<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999 , or
-------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------- ----------
Commission File No. 0-10587
-------
FULTON FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2195389
- --------------------------------------------------------------------------------
(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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value - 68,686,638 shares outstanding as of
-------------------------------------------------------------------
October 31,1999.
----------------
1
<PAGE>
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
-----
Description Page
----------- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
(a) Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998..............................3
(b) Consolidated Statements of Income -
Three and nine months ended September 30, 1999 and 1998...............4
(c) Consolidated Statements of Shareholders' Equity -
Nine months ended September 30, 1999 and 1998.........................5
(d) Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998.........................6
(e) Notes to Consolidated Financial Statements - September 30, 1999.......7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk......19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................23
SIGNATURES...............................................................24
2
<PAGE>
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per-share data)
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
--------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks ............................................................. $ 226,369 $ 247,558
Interest-bearing deposits with other banks .......................................... 1,234 2,975
Mortgage loans held for sale ........................................................ 1,802 7,987
Investment securities:
Held to maturity (Fair value: $99,481 in 1999 and $177,939 in 1998) ............ 99,188 176,623
Available for sale ............................................................. 1,184,852 1,206,121
Loans ............................................................................... 4,291,904 4,040,455
Less: Allowance for loan losses ............................................... (58,280) (57,415)
Unearned income ...................................................... (9,590) (10,064)
--------------- ---------------
Net Loans .................................................. 4,224,034 3,972,976
--------------- ---------------
Premises and equipment .............................................................. 77,600 75,715
Accrued interest receivable ......................................................... 32,004 34,942
Other assets ........................................................................ 122,425 113,766
--------------- ---------------
Total Assets ............................................... $ 5,969,508 $ 5,838,663
=============== ===============
LIABILITIES
- ----------------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing ............................................................ $ 704,014 $ 759,585
Interest-bearing ............................................................... 3,802,346 3,833,384
--------------- ---------------
Total Deposits ............................................. 4,506,360 4,592,969
--------------- ---------------
Short-term borrowings:
Securities sold under agreements to repurchase.................................. 234,168 212,225
Federal funds purchased......................................................... 214,330 19,521
Demand notes of U.S. Treasury .................................................. 5,756 3,839
--------------- ---------------
Total Short-Term Borrowings ................................ 454,254 235,585
--------------- ---------------
Accrued interest payable ............................................................ 33,688 34,255
Other liabilities ................................................................... 63,132 71,502
Long-term debt ...................................................................... 297,775 296,018
--------------- ---------------
Total Liabilities .......................................... 5,355,209 5,230,329
--------------- ---------------
SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------
Common stock ($2.50 par)
Shares: Authorized 400,000,000
Issued 69,356,609
Outstanding 68,765,838 (69,185,204 in 1998)....................... 173,392 157,638
Capital surplus ..................................................................... 394,710 293,897
Retained earnings ................................................................... 60,533 136,668
Accumulated other comprehensive income............................................... (2,417) 23,619
Treasury stock, at cost (590,771 shares in 1999 and 171,405 shares in 1998).......... (11,919) (3,488)
--------------- ---------------
Total Shareholders' Equity ................................. 614,299 608,334
--------------- ---------------
Total Liabilities and Shareholders' Equity.................. $ 5,969,508 $ 5,838,663
=============== ===============
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -----------------------------------------------------------------------------
(Dollars in thousands, except per-share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------- ----------------------------------
1999 1998 1999 1998
---------------------------------- ----------------------------------
INTEREST INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans, including fees ................................... $ 86,717 $ 85,194 $ 253,271 $ 254,005
Investment securities:
Taxable ............................................ 15,452 15,903 47,661 43,837
Tax-exempt ......................................... 2,271 1,259 6,119 3,215
Dividends .......................................... 991 859 3,004 2,563
Federal funds sold ...................................... 7 316 147 1,365
Interest-bearing deposits with other banks .............. 19 38 80 150
-------------- ------------- -------------- --------------
Total Interest Income ......... 105,457 103,569 310,282 305,135
INTEREST EXPENSE
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits ................................................ 35,511 40,735 106,851 120,651
Short-term borrowings ................................... 4,302 2,263 10,401 6,533
Long-term debt .......................................... 3,894 1,933 11,566 5,120
-------------- ------------- -------------- --------------
Total Interest Expense ......... 43,707 44,931 128,818 132,304
-------------- ------------- -------------- --------------
Net Interest Income ............ 61,750 58,638 181,464 172,831
PROVISION FOR LOAN LOSSES ............................... 1,997 1,067 6,049 4,299
-------------- ------------- -------------- --------------
Net Interest Income After
Provision for Loan Losses ... 59,753 57,571 175,415 168,532
-------------- ------------- -------------- --------------
OTHER INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
Investment management and trust services................. 4,635 3,230 12,066 9,469
Service charges on deposit accounts ..................... 5,494 4,836 15,441 13,954
Other service charges and fees .......................... 3,803 2,978 10,175 8,400
Mortgage banking income.................................. 935 1,059 3,436 3,439
Investment securities gains ............................. 1,587 2,071 6,313 10,066
-------------- ------------- -------------- --------------
Total Other Income ............. 16,454 14,174 47,431 45,328
OTHER EXPENSES
- ------------------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits .......................... 22,520 21,108 65,987 62,775
Net occupancy expense ................................... 3,361 3,171 9,803 9,484
Equipment expense ....................................... 2,345 2,349 7,023 7,153
Special services ........................................ 2,693 2,800 8,347 7,784
Other ................................................... 10,576 9,449 29,585 31,393
-------------- ------------- -------------- --------------
Total Other Expenses ........... 41,495 38,877 120,745 118,589
-------------- ------------- -------------- --------------
Income Before Income Taxes ..... 34,712 32,868 102,101 95,271
INCOME TAXES............................................. 10,303 10,520 30,122 30,169
-------------- ------------- -------------- --------------
Net Income ..................... $ 24,409 $ 22,348 $ 71,979 $ 65,102
============== ============= ============== ==============
- ------------------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA:
Net income (basic)....................................... $ 0.35 $ 0.32 $ 1.04 $ 0.95
Net income (diluted)..................................... $ 0.35 $ 0.32 $ 1.04 $ 0.93
Cash dividends .......................................... $ 0.150 $ 0.137 $ 0.436 $ 0.392
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
Accumulated
Other
Comprehen-
Common Capital Retained sive Treasury
(Dollars in thousands, except per-share data) Stock Surplus Earnings Income Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 ................................... $ 157,638 $ 293,897 $ 136,668 $ 23,619 $ (3,488) $608,334
Comprehensive income:
Net income ................................................ 71,979 71,979
Other - net unrealized loss on securities (net of $14.0
million tax benefit) ............................ (26,036) (26,036)
--------
Total comprehensive income ........................... 45,943
--------
Stock dividends issued - 10% (6,302,309 shares) ................ 15,754 102,099 (117,917) (64)
Stock issued (141,934 shares of treasury stock) ................ (1,286) 3,104 1,818
Acquisition of treasury stock (561,300 shares) ................. (11,535) (11,535)
Cash dividends - $0.436 per share .............................. (30,197) (30,197)
------------------------------------------------------------------
Balance at September 30, 1999 .................................. $ 173,392 $ 394,710 $ 60,533 $ (2,417) $(11,919) $614,299
==================================================================
Balance at December 31, 1997 ................................... $ 126,497 $ 326,402 $ 84,634 $ 28,257 $ (1,299) $564,491
Comprehensive income:
Net income ................................................ 65,102 65,102
Other - net unrealized gain on securities (net of
$675,000 tax expense) ........................... (1,254) (1,254)
--------
Total comprehensive income ........................... 63,848
--------
Stock split - 5 for 4 (13,183,897 shares) ...................... 29,963 (30,088) (125)
Stock issued (647,731 shares, including 143,169 shares of
treasury stock) ............................................ 1,178 (2,195) 2,875 1,858
Acquisition of treasury stock (189,393 shares) ................. (4,289) (4,289)
Cash dividends - $0.392 per share .............................. (27,013) (27,013)
------------------------------------------------------------------
Balance at September 30, 1998 .................................. $ 157,638 $ 294,119 $ 122,723 $ 27,003 $ (2,713) $598,770
==================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------------------------------
1999 1998
----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income........................................................................ $ 71,979 $ 65,102
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses ................................................... 6,049 4,299
Depreciation and amortization of premises and equipment ..................... 7,364 7,104
Net amortization of investment security premiums ............................ 1,026 197
Investment security gains ................................................... (6,313) (10,066)
Net decrease (increase) in mortgage loans held for sale...................... 6,185 (3,188)
Amortization of intangible assets ........................................... 974 1,010
Decrease (increase) in accrued interest receivable .......................... 2,938 (1,579)
Decrease in other assets .................................................... 4,321 2,012
(Decrease) increase in accrued interest payable ............................. (567) 5,202
Increase (decrease) in other liabilities..................................... 3,074 (3,700)
------------- -------------
Total adjustments...................................................... 25,051 1,291
------------- -------------
Net cash provided by operating activities .............................. 97,030 66,393
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale ............................. 14,434 21,739
Proceeds from maturities of securities held to maturity .......................... 78,331 127,923
Proceeds from maturities of securities available for sale ........................ 250,978 156,286
Purchase of securities held to maturity .......................................... (917) (5,541)
Purchase of securities available for sale ........................................ (291,236) (500,902)
Decrease (increase) in short-term investments .................................... 1,741 (420)
Net increase in loans ............................................................ (257,107) (13,363)
Purchase of premises and equipment................................................ (9,249) (9,251)
------------- -------------
Net cash used in investing activities .................................. (213,025) (223,529)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand and savings deposits ........................... (59,194) 51,207
Net (decrease) increase in time deposits ......................................... (27,415) 36,087
Increase in long-term debt........................................................ 1,757 134,660
Increase (decrease) in short-term borrowings ..................................... 218,669 (21,329)
Dividends paid ................................................................... (29,230) (24,481)
Net proceeds from issuance of common stock ....................................... 1,754 1,733
Acquisition of treasury stock .................................................... (11,535) (4,289)
------------- -------------
Net cash provided by financing activities............................... 94,806 173,588
------------- -------------
Net (Decrease) Increase in Cash and Due From Banks ............................... (21,189) 16,452
Cash and Due From Banks at Beginning of Period ................................... 247,558 208,289
------------- -------------
Cash and Due From Banks at End of Period ......................................... $ 226,369 $ 224,741
============= =============
Supplemental Disclosures of Cash Flow Information Cash paid during the
period for:
Interest .................................................................... $ 129,385 $ 127,337
Income taxes ................................................................ $ 22,113 $ 24,621
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
6
<PAGE>
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
NOTE B - 10% Stock Dividend
The Corporation paid a 10% stock dividend on June 1, 1999. All share and
per-share information has been restated to reflect the effect of this stock
dividend.
NOTE C - Net Income Per Share
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.
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>
Three months ended Nine months ended
September 30 September 30
--------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding (basic)............. 68,946 68,940 69,086 68,882
Impact of common stock equivalents...................... 410 504 418 847
-------- -------- -------- --------
Weighted average shares outstanding (diluted)........... 69,356 69,444 69,504 69,729
======== ======== ======== ========
</TABLE>
NOTE D - Reclassifications
Certain amounts in the 1998 consolidated financial statements and notes have
been reclassified to conform to the 1999 presentation.
NOTE E - New Accounting Standards
Accounting for Derivative Instruments and Hedging Activities: Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and for Hedging Activities" (Statement 133), was issued in July, 1998. Statement
133 replaces existing accounting practices with a single, integrated accounting
framework for derivatives and hedging activities. Under Statement 133, every
derivative is recorded in the balance sheet as either an asset or liability
measured at its fair value and changes in fair value are recognized currently in
earnings unless specific hedge accounting criteria are met. Statement 133 is
effective for years beginning after June 15, 2000. The Corporation does not
expect the adoption of Statement 133 to have a material impact on its balance
sheet or net income.
7
<PAGE>
Reporting Comprehensive Income: The Corporation adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (Statement 130)
in 1998. 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. Currently, other non-owner changes in
equity include only unrealized gains and losses on available for sale investment
securities.
The following table summarizes the reclassification adjustment for realized
security gains (net of taxes) for the first nine months of 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Unrealized holding (losses) gains arising during period.............. $ (21,933) $ 5,289
Less: reclassification adjustment for gains included
in net income................................................ 4,103 6,543
--------- ---------
Net unrealized losses on securities.................................. $ (26,036) $ (1,254)
========= =========
</TABLE>
NOTE F - Shareholder Rights
On June 20, 1989, the Board of Directors of the Corporation approved a Rights
Agreement and declared a dividend of one common share purchase right (Original
Rights) for each outstanding share of common stock, par value $2.50 per share of
the Corporation. The dividend was paid to the shareholders of record as of the
close of business on July 6, 1989. On April 27, 1999, the Board of Directors
approved an amendment to the Original Rights and the Rights Agreement. The
significant terms of the amendment included extending the expiration date from
June 20, 1999 to April 27, 2009 and resetting the purchase price to $90.00 per
share.
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.
8
<PAGE>
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
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 its management of net interest income and margin, the
allowance and provision for loan losses, operating expense levels, liquidity and
its progress in addressing Year 2000 issues. The Corporation cautions that these
forward-looking statements are subject to various assumptions, risks and
uncertainties. Because of the possibility of changes in these assumptions, risks
and uncertainties, 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 and regulatory oversight of the Corporation, actions of the Federal
Reserve Board, the Corporation's success in merger and acquisition integration,
actions of customers in anticipation of year 2000 and the progress of the
Corporation in its efforts to ensure Year 2000 compliance.
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.
RESULTS OF OPERATIONS
- ---------------------
Quarter ended September 30, 1999 versus Quarter ended September 30, 1998
- --------------------------------------------------------------------------
Fulton Financial Corporation's net income for the third quarter of 1999
increased $2.1 million, or 9.2%, in comparison to net income for the third
quarter of 1998. Diluted net income per share increased $0.03, or 9.4%, compared
to 1998. Third quarter net income of $24.4 million, or $0.35 per share (basic
and diluted), represented a return on average assets (ROA) of 1.64% and a return
on average equity (ROE) of 15.81%. This compares to 1998 net income of $22.3
million, or $0.32 per share (basic and diluted; 1.59% ROA and 14.94% ROE).
The increase in net income in 1999 resulted from continued expansion of the
Corporation's core banking business, as shown by increases in both net interest
income and non-interest income. These revenue gains were offset by an increase
in the provision for loan losses and other expenses as well as a decrease in
investment securities gains.
Net Interest Income
- -------------------
Net interest income increased $3.1 million, or 5.3%, for the quarter. Overall,
this increase was a result of growth in the Corporation's balance sheet, offset
by declines in interest rates. The following tables summarize the components of
the increase in net interest income as well as the changes in average balances
of interest-earning assets and interest-bearing liabilities from the third
quarter of 1998 to the third quarter of 1999 and the average interest rates
thereon. All dollar amounts are in thousands.
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
September 30 Change
------------------------------------ ---------------------------------
1999 1998 Amount %
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest income ................. $ 105,457 $ 103,569 $ 1,888 1.8%
Interest expense................. 43,707 44,931 (1,224) (2.7)
--------------- --------------- -------------- --------------
Net interest income.............. $ 61,750 $ 58,638 $ 3,112 5.3%
=============== ================ ============== ==============
<CAPTION>
Three Months Ended
September 30 Change
------------------------------------ ---------------------------------
1999 1998 Amount %
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest-Earning Assets:
Loans............................ $ 4,216,432 $ 3,949,822 $ 266,610 6.7%
Investment securities............ 1,332,082 1,200,507 131,575 11.0
Other earning assets............. 2,365 25,348 (22,983) (90.7)
--------------- --------------- -------------- --------------
Total........................ $ 5,550,879 $ 5,175,677 $ 375,202 7.2%
=============== =============== =============== ==============
Interest-Bearing Liabilities:
Deposits......................... $ 3,816,999 $ 3,853,410 $ (36,411) (0.9)%
Short-term borrowings............ 365,815 204,200 161,615 79.1
Long-term debt................... 298,467 136,450 162,017 118.7
--------------- --------------- -------------- --------------
Total........................ $ 4,481,281 $ 4,194,060 $ 287,221 6.8%
=============== ================ =============== ==============
Yield............................ 7.67% 8.05% (0.38) (4.7)%
Cost............................. 3.87% 4.25% (0.38) (8.9)%
Net interest margin (FTE)........ 4.55% 4.60% (0.06) (1.3)%
</TABLE>
The 7.2% increase in average earning assets accounted for an interest income
increase of approximately $7.6 million. This was offset by a $5.7 million
reduction due to the 38 basis point decline in yield. The decline in overall
yields from the third quarter of 1998 to the third quarter of 1999 mirror the
decrease in the Corporation's average prime lending rate from 8.50% in 1998 to
8.10% in 1999.
The Corporation's average loan portfolio grew by approximately $267 million, or
6.7%, mainly in commercial loans ($136 million, or 16.2% increase), commercial
mortgages ($65 million, or 6.0% increase) and home equity loans ($87 million, or
34.6% increase).
Investment securities, excluding unrealized gains and losses, increased $132
million or 11.0%. Mortgage-backed securities increased $92 million and tax-free
municipal investments increased $105 million as their yields continued to be
attractive relative to other investment options. These increases were offset by
$84 million in net maturities of United States Treasury and Agency securities.
Additional funds for purchases of investment securities were provided by an
increase in interest-bearing liabilities.
The 6.8% increase in average interest-bearing liabilities resulted in a $3.1
million increase in interest expense. This was offset by a $4.3 million decrease
in interest expense as a result of the 38 basis point decrease in the overall
cost of interest-bearing liabilities. The increase in interest-bearing
liabilities was realized in short-term borrowings ($162 million, or 79.1%
increase) and long-term debt ($162 million, or 118.7% increase). The Corporation
turned to these other funding sources as alternatives to interest-bearing
deposits, which decreased $36.4 million, or 0.9%.
10
<PAGE>
Overall, the Corporation's net interest margin on a fully taxable equivalent
basis decreased five basis points to 4.55% in 1999 from 4.60% in 1998. This
fairly stable margin reflects the Corporation's success in asset/liability
management as average rates fell in comparison to prior year.
Provision and Allowance for Loan Losses
The following table summarizes loans outstanding (including unearned income) as
of the dates shown:
September 30 December 31
1999 1998
-------------- --------------
(in thousands)
Commercial, financial and agricultural....... $ 622,635 $ 559,517
Real estate - construction................... 154,738 130,051
Real estate - mortgage....................... 2,750,280 2,596,364
Consumer .................................... 705,380 698,323
Leasing and other............................ 58,871 56,200
-------------- --------------
Totals.................................... $ 4,291,904 $ 4,040,455
============== ==============
The following table summarizes the activity in the Corporation's allowance for
loan losses:
<TABLE>
<CAPTION>
Three Months Ended
September 30
------------------------------------
1999 1998
--------------- ---------------
(dollars in thousands)
<S> <C> <C>
Loans outstanding at end of period (net of unearned)............... $ 4,282,314 $ 3,971,827
=============== ===============
Daily average balance of loans and leases.......................... $ 4,216,432 $ 3,949,822
=============== ===============
Balance of allowance for loan losses
at beginning of period........................................ $ 58,942 $ 58,541
Loans charged-off:
Commercial, financial and agricultural......................... 1,038 268
Real estate - mortgage......................................... 436 384
Consumer....................................................... 1,497 1,150
Leasing and other.............................................. 471 45
--------------- ---------------
Total loans charged-off........................................ 3,442 1,847
--------------- ---------------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural......................... 74 302
Real estate - mortgage......................................... 84 401
Consumer....................................................... 572 265
Leasing and other.............................................. 53 1
--------------- ---------------
Total recoveries............................................... 783 969
--------------- ---------------
Net loans charged-off.............................................. 2,659 878
Provision for loan losses.......................................... 1,997 1,067
--------------- ---------------
Balance at end of period........................................... $ 58,280 $ 58,730
=============== ===============
Net charge-offs to average loans (annualized)...................... 0.25% 0.09%
=============== ===============
Allowance for loan losses to loans outstanding..................... 1.36% 1.48%
=============== ===============
</TABLE>
11
<PAGE>
The following table summarizes the Corporation's non-performing assets as of the
indicated dates.
<TABLE>
<CAPTION>
Sept. 30 Dec. 31 Sept. 30
(Dollars in thousands) 1999 1998 1998
----------------- ----------------- ----------------
<S> <C> <C> <C>
Nonaccrual loans..................................... $ 17,022 $ 19,281 $ 21,958
Loans 90 days past due and accruing.................. 7,349 11,109 7,986
Other real estate owned (OREO)....................... 1,315 1,420 1,230
----------------- ----------------- ----------------
Total non-performing assets.......................... $ 25,686 $ 31,810 $ 31,174
================= ================= ================
Non-performing loans/Total loans..................... 0.57% 0.75% 0.75%
Non-performing assets/Total assets................... 0.43% 0.54% 0.55%
Non-performing assets/Gross loans and OREO........... 0.60% 0.81% 0.78%
</TABLE>
Additions to the allowance for loan losses are charged to income through the
provision for loan losses when, in the opinion of management and based on
continuing analyses of the loan portfolio, it is believed that the allowance is
not adequate. Management considers various factors in assessing the adequacy of
the allowance for loan losses and determining the provision for the period.
Among these are charge-off history and trends, risk classification of
significant credits, adequacy of collateral, the mix and risk characteristics of
loan types in the portfolio, the balance of the allowance relative to total and
nonperforming loans and the balance of the allocated and unallocated allowance.
Additional consideration is given to local and national economic conditions. The
Corporation's policy is individually applied to each of its eleven affiliate
banks. Resulting provisions and allowances are aggregated for consolidated
financial reporting.
For the third quarter of 1999, net charge-offs totaled $2.7 million, or 0.25% of
average loans on an annualized basis. This compares to $878,000, or 0.09%, for
the third quarter of 1998. The increase in charge-offs for the third quarter of
1999 was essentially the result of a $500,000 charge-off of a non-performing
commercial loan. In addition, the Corporation continued to experience a higher
level of consumer loan charge-offs related mainly to its indirect loan
portfolio. Despite these losses, the quality of the Corporation's loan portfolio
improved as shown by non-performing loans (including loans 90 days past due and
still accruing) to total loans of 0.57% at September 30, 1999 as compared to
0.75% at both December 31, 1998 and September 30, 1998.
The provision for loan losses increased $930,000, or 87.2%, to $2.0 million as
compared to $1.1 million in the third quarter of 1998. This increase resulted
from the higher net charge-off level in the third quarter, however, the
provision was less than the charge-offs for the quarter in recognition of the
continuing improvement in the quality of the portfolio overall. This improvement
is also reflected in the ratio of the allowance for loan losses to total loans,
which decreased to 1.36% at September 30,1999 as compared to 1.48% a year ago.
The Corporation's periodic loan portfolio review and allowance calculation
resulted in an unallocated allowance for loan losses of 26% at September 30,
1999. Management believes that the allowance balance of $58.3 million is
sufficient to cover losses incurred in the loan portfolio and appropriate based
on applicable accounting standards.
Other Income
- ------------
Other income for the quarter ended September 30, 1999 was $16.5 million. This
was a increase of $2.3 million, or 16.1%, over the comparable period in 1998.
Excluding investment security gains, which decreased from $2.1 million in 1998
to $1.6 million in 1999, other income increased $2.8 million, or 22.8%.
Investment management and trust services income increased $1.4 million, or
43.5%, primarily due to the continued roll-out of investment brokerage services
at all eleven of the Corporation's subsidiary banks. Service charges on deposit
accounts increased $658,000, or 13.6%, as a result of an increase in cash
12
<PAGE>
management and overdraft fees as well as the $110 million, or 4.9%, growth in
average savings and demand deposit accounts, which generate the majority of
service charges.
Other service charges and fees increased $825,000, or 27.7%, largely due to
higher debit card revenue ($197,000, or 42.6% increase) and other special fee
revenue. Total mortgage banking income decreased $124,000, or 11.7%, as higher
mortgage rates reduced the volume of refinance activity and, consequently, the
gains realized on sales.
Other Expenses
- --------------
Total other expenses for the third quarter of 1999 of $41.5 million increased
$2.6 million, or 6.7%, from $38.9 million in 1998. This moderate increase was
realized almost entirely in salaries and employee benefits, which is the largest
category of non-interest expense, and other expenses. Occupancy, equipment and
special services expenses decreased or rose slightly.
Salaries and employee benefits increased $1.4 million, or 6.7%, to $22.5 million
in 1999 as compared to $21.1 million in 1998. Salaries expense increased $1.0
million, or 6.0%, reflecting normal merit increases and a small increase in
average full-time equivalent employees from 2,377 in 1998 to 2,401 in 1999.
Employee benefits expense increased $389,000, or 9.5%, due to increased medical
insurance costs ($119,000, or 8.5%) and profit sharing plan expense ($235,000,
or 23.5% increase).
Net occupancy expense increased $190,000 or 6.0% from the prior year. Equipment
expense was flat at $2.3 million in both 1999 and 1998. Special services
expense, which represents the cost of data processing, decreased $107,000 or
3.8% from $2.8 million in 1998 to $2.7 million in 1999. This decrease resulted
from expenses incurred in 1998 to convert the systems of Ambassador Bank of the
Commonwealth, which the Corporation acquired on September 11,1998.
Other expenses increased $1.1 million or 11.9%, in 1999 to $10.6 million as
compared to $9.4 million for the same period in 1998. The increase resulted from
the general growth in the Corporation's business. Categories of expenses
registering increases included telephone ($197,000, or 22.7%), Pennsylvania
capital shares tax ($132,000, or 15.4%) and consulting services ($127,000, or
23.7%).
Although non-interest expenses increased in the third quarter of 1999, the
Corporation continued to improve its efficiency, reflected by its efficiency
ratio (operating expenses to revenues) of 52.9%. This was a 1.1 point
improvement from 54.0% in 1998
Income Taxes
- ------------
Income tax expense for the quarter was $10.3 million in 1999, a $217,000 or 2.1%
decrease from $10.5 million in 1998. The Corporation's effective tax rates were
29.7% in 1999 and 32.0% in 1998. The 1998 effective tax rate was higher due to
lower investments in tax-free municipal investments ($2.3 million in tax-free
interest in 1999 as compared to $1.3 million in 1998) and $1.3 million in
low-income housing related tax credits, as compared to $1.5 million in 1999.
Nine Months ended September 30, 1999 versus Nine Months ended
- -------------------------------------------------------------
September 30, 1998
- ------------------
Fulton Financial Corporation's net income for the first nine months of 1999
increased $6.9 million, or 10.6%, in comparison to net income for the same
period in 1998. Diluted net income per share increased $0.11, or 11.8%, compared
to 1998. Net income for the first nine months of 1999 of $72.0 million, or $1.04
per share (basic and diluted), represented a return on average assets (ROA) of
1.65% and a return on average equity (ROE) of 15.63%. This compares to 1998 net
income of $65.1 million, or $0.95 per share (basic) and $0.93 per share
(diluted) (1.59% ROA and 14.94% ROE).
Net Interest Income
- -------------------
13
<PAGE>
Net interest income increased $8.6 million, or 5.0%, for the first nine months
of 1999. Overall, this increase was a result of growth in the Corporation's
balance sheet, offset by declines in interest rates. The following tables
summarize the components of the increase in net interest income as well as the
changes in average balances of interest-earning assets and interest-bearing
liabilities from 1998 to 1999 and the average interest rates thereon. All dollar
amounts are in thousands.
<TABLE>
<CAPTION>
Nine Months Ended
September 30 Change
-------------------------------------- -------------------------------------
1999 1998 Amount %
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Interest income ................. $ 310,282 $ 305,135 $ 5,147 1.7%
Interest expense................. 128,818 132,304 (3,486) (2.6)%
--------------- --------------- -------------- -----------------
Net interest income.............. $ 181,464 $ 172,831 $ 8,633 5.0%
=============== =============== =============== =================
<CAPTION>
Nine Months Ended
September 30 Change
-------------------------------------- -------------------------------------
1999 1998 Amount %
----------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Interest-Earning Assets:
- ------------------------
Loans............................. $ 4,121,794 $ 3,954,956 $ 166,838 4.2%
Investment securities............. 1,329,255 1,096,626 232,629 21.2
Other earnings assets............. 6,500 36,017 (29,517) (82.0)
----------------- ----------------- --------------- -----------------
Total......................... $ 5,457,549 $ 5,087,599 $ 369,950 7.3%
================= ================= =============== =================
Interest-Bearing Liabilities:
- -----------------------------
Deposits.......................... $ 3,803,803 $ 3,810,288 $ (6,485) (0.2)%
Short-term borrowing.............. 312,489 198,569 113,920 57.4
Long-term debt.................... 298,545 120,204 178,341 148.4
----------------- ----------------- --------------- -----------------
Total......................... $ 4,414,837 $ 4,129,061 $ 285,776 6.9
================= ================= =============== =================
Yield............................. 7.72% 8.10% (0.38) (4.7)%
Cost.............................. 3.90% 4.28% (0.38) (8.9)%
Net interest margin (FTE)......... 4.56% 4.62% (0.06) (1.3)%
</TABLE>
The 7.3% increase in average earning assets accounted for an interest income
increase of approximately $22.4 million, offset by a reduction of $17.3 million
due to the 38 basis point decline in yield. As noted in the third quarter
discussion, yields were lower as a result of a decline in average rates in
general.
The Corporation's average loan portfolio grew by approximately $167 million, or
4.2%, mainly in commercial loans ($61 million, or 7.0%, increase), commercial
mortgages ($83 million, or 8.1%, increase) and home equity loans ($86 million,
or 37.2%, increase). These increases were offset by a $39 million, or 6.1%,
decrease in direct and indirect consumer loans due to increased competition. In
addition, despite recent increases in mortgage rates which have slowed volume,
average adjustable rate mortgages decreased $53 million, or 16.1%, as a result
of refinance activity earlier in the year.
Investment securities increased $233 million, or 21.2% to $1.3 million in 1999
as compared to $1.1 million in 1998. The increases resulted from sluggish loan
growth in the second half of 1998 and the first half of 1999 which resulted in
available funds being invested in mortgage-backed securities ($169 million, or
28.4%, increase) and municipal investments ($98 million, or 114.8%, increase).
Funding for the growth in earning assets was provided mainly through borrowings,
as average interest-bearing deposit balances were essentially flat compared to
1998. Although balances were flat in total,
14
<PAGE>
the Corporation did have success in generating a $64 million, or 4.1%, increase
in interest-bearing demand and savings deposits. Time deposits, however,
decreased $70 million, or 3.1%. Short-term borrowings, mainly federal funds
purchased, increased $114 million, or 57.4%. Long-term debt, mainly advances
from the Federal Home Loan Bank, incurred in the last half of 1998, increased
$178 million, or 148.4%. Borrowings were considered to be cost-effective
alternatives to increasing time-deposit rates.
In addition to borrowings, the Corporation also experienced an increase in
non-interest bearing deposits, which grew $65 million, or 9.9% in comparison to
the prior year.
The 6.9% increase in average interest-bearing liabilities resulted in a $9.9
million increase in interest expense. This was offset by a $13.4 million
decrease in interest expense as a result of a 38 basis point decrease in the
overall cost of interest-bearing liabilities.
Provision for Loan Losses
- -------------------------
The following table summarizes the activity in the Corporation's allowance for
loan losses:
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-------------------------------------
1999 1998
--------------- ----------------
(dollars in thousands)
<S> <C> <C>
Loans outstanding at end of period (net of unearned)............... $ 4,282,314 $ 3,971,881
=============== ===============
Daily average balance of loans and leases.......................... $ 4,121,794 $ 3,953,779
=============== ===============
Balance of allowance for loan losses
at beginning of period........................................ $ 57,415 $ 57,557
Loans charged-off:
Commercial, financial and agricultural......................... 1,810 1,110
Real estate -- mortgage........................................ 1,029 885
Consumer....................................................... 5,358 3,412
Leasing and other.............................................. 539 72
--------------- ---------------
Total loans charged-off........................................ 8,736 5,479
--------------- ---------------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural......................... 1,425 737
Real estate -- mortgage........................................ 555 729
Consumer....................................................... 1,519 885
Leasing and other.............................................. 53 2
--------------- ---------------
Total recoveries............................................... 3,552 2,353
--------------- ---------------
Net loans charged-off.............................................. 5,184 3,126
Provision for loan losses.......................................... 6,049 4,299
--------------- ---------------
Balance at end of period........................................... $ 58,280 $ 58,730
=============== ===============
Net charge-offs to average loans (annualized)...................... 0.17% 0.11%
=============== ===============
Allowance for loan losses to loans outstanding..................... 1.36% 1.48%
=============== ===============
</TABLE>
Refer to the "Provision for Loan Losses" section of Management's Discussion in
the third quarter discussion for a summary of the Corporation's process for
establishing the provision and allowance for loan losses. For the first nine
months of 1999, net charge-offs totaled $5.2 million, or 0.17%, of average loans
on an annualized basis. This compares to $3.1 million, or 0.11%, in 1998 and
0.14% for all of 1998. Non-
15
<PAGE>
performing loans to total loans were 0.57% at September 30, 1999 as compared to
0.75% at both December 31, 1998 and September 30, 1998.
Although there were improvements in some of the Corporation's loan quality
measures, the provision for loan losses increased $1.8 million, or 40.7% in
comparison to the first nine months of 1998. The increase in the provision
resulted from higher charge-off levels in 1999 as compared to 1998. In fact,
adjusting for several unusual recoveries on commercial loans, the provision was
roughly equal to the adjusted net charge-offs for the period.
The Corporation's periodic loan portfolio review and allowance calculation
resulted in an unallocated allowance for loan losses of 26% at September 30,
1999. Management believes that the allowance balance of $58.3 million is
sufficient to cover losses incurred in the loan portfolio and appropriate based
on applicable accounting standards.
Other Income
- ------------
Other income for the nine months ended September 30, 1999 was $47.4 million.
This was an increase of $2.1 million or 4.6% over the comparable period in 1998.
Excluding investment security gains, which decreased from $10.1 million in 1998
to $6.3 million in 1999, other income increased $5.9 million, or 16.6%.
Increases were realized in all major categories of other income except for
mortgage banking income.
Investment management and trust services income increased $2.6 million, or
27.4%, due to the introduction of new trust products and services, particularly
investment brokerage services, and continued emphasis on the Corporation's
traditional trust services.
Service charges on deposit accounts increased $1.5 million, or 10.7%, as a
result of the $128 million, or 5.8% growth in average savings and demand deposit
accounts which generate the majority of service charges. Other service charges
and fees increased $1.8 million, or 21.1%, as a result of higher debit card
revenue ($576,000, or 47.1% increase), and other special fee revenue. Mortgage
banking income remained flat at $3.4 million as refinance activity slowed.
Other Expenses
- --------------
Total other expenses for the first nine months of 1999 of $120.7 million showed
an increase of $2.2 million or 1.8% over 1998. This small increase was
attributable to expense management efforts in 1999, as well as certain
non-recurring items in 1998. In 1998, the Corporation incurred $1.3 million in
professional fee expenses related to mergers and acquisitions, $200,000 of costs
related to the conversion of Lebanon Valley National Bank's data processing
systems and $500,000 of expenses from contributions related to low income
housing projects. Excluding these expenses, the increase in total other expenses
was a still moderate $4.2 million, or 3.6%.
Salaries and employee benefits increased $3.2 million, or 5.1%, in comparison to
the first nine months of 1998. Salaries expense increased $1.9 million, or 3.7%
mainly due to normal merit increases. Employee benefits expense increased $1.3
million, or 10.8%, mainly due to increased medical insurance costs and profit
sharing expense.
Net occupancy expense increased $319,000, or 3.4%, due to growth. Equipment
expense decreased $130,000, or 1.8%, and special services expense, which
represents the cost of data processing, increased $563,000, or 7.2%. The
decrease in equipment expense and the increase in special services reflect the
conversion of Lebanon Valley National Bank to the Corporation's outside data
processing servicer upon being acquired by the Corporation in March, 1998. Prior
to the merger, Lebanon Valley's core data processing function was in-house,
using bank-owned equipment, software and personnel. Subsequent to the
acquisition, Lebanon Valley was added to the Corporation's organization-wide
third party data processing system.
16
<PAGE>
Other expenses decreased $1.8 million, or 5.8%, in 1999 to $29.6 million, as
compared to $31.4 million for the same period in 1998. This decrease was mainly
due to the nonrecurring expenses previously discussed.
Income Taxes
- ------------
Income tax expense for the first nine months of 1999 was $30.1 million as
compared to $30.2 million for the comparable period in 1998, a $47,000 or 0.2%
decrease. The effective tax rate was 29.5% for 1999 and 31.7% in 1998. The 1998
effective rate was higher due to the impact of the non-deductible merger-related
expenses incurred in 1998, higher investments in municipal securities in 1999
and an increase in federal tax credits on low income housing investments to $4.5
million in 1999 from $3.9 million in 1998.
FINANCIAL CONDITION
- -------------------
At September 30, 1999, the Corporation had total assets of $6.0 billion,
reflecting an increase of $130.8 million, or 2.2%, from December 31, 1998.
The increase in assets was almost entirely due to loan growth, with loans (net
of unearned) increasing $251.9 million, or 6.3% to $4.3 billion at September 30,
1999 as compared to $4.0 billion at December 31, 1998. Most of this increase
occurred as a result of new loan production during the third quarter of 1999.
This loan growth was realized mainly in commercial loans and mortgages.
The $252 million increase in loans, coupled with an $86.6 million, or 1.9%
decrease in deposits required total additional funding of $339 million. This was
provided mainly by short-term borrowings ($218.7 million, or 92.8% increase) and
maturities of investment securities ($98.7 million decrease). The effect of
funding through borrowings rather than deposits had a minimal impact on the
Corporation's net interest income and net interest margin (see "Net Interest
Income" section of Management's Discussion).
Capital Resources
- -----------------
Shareholders' equity increased $6.0 million or 1.0% during the first nine months
of 1999. Net income of $72.0 million, offset by $30.2 million in cash dividends
to shareholders, produced a net increase to equity of $41.8 million. However,
increases in interest rates had a negative impact on the value of the
Corporation's investment portfolio (primarily U.S. Treasury and Agency
securities), resulting in a $26.0 million after tax reduction in unrealized
gains on securities. In addition, the Corporation's treasury stock investments
increased $8.4 million, or 242% as a result of its current buy-back program,
resulting in further decreases to total equity.
Current capital guidelines measure the adequacy of a bank holding company's
capital by taking into consideration the differences in risk associated with
holding various types of assets as well as exposure to off-balance sheet
commitments. The guidelines call for a minimum risk-based Tier I capital
percentage of 4.0% and a minimum risk-based total capital of 8.0%. Tier I
capital includes common shareholders' equity less goodwill and non-qualified
intangible assets. Total capital includes all Tier I capital components plus the
allowance for loan losses.
The Corporation is also subject to a "leverage capital" requirement, which
compares capital (using the definition of Tier I capital) to total balance sheet
assets and is intended to supplement the risk based capital ratios in measuring
capital adequacy. The minimum acceptable leverage capital ratio is 3.0% for
institutions which are highly-rated in terms of safety and soundness and which
are not experiencing or anticipating any significant growth. Other institutions
are expected to maintain capital levels at least one or two percent above the
minimum.
As of September 30, 1999, 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.
17
<PAGE>
The Corporation's total and Tier I risk-based capital ratios have placed the
Corporation in the top half of its self-defined peer group over the past year.
The Corporation's ratio of Tier I capital to average assets has placed it in the
top quartile in comparison to its peers.
On April 27, 1999, the Board of Directors approved a plan to repurchase up to
770,000 shares of the Corporation's common stock through March 31, 2000.
Treasury stock acquired under this plan will be used for the Corporation's
Employee Stock Purchase Plan, Incentive Stock Option Plan and other benefit
plans. Through September 30, 1999, 518,300 shares had been repurchased under
this plan.
YEAR 2000
- ---------
The Corporation's business, operations and financial condition may be affected
by the "Year 2000 Problem" where certain computer and other electronic
information processing systems may not be able to properly recognize dates after
1999. A financial institution's ability to process financial data such as
deposits, loans and trust accounts through its various data processing systems
is the most obvious area of exposure to the Year 2000 Problem. In addition, a
financial institution's ability to collect payments on loans could be impacted
if borrowers are unable to make payments as a result of their own Year 2000
deficiencies. Furthermore, financial institutions could be affected by the Year
2000 readiness of business customers, vendors and correspondents, customer
perception of the problem, and regulatory influences, among other things.
The Corporation formed committees at each subsidiary bank and at the Corporation
to identify, evaluate and manage the risks related to the Year 2000 Problem. A
comprehensive plan adopted by the Board of Directors of the Corporation
established a five-step process - awareness, assessment, renovation, validation
and implementation - to address the Year 2000 Problem. The plan established
priorities for addressing the Year 2000 Problem, with systems classified as
being most mission critical receiving the highest priority treatment. The
primary focus of the plan is on assuring that information technology systems
will be operable, but it also addresses non-information technology issues such
as embedded technology in security and other systems.
Federal bank regulatory agencies have issued Year 2000 project guidelines for
financial institutions and have conducted examinations of the Corporation and
its banks on the Corporation's plans to address the Year 2000 Problem. The
Corporation has used such guidance to establish Year 2000 work tasks for each
phase.
All five phases of the plan have been completed for all mission critical
systems, including third party data processing providers. The Corporation also
has completed business contingency plans for all critical processes within the
organization. Testing alternative work-around processes from these business
contingency plans was completed during September, 1999 and necessary adjustments
were made to insure success when used. During the last quarter of 1999, the
Corporation will continue to re-inspect all processes, beginning with the most
critical, for continual assurance that contingency planning adequately addresses
potential disruptions. In addition, the Corporation continues to review and
improve the documented business contingency plans.
Since the beginning of its Year 2000 efforts, the Corporation has incurred
approximately $2.0 million in expenses related to the Year 2000 ($1.2 million in
1999). In addition, capital expenditures to replace non-compliant hardware,
software and other equipment have totaled approximately $5.5 million ($2.5
million in 1999). The Corporation expects to incur an additional $300,000 in
expenses as it continues to re-test renovated systems and test its contingency
plans during the remainder of 1999.
While these costs are related to the Year 2000 Problem, many also represent
significant improvements to the technology infrastructure for Fulton Financial
Corporation and its bank subsidiaries. Improvements at
18
<PAGE>
Fulton Bank included finishing migration to a new branch automation solution and
completing the wide area telecommunications network for both branch and security
communication.
Since third-party service providers perform most major data processing functions
of the Corporation, the Corporation has not incurred any material costs to
address the Year 2000 Problem other than those discussed above. The Corporation
expects, at this time, that the Year 2000 Problem will have no material adverse
effect on the products and services it offers or on competitive conditions;
however, continued testing with mission critical third-party service providers
will further validate the readiness of these providers for this change.
Similarly, the Corporation believes that the Year 2000 Problem should have no
material adverse effect on the Corporation's business, operations or financial
condition, based on surveys of its major business loan customers and other
actions designed to evaluate the risks associated with the Year 2000 Problem,
however, it cannot rule out the possibility that the Year 2000 Problem might
have such an effect. The Corporation continues to evaluate such risks throughout
the remainder 1999.
Federal bank regulators have initiated a series of examinations of all financial
institutions to assess their progress in addressing the Year 2000 Problem and
have indicated that institutions which have not adequately addressed the issue
will be subject to various sanctions, including denial of, or delay in acting
on, regulatory applications. The Corporation believes that it has made
sufficient progress on the Year 2000 Problem to minimize the likelihood of
regulatory sanctions.
As documented herein, the Corporation has made significant investments to
address the Year 2000 problem. Despite these efforts and the Corporation's
confidence in the integrity of its systems and processes, it is possible that
certain customers may withdraw higher than usual amounts of cash from their
accounts near the end of the year. As part of its contingency planning, the
Corporation has verified with its external liquidity sources that additional
cash will be available if needed. While it is expected that customer actions in
anticipation of the year 2000 will not have a material adverse impact on the
Corporation's financial statements, the impact will not be known until such
actions occur.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
Market risk is the exposure to economic loss that arises from changes in the
values of certain financial instruments. 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 $53.5 million) and U.S. Government and agency stock (cost basis of
approximately $31.3 million). The Corporation's financial institutions stock
portfolio had unrealized gains of approximately $17.9 million at September 30,
1999.
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 primarily 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
19
<PAGE>
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, changes in
rates have an impact on the Corporation's liquidity position and could affect
its ability to meet obligations and continue to grow. Second, movements in
interest rates can create fluctuations in the Corporation's net income and
changes in the economic value of its equity.
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. The ALCO is responsible for reviewing the interest rate sensitivity
position of the Corporation, approving asset and liability management policies,
and overseeing the formulation and implementation of strategies regarding
balance sheet positions and earnings. The primary goal of asset/liability
management is to address the liquidity and net income risks noted above.
From a liquidity standpoint, 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.
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.
20
<PAGE>
FULTON FINANCIAL CORPORATION
INTEREST RATE SENSITIVITY
(dollars in thousands)
<TABLE>
<CAPTION>
Expected Maturity Period
---------------------------------------------------------------------------------------
(greater than) Estimated
(less than)1 Year 1-2 Years 2-3 Years 3-4 Years 4-5 Years 5 Years Total Fair Value
----------------- --------- --------- ---------- --------- ------------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate loans (1) $ 739,223 $ 591,378 $ 443,534 $ 295,689 $ 236,551 $ 650,517 $ 2,956,892 $2,942,108
Average rate (2) 8.06% 8.03% 7.94% 7.93% 7.85% 7.70% 7.93%
Floating rate
loans (1) 333,753 200,252 146,851 133,501 53,400 467,255 1,335,012 1,333,914
Average rate 8.71% 8.93% 8.90% 8.92% 8.18% 8.08% 8.54%
Fixed rate invest-
ments (3) 350,616 233,744 116,872 175,308 58,436 233,825 1,168,801 1,167,800
Average rate 6.37% 6.01% 6.03% 6.05% 6.06% 5.92% 6.11%
Floating rate invest-
ments (3) 12,259 -- -- -- -- -- 12,259 13,553
Average rate 4.53% -- -- -- -- -- 4.53%
Other interest-
earning assets 106,016 -- -- -- -- -- 106,016 109,788
Average rate 5.69% -- -- -- -- -- 5.69%
-------------------------------------------------------------------------------------------------------
Total $ 1,541,867 $1,025,374 $ 707,257 $ 604,498 $ 348,387 $ 1,351,597 $ 5,578,980 $5,567,163
Average rate 7.63% 7.75% 7.82% 7.60% 7.60% 7.52% 7.64%
-------------------------------------------------------------------------------------------------------
Fixed rate
deposits (4) $ 1,284,502 $ 428,167 $ 256,900 $ 107,042 $ 42,817 $ 21,409 $ 2,140,837 $2,141,654
Average rate 4.92% 5.31% 5.28% 5.63% 5.25% 5.61% 5.09%
Floating rate
deposits (5) 747,679 83,075 66,460 66,460 66,460 631,375 1,661,509 1,661,509
Average rate 2.83% 1.44% 1.40% 1.40% 1.40% 1.35% 2.03%
Fixed rate
borrowings (6) 74,444 2,978 29,778 357 29,778 160,440 297,775 291,820
Average rate 5.44% 5.79% 4.80% 5.25% 4.99% 5.18% 5.19%
Floating rate
borrowings (7) 454,254 -- -- -- -- -- 454,254 454,254
Average rate 4.47% -- -- -- -- -- 4.47%
-------------------------------------------------------------------------------------------------------
Total $ 2,560,879 $ 514,220 $ 353,138 $ 173,859 $ 139,055 $ 813,224 $ 4,554,375 $4,549,237
Average rate 4.25% 4.69% 4.51% 4.01% 3.35% 2.22% 3.92%
-------------------------------------------------------------------------------------------------------
</TABLE>
Assumptions:
1) Amounts are based on contractual maturities, adjusted for expected
prepayments.
2) Average rates are shown on a fully taxable equivalent basis using an
effective tax rate of 35%.
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 and Super NOW 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.
21
<PAGE>
The Corporation uses three complementary methods to measure and manage interest
rate risk. They are static gap analysis, simulation of net interest income, and
estimates of economic value of equity. Using these measurements in tandem
provides a reasonably comprehensive summary of the magnitude of interest rate
risk in the Corporation, level of risk as time evolves, and exposure to changes
in interest rate relationships.
Static gap analysis provides a measurement of repricing risk in the
Corporation's balance sheet as of a point in time. This measurement is
accomplished through stratification of the Corporation's assets and liabilities
into predetermined repricing periods. The assets and liabilities in each of
these periods are summed and compared for mismatches within that maturity
segment. Core deposits having noncontractual maturities are placed into
repricing periods based upon historical balance performance. Repricing for
mortgage loans held and for mortgage-backed securities includes the effect of
expected cash flows. Estimated prepayment effects are applied to these balances
based upon industry projections for prepayment speeds. The Corporation's policy
limits the cumulative 6-month gap to plus or minus 15 percent of total earning
assets. The Corporation was positioned within this range throughout the first
nine months of 1999. At September 30, 1999, the cumulative 6-month gap was 0.87.
Simulation of net interest income and of net income is performed for the next
twelve-month period. A variety of interest rate scenarios is used to measure the
effects of sudden and gradual movements upward and downward in the yield curve.
These results are compared to the results obtained in a flat or unchanged
interest rate scenario. Simulation of earnings is used primarily to measure the
Corporation's short-term earnings exposure to rate movements. The Corporation's
policy limits the potential exposure of net interest income to 10% of the base
case net interest income for every 100 basis point "shock" in interest rates. A
"shock' is an immediate upward or downward movement of interest rates across the
yield curve based upon changes in the prime rate. As of September 30, 1999, the
Corporation had risk exposures of loss of net interest income over the next
twelve months that were within the allowable policy maximums as established by
the Corporation. These rate exposure tests are processed for scenarios where
interest rates are shocked upward or downward by 100, 200 and 300 basis points.
Economic value of equity estimates the discounted present value of asset cash
flows and liability cash flows. Discount rates are based upon market prices for
like assets and liabilities. Upward and downward shocks of interest rates are
used to determine the comparative effect of such interest rate movements
relative to the unchanged environment. This measurement tool is used primarily
to evaluate the longer term repricing risks and options in the Corporation's
balance sheet. A policy limit of 10% of economic equity may be at risk for every
100 basis point "shock" movement in interest rates. As of September 30, 1999,
the exposures to market value in upward or downward shocks of 100, 200 and 300
basis points were estimated to have potential effects upon economic equity that
were within the limits established in the Corporation's policy.
22
<PAGE>
PART II -- OTHER INFORMATION
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits -- The following is a list of the exhibits required by
Item 601 of Regulation S-K and filed as part of this report:
(1) Articles of incorporation, as amended and restated, and Bylaws
of Fulton Financial Corporation, as amended.
(2) Instruments defining the right of securities holders,
including indentures:
(a) Rights Agreement dated June 20, 1989, as amended and
restated on April 27, 1999 between Fulton Financial
Corporation and Fulton Bank Incorporated by reference to
Exhibit 1 of the Fulton Financial Corporation Current
Report on Form 8-K dated April 27, 1999.
(3) Material Contracts - Executive Compensation Agreements and
Plans:
(a) Severance Agreements entered into between Fulton Financial
and: Rufus A. Fulton, Jr., as of April 17, 1984; R. Scott
Smith, Jr., as of May 17, 1988; Charles J. Nugent, as of
November 19, 1992; and Richard J Ashby, Jr., as of May 17,
1988.
(b) Incentive Stock Option Plan adopted September 19, 1995 -
Incorporated by reference from Exhibit A of Fulton
Financial Corporation's 1996 Proxy Statement.
(4) Financial Data Schedule - September 30, 1999
(5) Financial Data Schedule - September 30, 1998 (restated).
(b) Reports on Form 8-K:
(1) Form 8-K dated April 27, 1999 (as amended by Form 8-K/A filed
July 8, 1999) reporting the Amended and Restated Rights
Agreement.
23
<PAGE>
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FULTON FINANCIAL CORPORATION
Date: November 10, 1999 /s/ Rufus A. Fulton, Jr.
----------------------- -------------------------------
Rufus A. Fulton, Jr.
Chairman, President and
Chief Executive Officer
Date: November 10, 1999 /s/ Charles J. Nugent
----------------------- -------------------------------
Charles J. Nugent
Executive Vice President and
Chief Financial Officer
24
<PAGE>
EXHIBIT INDEX
Exhibits Required Pursuant
to Item 601 of Regulation S-K
-----------------------------
3. Articles of incorporation, as amended and restated, and Bylaws of
Fulton Financial Corporation, as amended.
4. Instruments defining the rights of security holders, including
indentures.
(a) Rights Agreement dated June 20, 1989, as amended and restated on
April 27, 1999 between Fulton Financial Corporation and Fulton
Bank - Incorporated by reference to Exhibit 1 of the Fulton
Financial Corporation Current Report on Form 8-K dated April 27,
1999.
10. Material Contracts
(a) Severance Agreements entered into between Fulton Financial and:
Rufus A. Fulton, Jr., as of April 17, 1984; R. Scott Smith, Jr.,
as of May 17, 1988; Charles J. Nugent, as of November 19, 1992;
and Richard J Ashby, Jr., as of May 17, 1988.
(b) Incentive Stock Option Plan adopted September 19, 1995 -
Incorporated by reference from Exhibit A of Fulton Financial
Corporation's 1996 Proxy Statement.
27. Financial data schedule - September 30, 1999.
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Fulton
Financial Corporation consolidated balance sheet as of September 30, 1999 and
the related consolidated statement of income for the nine months ended September
30, 1999 and other financial data included within management's discussion and
analysis of financial condition and results of operations as of and for the nine
months ended September 30, 1999 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 226,369
<INT-BEARING-DEPOSITS> 1,234
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,184,852
<INVESTMENTS-CARRYING> 99,188
<INVESTMENTS-MARKET> 99,481
<LOANS> 4,282,314
<ALLOWANCE> 58,280
<TOTAL-ASSETS> 5,969,508
<DEPOSITS> 4,506,360
<SHORT-TERM> 454,254
<LIABILITIES-OTHER> 96,820
<LONG-TERM> 297,775
0
0
<COMMON> 173,392
<OTHER-SE> 440,907
<TOTAL-LIABILITIES-AND-EQUITY> 5,969,508
<INTEREST-LOAN> 253,271
<INTEREST-INVEST> 56,784
<INTEREST-OTHER> 227
<INTEREST-TOTAL> 310,282
<INTEREST-DEPOSIT> 106,851
<INTEREST-EXPENSE> 128,818
<INTEREST-INCOME-NET> 181,464
<LOAN-LOSSES> 6,049
<SECURITIES-GAINS> 6,313
<EXPENSE-OTHER> 120,745
<INCOME-PRETAX> 102,101
<INCOME-PRE-EXTRAORDINARY> 71,979
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71,979
<EPS-BASIC> 1.04
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 4.56
<LOANS-NON> 17,022
<LOANS-PAST> 7,349
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 57,415
<CHARGE-OFFS> 8,736
<RECOVERIES> 3,552
<ALLOWANCE-CLOSE> 58,280
<ALLOWANCE-DOMESTIC> 58,280
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 24,478
</TABLE>
