========== ===========
</TABLE>
44
<PAGE>
Gains totaling $5.7 million, $2.9 million and $3.2 million were
realized on the sale of equity securities during 1997, 1996 and 1995,
respectively. Gains totaling $176,000 and $261,000 were realized on the sale of
available for sale debt securities during 1997 and 1996, respectively. There
were no sales of debt securities during 1995.
Securities carried at $508.8 million and $437.5 million at December 31,
1997 and 1996, respectively, were pledged as collateral to secure public and
trust deposits and for other purposes.
NOTE D - LOANS AND ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
Gross loans are summarized as follows as of December 31:
1997 1996
------------- -------------
(in thousands)
Commercial, financial and agricultural..... $ 417,434 $ 389,377
Real estate-construction................... 136,775 118,131
Real estate-mortgage:
First and second-residential............ 1,193,834 1,159,149
Commercial.............................. 906,245 774,881
Consumer................................... 609,244 549,647
Leasing and other......................... 53,698 43,962
------------- -------------
$ 3,317,230 $ 3,035,147
============= =============
Changes in the allowance for loan losses were as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance at January 1 ................. $ 44,792 $ 41,134 $ 40,377
-------- -------- --------
Loans charged off .................... (8,235) (5,490) (6,096)
Recoveries of loans
previously charged off ............ 2,724 3,587 2,855
Net loans charged off ................ (5,511) (1,903) (3,241)
-------- -------- --------
Provision for loan losses ............ 7,742 5,561 3,998
Allowance purchased .................. 130 -- --
-------- -------- --------
Balance at December 31 ............... $ 47,153 $ 44,792 $ 41,134
======== ======== ========
</TABLE>
Nonaccrual loans aggregated approximately $15.2 million at December 31,
1997 and 1996, and $15.3 million at December 31, 1995. Interest of approximately
$1.4 million, $1.6 million and $1.7 million was not recognized as interest
income due to the nonaccrual status of loans during 1997, 1996 and 1995,
respectively.
At December 31, 1997, the recorded investment in loans that are
considered to be impaired as defined by Statement 114 was $12.9 million (of
which $12.0 million were included in nonaccrual loans). Included in this amount
were $11.1 million of impaired loans with a related allowance for loan losses of
$1.9 million and $1.8 million of impaired loans that as a result of write-downs
do not have an allowance for loan losses. The average recorded investment in
impaired loans during the years ended December 31, 1997 and 1996 was
approximately $12.5 million and $15.4 million, respectively.
The Corporation applies all payments received on nonaccruing impaired
loans to principal until such time as the principal is paid off, after which
time any additional payments received are recognized as interest income.
Payments received on accruing impaired loans are applied to principal and
interest according to the original terms of the loan. The Corporation recognized
interest income of approximately $90,000 and $290,000 on impaired loans in 1997
and 1996, respectively.
The Corporation has granted loans to the officers and directors of the
Corporation and to their associates. Related-party loans are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and do
not involve more than the normal risk of collectibility. The aggregate dollar
amount of these loans was $63.4 million and $61.2 million at December
45
<PAGE>
31, 1997 and 1996, respectively. During 1997, $12.9 million of new loans were
made and repayments totaled $10.7 million.
The total portfolio of mortgage loans serviced by the Corporation for
unrelated third parties at December 31, 1997 and 1996 was $520.1 million and
$514.0 million, respectively.
NOTE E - PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
The following is a summary of premises and equipment as of December 31:
1997 1996
------------- -------------
(in
thousands)
Premises and leasehold improvements.. $ 73,239 $ 69,326
Furniture and equipment.............. 47,987 43,824
Construction in progress............. 2,337 1,878
------------- -------------
123,563 115,028
Less accumulated depreciation and
amortization......................... (61,916) (57,128)
------------- -------------
$ 61,647 $ 57,900
============= =============
NOTE F - LONG-TERM DEBT
- --------------------------------------------------------------------------------
Long-term debt included the following as of December 31:
1997 1996
------------- -------------
(in thousands)
Federal Home Loan Bank advances...... $ 47,294 $ 49,028
Collateralized mortgage obligations.. - 2,098
Other................................ 401 434
------------- -------------
$ 47,695 $ 51,560
============= =============
As of December 31, 1997, the Corporation had a series of collateralized
Federal Home Loan Bank advances totaling $47.3 million. These advances mature
through July, 2007, and carry a weighted average interest rate of 6.01%. As of
December 31, 1997, the Corporation had an additional borrowing capacity of
approximately $765 million with the Federal Home Loan Bank.
NOTE G - REGULATORY MATTERS
- --------------------------------------------------------------------------------
Dividend and Loan Limitations
The dividends that may be paid by subsidiary banks to the Parent Company
are subject to certain legal and regulatory limitations. Under such limitations,
the total amount available for payment of dividends by subsidiary banks was
approximately $157 million at December 31, 1997.
Under current Federal Reserve regulations, the subsidiary banks are limited
in the amount they may loan to their affiliates, including the Parent Company.
Loans to a single affiliate may not exceed 10%, and the aggregate of loans to
all affiliates may not exceed 20% of each bank subsidiary's capital and surplus.
At December 31, 1997, the maximum amount available for transfer from the
subsidiary banks to the Parent Company in the form of loans and dividends was
approximately $182 million.
Regulatory Capital Requirements
The Corporation's subsidiary banks are subject to various regulatory
capital requirements administered by banking regulators. Failure to meet minimum
capital requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the subsidiary banks must meet specific capital guidelines that involve
quantitative measures of the
46
<PAGE>
subsidiary banks' assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The subsidiary banks' capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the subsidiary banks to maintain minimum amounts and ratios of
total and Tier I capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier I capital to average assets (as defined). Management
believes, as of December 31, 1997, that all of its bank subsidiaries meet the
capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notifications from The
Pennsylvania Department of Banking categorized the Corporation's two significant
subsidiaries -Fulton Bank and Lafayette Bank -- as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, these banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the following table.
There are no conditions or events since that notification that management
believes have changed the institutions' categories
The table below presents the total risk-based, Tier I risk-based and
Tier I leverage requirements for the Corporation, Fulton Bank, and Lafayette
Bank. Actual capital amounts and ratios are also presented.
<TABLE>
<CAPTION>
As of December 31, 1997
----------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- --------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets):
Corporation .............................. $472,110 14.3% $264,604 8.0% $330,754 10.0%
Fulton Bank .............................. 193,892 12.7 121,807 8.0 152,258 10.0
Lafayette Bank ........................... 44,092 13.7 25,685 8.0 32,106 10.0
Tier I Capital (to Risk Weighted Assets):
Corporation .............................. $430,694 13.0% $132,302 4.0% $198,453 6.0%
Fulton Bank .............................. 176,392 11.6 60,903 4.0 91,355 6.0
Lafayette Bank ........................... 40,060 12.5 12,842 4.0 19,264 6.0
Tier I Capital (to Average Assets):
Corporation .............................. $430,694 10.1% $127,527 3.0% $212,546 5.0%
Fulton Bank .............................. 176,392 9.9 53,229 3.0 88,715 5.0
Lafayette Bank ........................... 40,060 9.1 13,163 3.0 21,939 5.0
<CAPTION>
As of December 31, 1997
----------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- --------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets):
Corporation .............................. $431,818 14.5% $233,816 8.0% $298,520 10.0%
Fulton Bank .............................. 179,555 13.1 102,084 8.0 127,605 10.0
Lafayette Bank ........................... 42,801 14.3 24,017 8.0 30,022 10.0
Tier I Capital (to Risk Weighted Assets):
Corporation .............................. $394,406 13.2% $119,408 4.0% $179,112 6.0%
Fulton Bank .............................. 163,923 11.9 51,042 4.0 76,562 6.0
Lafayette Bank ........................... 39,089 13.0 12,009 4.0 18,013 6.0
Tier I Capital (to Average Assets):
Corporation .............................. $394,406 10.0% $118,657 3.0% $197,761 5.0%
Fulton Bank .............................. 163,923 9.9 49,629 3.0 82,716 5.0
Lafayette Bank ........................... 39,089 9.5 12,356 3.0 20,593 5.0
</TABLE>
47
<PAGE>
NOTE H - INCOME TAXES
- --------------------------------------------------------------------------------
The components of the provision for income taxes are as follows:
Year ended December 31
-----------------------------
1997 1996 1995
------- ------- -------
(in thousands)
Current tax expense -
Federal ................................ $26,782 $22,982 $18,504
State .................................. 25 379 370
------- ------- -------
26,807 23,361 18,874
Deferred tax expense (primarily federal)..... 1,624 103 1,343
------- ------- -------
$28,431 $23,464 $20,217
======= ======= =======
The differences between the effective income tax rate and the federal
statutory income tax rate are as follows:
Year ended December 31
--------------------------
1997 1996 1995
------ ------ ------
Statutory tax rate ........................... 35.0% 35.0% 35.0%
Effect of tax-exempt income .................. (2.7) (3.3) (3.9)
Effect of low income housing investments ..... (2.4) (3.1) (2.6)
Goodwill amortization ........................ 0.4 0.5 0.6
Other, net ................................... 0.1 0.5 (1.0)
------ ------ ------
Effective income tax rate .................... 30.4% 29.6% 28.1%
====== ====== ======
The net deferred tax asset recorded by the Corporation consisted of the
following tax effects of temporary differences at December 31:
1997 1996
--------- ---------
(in thousands)
Allowance for loan losses............................ $ 16,175 $ 14,747
Deferred loan fees................................... 1,002 1,641
Direct leasing....................................... (4,430) (3,235)
Deferred compensation................................ 1,778 1,675
Postretirement benefits.............................. 3,136 3,156
Fixed asset depreciation............................. (282) (245)
Other................................................ 451 1,715
--------- ---------
17,830 19,454
Unrealized holding gains on securities available for
sale................................................. (14,220) (5,056)
--------- ---------
$ 3,610 $ 14,398
========= =========
As of December 31, 1997 and 1996, the Corporation has not established
any valuation allowance against deferred tax assets since these tax benefits are
realizable either through carryback availability against prior years' taxable
income or the reversal of existing deferred tax liabilities.
NOTE I - EMPLOYEE BENEFIT PLANS
- --------------------------------------------------------------------------------
Description of Plans
The Corporation has a noncontributory defined contribution
profit-sharing plan covering substantially all employees of the Parent Company,
Fulton Bank, Farmers Trust Bank and certain employees of Lafayette Bank.
Contributions are based on a formula providing for an amount not to exceed 15%
of each eligible employee's annual salary for employees hired prior to January
1, 1996 and 10% of such annual salary for employees hired subsequent to January
1, 1996.
48
<PAGE>
The Corporation also maintains a defined benefit pension plan which
covers substantially all full-time employees of Swineford National Bank, FNB
Bank, N.A., Lafayette Bank, Great Valley Savings Bank, Hagerstown Trust Company
and Delaware National Bank. Pension contributions are actuarially determined and
funded as accrued. These funds are invested in guaranteed investment contracts,
U.S. Treasury securities, money market funds and common stock investment funds.
For employees covered under the defined benefit plan, the Corporation
provides an optional 401(k) plan. The terms of the plan allow eligible employees
to defer up to 10% of their pre-tax salary on an annual basis. On a
discretionary basis, the Corporation may also make a matching contribution which
is limited to a maximum of 3%.
The following summarizes the Corporation's expense under the above
plans for the years ended December 31:
1997 1996 1995
--------- ---------- ----------
(in thousands)
Profit-sharing plan.................... $ 3,322 $ 3,089 $ 2,969
Defined benefit plan................... 1,197 1,159 947
401(k) plan............................ 638 600 514
--------- ---------- ----------
$ 5,157 $ 4,848 $ 4,430
========= ========== ==========
Defined Benefit Pension Plan
The net periodic pension cost for the Corporation's defined benefit
plan, as determined by consulting actuaries, consisted of the following
components for the years ended December 31:
1997 1996 1995
---------- ---------- ---------
(in thousands)
Service cost-benefits earned
during period...................... $ 969 $ 927 $ 657
Interest cost on projected
benefit obligation................. 1,006 899 806
Actual return on assets................. (2,496) (808) (1,784)
Net amortization and deferral........... 1,718 141 1,268
---------- ---------- ---------
Net periodic pension cost............... $ 1,197 $ 1,159 $ 947
========== =========- =========
In 1996, the Corporation changed the valuation date of the defined
benefit plan from December 31 to September 30. The accumulated plan benefits and
funded status of the Corporation's defined benefit plan are as follows as of
September 30:
1997 1996
------------- -------------
(in thousands)
Actuarial present value of benefit obligations:
Vested benefit obligation................. $ 11,142 $ 9,436
============= =============
Accumulated benefit obligation............ $ 11,386 $ 9,683
============= =============
Projected benefit obligation.............. $ 15,575 $ 14,015
Plan assets at fair value...................... 15,083 11,546
------------- -------------
Projected benefit obligation in excess of
plan assets............................... (492) (2,469)
Unrecognized net (gain) loss................... (1,149) 382
Service cost not yet recognized in net
periodic pension cost..................... 34 39
Unrecognized net obligation at transition...... 556 690
------------- -------------
Pension liability recognized in the
consolidated balance sheets............... $ (1,051) $ (1,358)
============= =============
49
<PAGE>
The following rates were used in calculating net periodic pension cost
and the actuarial present value of benefit obligations:
1997 1996 1995
------ ------ ------
Discount rate-projected benefit obligation ......... 7.00% 7.25% 7.00%
Rate of increase in compensation level ............. 4.50 4.75 5.00
Expected long-term rate of return on plan assets ... 8.00 8.00 8.00
Postretirement Benefits
The Corporation currently provides medical and life insurance benefits
to retired full-time employees. Substantially all of the Corporation's full-time
employees may become eligible for these discretionary benefits if they reach
normal retirement age while working for the Corporation.
The components of the expense for postretirement benefits other than
pensions are as follows for the years ended December 31:
1997 1996 1995
------- -------- --------
(in thousands)
Service cost-benefits earned during the period. $ 217 $ 230 $ 189
Interest cost on accumulated benefit obligation 369 367 377
Actual return on plan assets................... (10) (6) (10)
Net amortization and deferral.................. (309) (269) (279)
------- -------- --------
Net nonpension postretirement benefit cost..... $ 267 $ 322 $ 277
======= ======== ========
The following table presents the status of the postretirement benefits
plan at December 31:
1997 1996
--------- ---------
(in thousands)
Accumulated postretirement benefit
obligation:
Fully eligible active and former members.. $ (968) $ (1,019)
Other active members...................... (1,424) (1,367)
Retired members........................... (3,270) (3,193)
--------- ---------
(5,662) (5,579)
Plan assets at fair value...................... 196 189
Unrecognized prior service cost................ (2,263) (2,489)
Unrecognized net gain.......................... (1,232) (1,138)
--------- ---------
Accrued postretirement benefit obligation...... $ (8,961) $ (9,017)
========= =========
For measuring the postretirement benefits obligation, an 8.5% increase
in the per capita cost of health care benefits was assumed for 1997. This rate
was assumed to gradually decline to 6.0% in 2000 and remain at that level
thereafter. This health care cost trend rate has a significant impact on the
amounts reported. Assuming a 1% change in the health care cost trend rate, the
accumulated postretirement benefit obligation would increase or decrease by
approximately $728,000 and the current period expense would increase or decrease
by approximately $111,000. The discount rate used in determining the accumulated
postretirement benefit obligation was 7.00% and 7.25% at December 31, 1997 and
1996, respectively.
NOTE J - STOCK-BASED COMPENSATION PLANS AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Incentive Stock Option Plan and Employee Stock Purchase Plan
The Corporation has an Incentive Stock Option Plan (Option Plan) and an
employee stock purchase plan (ESPP). The Option Plan, which was adopted in 1996,
replaced a prior plan that originated in 1986 and expired in 1996. The terms of
the plans are substantially the same. Under the Option Plan, options are granted
to key personnel for terms of up to 10 years at option prices equal to the fair
market value of the Corporation's stock on the date of grant. Options granted
are 100% vested immediately upon grant. The Plan has reserved 1.55 million
shares for grant under this plan through 2006. The number of options granted in
any year is dependent upon the Corporation's performance relative to that of a
self-defined peer group. A summary of stock option activity under the current
and prior plan follows:
50
<PAGE>
<TABLE>
<CAPTION>
Option Price Per Share
-------------------------------
Stock Weighted
Options Range Average
--------- ------------------ --------
<S> <C> <C> <C>
Balance at January 1, 1995............ 1,058,233 $ 4.79 - $ 16.44 $ 9.90
Granted............................. 135,762 14.98 14.98
Exercised........................... (123,661) 5.06 - 16.44 9.88
Canceled (6,059) 5.06 5.06
----------
Balance at December 31, 1995.......... 1,064,275 4.79 - 16.44 10.61
Granted............................. 126,638 17.39 17.39
Exercised........................... (269,922) 4.79 - 16.44 8.11
Canceled............................ (69) 12.55 12.55
----------
Balance at December 31, 1996.......... 920,922 4.79 - 17.39 12.27
Granted............................. 138,500 27.13 27.13
Exercised........................... (212,956) 4.79 - 17.39 11.09
----------
Balance at December 31, 1997.......... 846,466 $ 5.27 - $ 27.13 $ 15.00
==========
</TABLE>
The following table summarizes information concerning options
outstanding at December 31, 1997:
Weighted Weighted
Range of Unexercised Average Average
Exercise Stock Remaining Exercise
Prices Options Life (Years) Price
--------------- ----------- ------------ --------
$5.00 - $10.00 196,284 4.24 $ 6.71
$10.00 - $15.00 289,905 5.66 13.33
$15.00 - $20.00 221,777 7.62 16.93
$20.00 - $30.00 138,500 9.50 27.13
----------- ------------ --------
846,466 6.49 $15.00
=========== ============ ========
The ESPP allows eligible employees to purchase stock in the Corporation
at 85% of the fair market value of the stock on the date of exercise. Under the
terms of the ESPP, 44,338 shares, 57,994 shares and 58,699 shares were issued in
1997, 1996 and 1995, respectively. A total of 411,249 shares have been issued
since the inception of the ESPP in 1986. As of December 31, 1997, 124,648 shares
have been reserved for future issuances under the ESPP.
The Corporation accounts for both the Option Plan and the ESPP under
Accounting Principles Board Opinion No. 25, and, accordingly, no compensation
expense has been recognized in the financial statements of the Corporation. Had
compensation cost for these plans been recorded in the financial statements of
the Corporation consistent with the provisions of Statement 123, the
Corporation's net income and net income per share would have been reduced to the
following pro-forma amounts (in thousands, except per-share data):
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ -------------
<S> <C> <C> <C>
Net income: As reported.............. $ 65,199 $ 55,747 $ 51,612
Proforma................. 64,263 55,093 51,075
WNet income per share (basic): As reported.............. $ 1.61 $ 1.38 $ 1.28
Proforma................. 1.58 1.36 1.27
Net income per share (diluted): As reported.............. $ 1.60 $ 1.37 $ 1.27
Proforma................. 1.57 1.36 1.26
Weighted average fair value of options granted.............. $ 6.68 $ 4.10 $ 3.08
</TABLE>
Because the Statement 123 method has not been applied to options
granted prior to January 1, 1995, the resulting pro-forma compensation cost may
not be representative of that to be expected in future years. The fair
51
<PAGE>
value of each option grant is estimated on the date of grant using the Black-
Scholes option pricing model with the following weighted average assumptions
used for grants:
1997 1996 1995
------- ------- -------
Risk-free interest rate............... 6.44% 6.74% 6.65%
Volatility of Corporation's stock..... 18.80 20.30 19.10
Expected dividend yield............... 2.50 3.20 3.20
Expected life of options.............. 6 Years 6 Years 6 Years
Shareholder Rights
In 1989, the Corporation declared a dividend distribution of one Right
for each outstanding share of common stock to existing shareholders of record.
In addition, each share of common stock issued subsequent to the record date of
the dividend also entitles the holder to one Right. Upon distribution, each
Right entitles the holder to purchase one share of common stock or depending on
events, receive common stock having a value equal to two times the exercise
price of the Right. The purchase price was $90 per share in 1989 and is
currently $40.65 due to stock dividends and splits. The Rights are not
exercisable or transferable apart from the common stock prior to distribution.
Distribution of the Rights will occur ten business days following (1) a public
announcement that a person or group of persons ("Acquiring Person") has acquired
or obtained the right to acquire beneficial ownership of 20% or more of the
outstanding shares of common stock (the "Stock Acquisition Date") or (2) the
commencement of a tender offer or exchange offer that would result in a person
or group beneficially owning 25% or more of such outstanding shares of common
stock. The Rights are redeemable in full, but not in part, by the Corporation at
any time until ten business days following the Stock Acquisition Date, at a
price of $0.01 per Right. The Rights will expire at the close of business on
June 20, 1999, unless earlier redeemed.
NOTE K - LEASES
- --------------------------------------------------------------------------------
Certain branch offices and equipment are leased under agreements which
expire at varying dates through 2025. Most leases contain renewal provisions at
the Corporation's option. Total rental expense was approximately $2.3 million in
1997, and $2.1 million in 1996 and 1995. Future minimum payments as of December
31, 1997 under noncancelable operating leases are as follows:
Minimum
Year Rent
----------------- --------
(in thousands)
1998............. $ 2,117
1999............. 2,054
2000............. 2,036
2001............. 1,980
2002............. 1,925
Thereafter....... 32,570
--------
$ 42,682
========
NOTE L - COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
The Corporation has not engaged in the practice of trading, issuing or
holding derivative financial instruments such as futures, forward, swap, or
option contracts. The Corporation is, however, a party to financial instruments
with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit, letters of credit, and guarantees which involve,
to varying degrees, elements of credit and interest rate risk that are not
recognized in the consolidated balance sheets.
Exposure to credit loss in the event of non-performance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Corporation uses the same credit policies in making commitments as it does for
on-balance-sheet instruments. The Corporation had the following outstanding
commitments to fund loans as of December 31:
52
<PAGE>
1997 1996
------------ ------------
(in thousands)
Fixed rate:
Less than 8.00%............ $ 17,997 $ 15,454
8.00% - 8.99%.............. 31,557 25,385
9.00% - 9.99%.............. 2,751 9,309
Greater than 10.00%........ 2,713 2,880
------------ ------------
Total fixed rate................. 55,018 53,028
Floating rate.................... 938,996 876,056
------------ ------------
$ 994,014 $ 929,084
============ ============
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since a portion of the commitments is expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Corporation evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained upon extension of credit is based on management's credit evaluation of
the customer. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment and income producing commercial
properties. Commitments under outstanding standby letters of credit were $89.9
million at December 31, 1997 and $75.8 million at December 31, 1996.
From time to time, the Corporation and its subsidiary banks may be
defendants in legal proceedings relating to the conduct of their banking
business. Most of such legal proceedings are a normal part of the banking
business, and in management's opinion, the financial position and results of
operations of the Corporation would not be affected materially by the outcome of
such legal proceedings.
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The following are the estimated fair values of the Corporation's
financial instruments as of December 31 followed by a general description of the
methods and assumptions used to estimate such fair values. These fair values are
significantly affected by assumptions used, principally the timing of future
cash flows and the discount rate. Because assumptions are inherently subjective
in nature, the estimated fair values cannot be substantiated by comparison to
independent market quotes and, in many cases, the estimated fair values could
not necessarily be realized in an immediate sale or settlement of the
instrument. Further, certain financial instruments and all nonfinancial
instruments are excluded. Accordingly, the aggregate fair value amounts
presented do not necessarily represent management's estimation of the underlying
value of the Corporation.
<TABLE>
<CAPTION>
1997 1996
--------------------------- ----------------------------
Estimated Estimated
FINANCIAL ASSETS Book Value Fair Value Book Value Fair Value
- --------------------------------- ------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Cash and due from banks.......... $ 172,392 $ 172,392 $ 180,691 $ 180,691
Interest-bearing deposits
with other banks............ 1,042 1,042 2,077 2,077
Mortgage loans held for sale..... 1,118 1,118 125 125
Securities held to maturity...... 257,127 257,518 429,138 428,898
Securities available for sale.... 597,448 597,448 349,092 349,092
Net loans........................ 3,260,606 3,284,464 2,982,275 2,987,506
Accrued interest receivable...... 26,771 26,771 24,044 24,044
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
Estimated Estimated
FINANCIAL LIABILITIES Book Value Fair Value Book Value Fair Value
- -------------------------------------- ------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Demand and savings deposits........... $ 1,789,613 $ 1,789,613 $ 1,779,843 $ 1,779,843
Time deposits......................... 1,831,956 1,840,877 1,588,111 1,592,918
Short-term borrowings................. 236,762 236,762 209,039 209,039
Accrued interest payable.............. 25,618 25,618 20,667 20,667
Other financial liabilities........... 24,259 24,259 18,617 18,617
Long-term debt........................ 47,695 47,740 51,560 51,529
</TABLE>
For short-term financial instruments, defined as those with remaining
maturities of 90 days or less, the carrying amount was considered to be a
reasonable estimate of fair value. The following instruments are predominantly
short-term:
Assets Liabilities
----------------------------- -------------------------------
Cash and due from banks Demand and savings deposits
Interest bearing deposits Short-term borrowings
Accrued interest receivable Accrued interest payable
Other financial liabilities
For those components of the above-listed financial instruments with
remaining maturities greater than 90 days, fair values were determined by
discounting contractual cash flows using rates which could be earned for assets
with similar remaining maturities and, in the case of liabilities, rates at
which the liabilities with similar remaining maturities could be issued as of
the balance sheet date.
As indicated in Note A, securities available for sale are carried at
their estimated fair values. The estimated fair values of securities held to
maturity as December 31, 1997 and 1996 were generally based on quoted market
prices, broker quotes or dealer quotes.
For short-term loans and variable rate loans which reprice within 90
days, the carrying value was considered to be a reasonable estimate of fair
value. For other types of loans, fair value was estimated by discounting future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities. In
addition, for loans secured by real estate, appraisal values for the collateral
were considered in the fair value determination.
The fair value of long-term debt was estimated by discounting the
remaining contractual cash flows using a rate at which the Corporation could
issue debt with a similar remaining maturity as of the balance sheet date.
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of standby letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations.
NOTE N - MERGERS
- --------------------------------------------------------------------------------
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, Elkton became a wholly-owned subsidiary of the
Corporation and 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 959,000 shares of its common stock in connection with the merger. Elkton,
with approximately $99 million in assets at December 31, 1997, operates two
branch offices in Cecil County, Maryland. As a result of the merger, Elkton
became the Corporation's second banking subsidiary in Maryland and eleventh
overall.
54
<PAGE>
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 Corporation's
common stock. The Corporation issued 3.2 million shares of its common stock in
connection with the merger. Woodstown, with approximately $267 million in total
assets at December 31, 1997, operates seven branch offices in Salem and
Gloucester Counties. As a result of the merger, Woodstown became the
Corporation's second banking subsidiary in New Jersey and tenth overall.
Gloucester County Bankshares, Inc.
On February 29, 1996, the Corporation completed its acquisition of
Gloucester County Bankshares, Inc. (Gloucester) of Woodbury, New Jersey. As
provided under the terms of the merger agreement, Gloucester was merged with and
into the Corporation and each of the outstanding shares of the common stock of
Gloucester was converted into 1.91 shares of the Corporation's common stock. The
Corporation issued 2.0 million shares of its common stock in connection with the
merger. Through this transaction, the Corporation acquired ownership of The Bank
of Gloucester County, its first banking subsidiary in New Jersey. The Bank of
Gloucester County, with approximately $277 million in assets as of December 31,
1997, operates eight branch offices in Gloucester County, New Jersey.
The acquisitions of Elkton, Woodstown and Gloucester were accounted for
as poolings of interest and all financial statements and financial information
contained herein have been restated to include the accounts and results of
operations of these companies for all periods presented.
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,
Pennsylvania. 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 approximately 4.0
million shares of Keystone Heritage's common stock will be exchanged for 1.83
shares of the Corporation's common stock. In addition, each of the 84,000
options to acquire Keystone Heritage stock will be converted to options to
purchase the Corporation's stock. The transaction is expected to be completed in
the first 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 Farmers Trust Bank, one of
the Corporation's existing affiliate banks, to become Lebanon Valley Farmers
Bank. Concurrently with the merger, deposits, loans and branches located in
Lancaster and Dauphin Counties will be transferred to Fulton Bank.
Ambassador Bank of the Commonwealth
On January 26, 1998, the Corporation entered into a Merger Agreement to
acquire Ambassador Bank of the Commonwealth. (Ambassador) of Allentown,
Pennsylvania. Ambassador is a $275 million bank, which operates eight community
banking offices in Lehigh and Northampton Counties.
Under the terms of the merger agreement, each of the 1.9 million shares
of Ambassador's common stock will be exchanged for 1.12 shares of the
Corporation's common stock. In addition, the 417,000 options and warrants to
acquire Ambassador stock will be exchanged for approximately 327,000 shares of
the Corporation's common stock. The acquisition is subject to approval by bank
regulatory authorities and Ambassador shareholders. The transaction is expected
to be completed in the third quarter of 1998 and will be accounted for as a
pooling of interests. As a result of the acquisition, Ambassador will be merged
with and into Lafayette Bank, one of the Corporation's existing affiliate banks.
55
<PAGE>
NOTE O - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
- --------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
- ------------------------
December 31
---------------------------
1997 1996
------------ ------------
(in thousands)
ASSETS
- ------
Cash, securities, and other assets......... $ 3,644 $ 40,938
Receivable from:
Bank subsidiaries..................... - 822
Nonbank subsidiaries.................. 262 753
Investment in:
Bank subsidiaries..................... 410,924 380,580
Nonbank subsidiaries.................. 90,080 21,497
------------ ------------
Total Assets.......................... $ 504,910 $ 444,590
============ ============
LIABILITIES
- -----------
Short-term borrowings...................... $ 16,000 $ 15,111
Other liabilities.......................... 13,616 9,922
------------ ------------
Total Liabilities..................... 29,616 25,033
Shareholders' equity....................... 475,294 419,557
------------ ------------
Total Liabilities and Shareholders'
Equity..................................... $ 504,910 $ 444,590
============ ============
CONDENSED STATEMENTS OF INCOME
- ------------------------------
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------
1997 1996 1995
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Income:
Dividends from bank subsidiaries...... $ 41,428 $ 30,936 $ 35,653
Other................................. 12,262 8,432 8,764
------------ ------------ ------------
53,690 39,368 44,417
Expenses................................... 13,043 11,663 12,824
------------ ------------ ------------
Income before income taxes and equity
in undistributed net income (loss) of
subsidiaries.......................... 40,647 27,705 31,593
Income tax benefit......................... (2,192) (3,162) (3,249)
------------ ------------ ------------
42,839 30,867 34,842
Equity in undistributed net income (loss) of:
Bank subsidiaries..................... 23,291 25,694 16,373
Nonbank subsidiaries.................. (931) (814) 397
------------ ------------ ------------
Net Income....................... $ 65,199 $ 55,747 $ 51,612
============ ============ ============
</TABLE>
56
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
- ----------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------
1997 1996 1995
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income..................................................... $ 65,199 $ 55,747 $ 51,612
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Deferred income tax expense (benefit)....................... 566 (211) 172
Gain on sale of investment securities....................... (5,191) (2,801) (3,151)
Decrease (increase) in other assets......................... 2,366 2,708 (2,223)
Increase in investment in subsidiaries...................... (22,361) (24,880) (16,770)
Increase in other liabilities............................... 2,659 191 2,486
------------ ------------ ------------
Total adjustments....................................... (21,961) (24,993) (19,486)
------------ ------------ ------------
Net cash provided by operating activities............... 43,238 30,754 32,126
------------ ------------ ------------
Cash Flows From Investing Activities:
Investment in subsidiaries.................................. (20,283) (4,025) (12,851)
Investment in real estate partnerships...................... (266) (296) (770)
Proceeds from sales of investment securities................ 7,756 5,827 6,333
Purchase of investment securities........................... (5,978) (6,331) (5,767)
Proceeds from sales of fixed assets......................... - - 1,090
------------ ------------ ------------
Net cash used in investing activities................... (18,771) (4,825) (11,965)
------------ ------------ ------------
Cash Flows From Financing Activities:
Net increase (decrease) in short-term borrowings............ 889 (5,389) (2,500)
Dividends paid.............................................. (25,849) (21,126) (18,215)
Net proceeds from issuance of common stock.................. 1,865 2,171 3,714
Acquisition of treasury stock............................... (1,196) (1,482) (5,979)
------------ ------------ ------------
Net used in financing activities........................ (24,291) (25,826) (22,980)
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents............... 176 103 (2,819)
Cash and Cash Equivalents at Beginning of Year..................... 5 (98) 2,721
------------ ------------ ------------
Cash and Cash Equivalents at End of Year........................... $ 181 $ 5 $ (98)
============ ============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest..................................................... $ 3,416 $ 3,508 $ 4,289
Income taxes................................................. $ 23,788 $ 19,763 $ 16,910
</TABLE>
57
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Fulton Financial Corporation:
We have audited the accompanying consolidated balance sheets of Fulton Financial
Corporation (a Pennsylvania corporation) and subsidiaries as of December 31,
1997 and 1996 and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of The
Woodstown National Bank & Trust Company, which was acquired in 1997 in a
transaction accounted for as a pooling of interests, as discussed in Note N.
Such statements are included in the consolidated financial statements of Fulton
Financial Corporation and reflect total assets of 6 percent in 1996, and
interest income of 6 percent and 7 percent in 1996 and 1995, respectively, of
the consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to the
amounts included for The Woodstown National Bank & Trust Company, is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Fulton Financial Corporation and subsidiaries as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Lancaster, Pennsylvania
January 23, 1998
58
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
The Board of Directors and Shareholders
The Woodstown National Bank and Trust Company
P. O. Box 248
Woodstown, NJ 08098
We have audited the accompanying consolidated statements of condition of The
Woodstown National Bank and Trust Company and Subsidiary as of December 1996 and
1995, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Woodstown National Bank and Trust Company and Subsidiary as of December 31, 1996
and 1995, and the results of their operations and their cash flows for each of
the years then ended, in conformity with generally accepted accounting
principles.
PETRONI & ASSOCIATES
/s/ Nick L. Petroni
Certified Public Accountant
January 30, 1997
59
<PAGE>
FULTON FINANCIAL CORPORATION
QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per-share data)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------
For the Year 1997 March 31 June 30 Sept. 30 Dec. 31
- ------------------------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income............... $ 76,009 $ 79,092 $ 81,098 $ 83,429
Interest expense.............. 32,187 33,437 35,049 36,345
------------- ------------- ------------- -------------
Net interest income........... 43,822 45,655 46,049 47,084
Provision for loan losses..... 1,818 1,641 1,930 2,353
Other income.................. 10,308 9,121 11,409 10,217
Other expenses................ 29,955 29,440 31,593 31,305
------------- ------------- ------------- -------------
Income before income taxes.... 22,357 23,695 23,935 23,643
Income taxes.................. 6,657 7,669 7,377 6,728
------------- ------------- ------------- -------------
Net income.................... $ 15,700 $ 16,026 $ 16,558 $ 16,915
============= ============= ============= =============
Per-share data:
Net income (basic)....... $ 0.39 $ 0.40 $ 0.41 $ 0.42
Net income (diluted)..... $ 0.39 $ 0.39 $ 0.41 $ 0.41
Cash dividends........... $ 0.159 $ 0.170 $ 0.170 $ 0.170
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
For the Year 1996 March 31 June 30 Sept. 30 Dec. 31
- ------------------------------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Interest income............... $ 71,268 $ 72,591 $ 74,806 $ 76,184
Interest expense.............. 30,696 30,662 31,434 32,385
--------- ---------- --------- ---------
Net interest income........... 40,572 41,929 43,372 43,799
Provision for loan losses..... 742 1,031 1,669 2,119
Other income.................. 8,596 7,990 8,680 9,717
Other expenses................ 28,399 28,519 31,826 31,139
--------- ---------- --------- ---------
Income before income taxes.... 20,027 20,369 18,557 20,258
Income taxes.................. 5,993 6,076 5,597 5,798
--------- ---------- --------- ---------
Net income.................... $ 14,034 $ 14,293 $ 12,960 $ 14,460
========= ========== ========= =========
Per-share data:
Net income (basic)....... $ 0.35 $ 0.35 $ 0.32 $ 0.36
Net income (diluted)..... $ 0.35 $ 0.35 $ 0.32 $ 0.36
Cash dividends........... $ 0.137 $ 0.152 $ 0.152 $ 0.153
</TABLE>
Item 9. Changes in and Disagreements with Accountants on
- ---------------------------------------------------------
Accounting and Financial Disclosure
-----------------------------------
None.
60
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Incorporated by reference herein is the information appearing under the
heading "Information about Nominees and Continuing Directors" on pages 8 through
12 of the 1997 Proxy Statement and under the heading "Executive Officers" on
pages 13 and 14 of the 1997 Proxy Statement.
Item 11. Executive Compensation
- --------------------------------
Incorporated by reference herein is the information appearing under the
heading "Executive Compensation" on pages 15 through 17 of the 1997 Proxy
Statement and under the heading "Compensation of Directors" on page 13 of the
1997 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Incorporated by reference herein is the information appearing under the
heading "Voting of Shares and Principal Holders Thereof" on page 5 of the 1997
Proxy Statement and under the heading "Information about Nominees and Continuing
Directors" on pages 8 through 12 of the 1997 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Incorporated by reference herein is the information appearing under the
heading "Transactions with Directors and Executive Officers" on pages 20 and 21
of the 1997 Proxy Statement, and the information appearing in Note D - Loans and
Allowance for Loan Losses, of the Notes to Consolidated Financial Statements in
Item 8, "Financial Statements and Supplementary Data".
61
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. Financial Statements -- The following consolidated financial statements
of Fulton Financial Corporation and subsidiaries are incorporated
herein by reference in response to Item 8 above:
(i) Consolidated Balance Sheets - December 31, 1997 and 1996.
(ii) Consolidated Statements of Income - Years ended December 31,
1997, 1996 and 1995.
(iii) Consolidated Statements of Shareholders' Equity - Years ended
December 31, 1997, 1996 and 1995.
(iv) Consolidated Statements of Cash Flows - Years ended December 31,
1997, 1996 and 1995.
(v) Notes to Consolidated Financial Statements
(vi) Report of Independent Public Accountants.
2. Financial Statement Schedules -- All financial statement schedules for
which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission are not required under the related
instructions or are inapplicable and have therefore been omitted.
3. Exhibits -- The following is a list of the Exhibits required by Item
601 of Regulation S-K and filed as part of this report:
(i) 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.
(ii) Rights Amendment dated June 20, 1989 between Fulton Financial
Corporation and Fulton Bank - Incorporated by reference from
Exhibit 1 of the Fulton Financial Corporation Current Report on
Form 8-K dated June 21, 1989.
(iii) 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) of the Fulton
Financial Corporation Annual Report on Form 10-K for the year
ended December 31, 1992.
(iv) Subsidiaries of the Registrant.
(v) Consents of Independent Public Accountants
62
<PAGE>
(vi) Financial Data Schedule
(b) Reports on Form 8-K --
1. Form 8-K dated March 7, 1997 reporting the merger of Fulton Financial
Corporation and The Woodstown National Bank & Trust Company.
2. Form 8-K dated March 31, 1997 reporting execution of a Merger Agreement
between Fulton Financial Corporation and The Peoples Bank of Elkton.
3. Form 8-K dated August 28, 1997 reporting execution of a Merger
Agreement between Fulton Financial Corporation and Keystone Heritage
Group, Inc.
4. Form 8-K dated September 15, 1997 reporting the merger of Fulton
Financial Corporation and The Peoples Bank of Elkton.
(c) Exhibits -- The exhibits required to be filed as part of this report
are submitted as a separate section of this report.
(d) Financial Statement Schedules -- None required.
63
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FULTON FINANCIAL CORPORATION
(Registrant)
Dated: March 17, 1998 By: /s/ Rufus A. Fulton, Jr.
-----------------------------
Rufus A. Fulton, Jr.,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been executed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Jeffrey G. Albertson Director March 17, 1998
- ------------------------------------
Jeffrey G. Albertson
/s/ James P. Argires, M.D. Director March 17, 1998
- ------------------------------------
James P. Argires, M.D.
Director March 17, 1998
- ------------------------------------
Donald M. Bowman, Jr.
/s/ Thomas D. Caldwell, Jr., Esq. Director March 17, 1998
- ------------------------------------
Thomas D. Caldwell, Jr., Esq.
/s/ Beth Ann L. Chivinski Senior Vice President March 17, 1998
- ------------------------------------
Beth Ann L. Chivinski and Controller
(Principal Accounting Officer)
/s/ Harold D. Chubb Director March 17, 1998
- ------------------------------------
Harold D. Chubb
/s/ William H. Clark, Jr. Director March 17, 1998
- ------------------------------------
William H. Clark, Jr.
/s/ Frederick B. Fichthorn Director March 17, 1998
- ------------------------------------
Frederick B. Fichthorn
Director March 17, 1998
- ------------------------------------
Patrick J. Freer
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Rufus A. Fulton, Jr. President, Chief Executive March 17, 1998
- -----------------------------------
Rufus A. Fulton, Jr. Officer, and Director
(Principal Executive Officer)
/s/ Eugene H. Gardner Director March 17, 1998
- -----------------------------------
Eugene H. Gardner
/s/ Robert D. Garner Chairman of the Board and March 17, 1998
- -----------------------------------
Robert D. Garner Director
/s/ Daniel M. Heisey Director March 17, 1998
- -----------------------------------
Daniel M. Heisey
/s/ J. Robert Hess Director March 17, 1998
- -----------------------------------
J. Robert Hess
/s/ Carolyn R. Holleran Director March 17, 1998
- -----------------------------------
Carolyn R. Holleran
/s/ Clyde W. Horst Director March 17, 1998
- -----------------------------------
Clyde W. Horst
/s/ Samuel H. Jones, Jr. Director March 17, 1998
- -----------------------------------
Samuel H. Jones, Jr.
/s/ Bernard J. Metz, Sr. Director March 17, 1998
- -----------------------------------
Bernard J. Metz, Sr.
/s/ Charles J. Nugent Executive Vice President and March 17, 1998
- -----------------------------------
Charles J. Nugent Chief Financial Officer
(Principal Financial Officer)
/s/ Arthur M. Peters, Jr., Esq. Director March 17, 1998
- -----------------------------------
Arthur M. Peters, Jr., Esq.
/s/ Stuart H. Raub, Jr. Director March 17, 1998
- -----------------------------------
Stuart H. Raub, Jr.
/s/ William E. Rusling Director March 17, 1998
- -----------------------------------
William E. Rusling
/s/ Mary Ann Russell Director March 17, 1998
- -----------------------------------
Mary Ann Russell
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ John O. Shirk, Esq. Director March 17, 1998
- -----------------------------------
John O. Shirk, Esq.
/s/ James K. Sperry Executive Vice President and March 17, 1998
- -----------------------------------
James K. Sperry Director
/s/ Kenneth G. Stoudt Director March 17, 1998
- -----------------------------------
Kenneth G. Stoudt
</TABLE>
66
<PAGE>
EXHIBIT INDEX
-------------
Exhibits Required Pursuant
to Item 601 of Regulation S-K
- -----------------------------
3. 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.
4. (a) Rights Agreement dated June 20, 1989 between Fulton Financial
Corporation and Fulton Bank - Incorporated by reference from Exhibit 1
of the Fulton Financial Corporation Current Report on Form 8-K dated
June 21, 1989.
10. 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 and Amendment No. 1 to that Plan adopted
February 17, 1987 - Incorporated by reference from Exhibit (a)(i) of
the Fulton Financial Corporation Quarterly Report on Form 10-Q for the
quarter ended March 31, 1987.
(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) of the Fulton Financial Corporation Annual Report on Form 10-K
for the year ended December 31, 1992.
13. Annual Report to Shareholders for the year ended December 31, 1997.
21. Subsidiaries of the Registrant.
23. Consents of Independent Public Accountants.
27. Financial Data Schedule.
67
<PAGE>
Exhibit 21 - Subsidiaries of the Registrant
The following are the subsidiaries of Fulton Financial Corporation:
<TABLE>
<CAPTION>
State of Incorporation Name Under Which
Subsidiary or Organization Business is Conducted
---------- --------------- ---------------------
<S> <C> <C>
Fulton Bank Pennsylvania Fulton Bank
One Penn Square
P.O. Box 4887
Lancaster, Pennsylvania 17604
Farmers Trust Bank Pennsylvania Farmers Trust Bank
817 Cumberland Street
Lebanon, Pennsylvania 17042
Swineford National Bank Pennsylvania Swineford National Bank
227 East Main Street
Middleburg, Pennsylvania 17842
Lafayette Bank Pennsylvania Lafayette Bank
360 Northampton Street
Easton, Pennsylvania 18042
Fulton Financial Realty Company Pennsylvania Fulton Financial Realty Company
One Penn Square
P.O. Box 4887
Lancaster, Pennsylvania 17604
Fulton Life Insurance Company Arizona Fulton Life Insurance Company
One Penn Square
P.O. Box 4887
Lancaster, Pennsylvania 17604
FNB Bank, N.A. Pennsylvania FNB Bank, N.A.
354 Mill Street
P.O. Box 279
Danville, Pennsylvania 17821
Great Valley Bank Pennsylvania Great Valley Bank
210 North 5th Street
P. O. Box 1342
Reading, Pennsylvania 19603
Hagerstown Trust Company Maryland Hagerstown Trust Company
83 West Washington Street
Hagerstown, Maryland 21740
Central Pennsylvania Financial Corp. Pennsylvania Central Pennsylvania Financial Corp.
One Penn Square
P.O. Box 4887
Lancaster, Pennsylvania 17604
</TABLE>
68
<PAGE>
Exhibit 21 - Subsidiaries of the Registrant (Continued)
<TABLE>
<CAPTION>
State of Incorporation Name Under Which
Subsidiary or Organization Business is Conducted
---------- --------------- ---------------------
<S> <C> <C>
Delaware National Bank Delaware Delaware National Bank
Route 113 North
P. O. Box 520
Georgetown, DE 19947
The Bank of Gloucester County New Jersey The Bank of
100 Park Avenue Gloucester County
P.O. Box 832
Woodbury, NJ 08096
FFC Management, Inc. Delaware FFC Management, Inc.
900 Market Street, Second Floor
Wilmington, DE 19801
The Woodstown National New Jersey The Woodstown National
Bank and Trust Company Bank and Trust Company
1 South Main Street
Woodstown, NJ 08098
The Peoples Bank of Elkton Maryland The Peoples Bank of Elkton
130 North Street
P.O. Box 220
Elkton, MD 21922
</TABLE>
69
<PAGE>
Exhibit 23 - Consent of Independent Public Accountants
To: Fulton Financial Corporation
As independent public accountants, we hereby consent to the incorporation of our
report dated January 23, 1998 included in this Form 10-K, into the Company's
previously filed Registration Statement File No. 333-05481, File No. 33-5965 and
File No. 33-37835.
/s/ Arthur Andersen LLP
Lancaster, Pennsylvania
March 18, 1998
70
<PAGE>
Exhibit 23 - Consent of Independent Public Accountants
To: Fulton Financial Corporation
As independent public accountants, we hereby consent to the incorporation of our
report dated January 30, 1997 included in this Form 10-K, into the Company's
previously filed Registration Statement File No. 333-05481, No. 33-5965 and File
No. 33-37835.
/s/ Nick L. Petroni
Certified Public Accountant
Glassboro, New Jersey
March 10, 1998
71
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from The Fulton
Financial Corporation consolidated balance sheet as of December 31, 1997 and the
related consolidated statement of income for the year ended December 31, 1997
and other financial data included within management's discussion and analysis of
financial condition and results of operations as of and for the year ended
December 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 172,392
<INT-BEARING-DEPOSITS> 1,042
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 597,448
<INVESTMENTS-CARRYING> 257,127
<INVESTMENTS-MARKET> 257,518
<LOANS> 3,317,230
<ALLOWANCE> 47,153
<TOTAL-ASSETS> 4,460,823
<DEPOSITS> 3,621,569
<SHORT-TERM> 236,762
<LIABILITIES-OTHER> 79,503
<LONG-TERM> 47,695
0
0
<COMMON> 101,610
<OTHER-SE> 373,684
<TOTAL-LIABILITIES-AND-EQUITY> 4,460,823
<INTEREST-LOAN> 271,791
<INTEREST-INVEST> 47,550
<INTEREST-OTHER> 297
<INTEREST-TOTAL> 319,628
<INTEREST-DEPOSIT> 124,786
<INTEREST-EXPENSE> 137,018
<INTEREST-INCOME-NET> 182,610
<LOAN-LOSSES> 7,742
<SECURITIES-GAINS> 5,831
<EXPENSE-OTHER> 122,293
<INCOME-PRETAX> 93,630
<INCOME-PRE-EXTRAORDINARY> 65,199
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65,199
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.60
<YIELD-ACTUAL> 4.72
<LOANS-NON> 15,225
<LOANS-PAST> 9,580
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 44,792
<CHARGE-OFFS> 8,235
<RECOVERIES> 2,724
<ALLOWANCE-CLOSE> 47,153
<ALLOWANCE-DOMESTIC> 47,153
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 20,021
</TABLE>
