<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 June 30, 2000 , 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 - 69,724,619 shares outstanding as of July 31,
---------------------------------------------------------------------------
2000.
----
1
<PAGE>
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
-----
Description Page
----------- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
(a) Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999........................................3
(b) Consolidated Statements of Income -
Three and six months ended June 30, 2000 and 1999..........................4
(c) Consolidated Statements of Shareholders' Equity -
Six months ended June 30, 2000 and 1999....................................5
(d) Consolidated Statements of Cash Flows -
Six months ended June 30, 2000 and 1999....................................6
(e) Notes to Consolidated Financial Statements - June 30, 2000.................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...........18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................22
SIGNATURES....................................................................23
2
<PAGE>
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per-share data)
June 30 December 31
2000 1999
--------------------------------------
ASSETS
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks .............................................................. $ 267,857 $ 245,572
Interest-bearing deposits with other banks ........................................... 3,888 1,798
Mortgage loans held for sale ......................................................... 3,074 1,016
Investment securities:
Held to maturity (Fair value: $66,183 in 2000 and $84,777 in 1999) .............. 66,660 85,474
Available for sale .............................................................. 1,089,734 1,137,846
Loans ................................................................................ 4,582,659 4,432,030
Less: Allowance for loan losses ................................................ (58,280) (57,631)
Unearned income ....................................................... (10,828) (9,623)
-------------- ---------------
Net Loans ................................................... 4,513,551 4,364,776
-------------- ---------------
Premises and equipment ............................................................... 84,945 79,217
Accrued interest receivable .......................................................... 33,232 31,496
Other assets ......................................................................... 121,658 122,824
-------------- ---------------
Total Assets ................................................ $ 6,184,599 $ 6,070,019
============== ===============
LIABILITIES
----------------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing ............................................................. $ 809,597 $ 724,778
Interest-bearing ................................................................ 3,860,329 3,822,035
-------------- ---------------
Total Deposits .............................................. 4,669,926 4,546,813
-------------- ---------------
Short-term borrowings:
Securities sold under agreements to repurchase................................... 296,610 309,790
Federal funds purchased.......................................................... 211,450 172,250
Demand notes of U.S. Treasury ................................................... 5,683 5,506
-------------- ---------------
Total Short-Term Borrowings ................................. 513,743 487,546
-------------- ---------------
Accrued interest payable ............................................................. 36,194 32,313
Other liabilities .................................................................... 62,163 60,803
Long-term debt ....................................................................... 306,637 328,250
-------------- ---------------
Total Liabilities ........................................... 5,588,663 5,455,725
-------------- ---------------
SHAREHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------------------------------
Common stock ($2.50 par)
Shares: Authorized 400,000,000
Issued 72,824,439; Outstanding 69,893,119 (71,924,447 in 1999)..... 182,052 173,392
Capital surplus ...................................................................... 452,528 394,234
Retained earnings .................................................................... 38,305 75,482
Accumulated other comprehensive income................................................ (21,878) (11,846)
Treasury stock, at cost (2,931,320 shares in 2000 and 899,992 shares in 1999)......... (55,071) (16,968)
-------------- ---------------
Total Shareholders' Equity .................................. 595,936 614,294
-------------- ---------------
Total Liabilities and Shareholders' Equity................... $ 6,184,599 $ 6,070,019
============== ===============
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per-share data)
Three Months Ended Six Months Ended
June 30 June 30
---------------------------------- --------------------------------
2000 1999 2000 1999
---------------------------------- --------------------------------
INTEREST
INCOME
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans, including fees ...................................... $ 94,820 $ 84,225 $ 186,188 $ 166,463
Investment securities:
Taxable ............................................... 14,130 15,990 28,319 32,209
Tax-exempt ............................................ 2,152 2,056 4,357 3,848
Dividends ............................................. 1,109 1,020 2,214 2,013
Other interest income....................................... 157 135 301 201
-------------- ------------- -------------- --------------
Total Interest Income ............ 112,368 103,426 221,379 204,734
INTEREST EXPENSE
------------------------------------------------------------------------------------------------------------------------------------
Deposits ................................................... 39,336 35,310 76,562 71,340
Short-term borrowings ...................................... 7,008 3,229 13,264 6,099
Long-term debt ............................................. 4,186 3,890 8,595 7,672
-------------- ------------- -------------- --------------
Total Interest Expense ............ 50,530 42,429 98,421 85,111
-------------- ------------- -------------- --------------
Net Interest Income ............... 61,838 60,997 122,958 119,623
PROVISION FOR LOAN LOSSES .................................. 2,025 2,085 4,050 4,052
-------------- ------------- -------------- --------------
Net Interest Income After
Provision for Loan Losses ...... 59,813 58,912 118,908 115,571
-------------- ------------- -------------- --------------
OTHER INCOME
------------------------------------------------------------------------------------------------------------------------------------
Investment management and trust services.................... 5,057 4,014 9,978 7,431
Service charges on deposit accounts ........................ 5,890 5,177 11,474 9,947
Other service charges and fees ............................. 3,239 2,963 6,320 5,749
Mortgage banking income..................................... 781 1,218 1,371 2,501
Investment securities gains ................................ 2,065 1,669 4,541 4,726
-------------- ------------- -------------- --------------
Total Other Income ................ 17,032 15,041 33,684 30,354
OTHER EXPENSES
------------------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits ............................. 22,601 22,105 45,346 43,467
Net occupancy expense ...................................... 3,411 3,167 7,002 6,442
Equipment expense .......................................... 2,241 2,385 4,724 4,678
Special services ........................................... 2,554 2,774 5,327 5,654
Other ...................................................... 9,116 9,407 17,310 18,295
-------------- ------------- -------------- --------------
Total Other Expenses .............. 39,923 39,838 79,709 78,536
-------------- ------------- -------------- --------------
Income Before Income Taxes ........ 36,922 34,115 72,883 67,389
INCOME TAXES................................................ 11,015 10,072 21,662 19,819
-------------- ------------- -------------- --------------
Net Income ........................ $ 25,907 $ 24,043 $ 51,221 $ 47,570
============== ============= ============== ==============
------------------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA:
Net income (basic).......................................... $ 0.37 $ 0.33 $ 0.72 $ 0.66
Net income (diluted)........................................ 0.37 0.33 0.72 0.65
Cash dividends ............................................. 0.160 0.143 0.303 0.273
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION> Accumulated
Other
Comprehen-
Common Capital Retained Sive Income Treasury
(Dollars in thousands, except per-share data) Stock Surplus Earnings (Loss) Stock Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999............................. $ 173,392 $ 394,234 $ 75,482 $ (11,846) $ (16,968) $ 614,294
Comprehensive income:
Net income.......................................... 51,221 51,221
Other - net unrealized loss on securities (net of
$5.4 million tax benefit)....................... (10,032) (10,032)
------------
Total comprehensive income..................... 41,189
------------
Stock dividends issued - 5% (3,464,213 shares)........... 8,660 59,065 (67,796) (71)
Stock issued (121,419 shares of treasury stock).......... (771) 2,331 1,560
Acquisition of treasury stock (2,152,747 shares)......... (40,434) (40,434)
Cash dividends - $0.303 per share........................ (20,602) (20,602)
--------------------------------------------------------------------------
Balance at June 30, 2000................................. $ 182,052 $ 452,528 $ 38,305 $ (21,878) $ (55,071) $ 595,936
==========================================================================
Balance at December 31, 1998............................. $ 157,638 $ 293,897 $ 136,668 $ 23,619 $ (3,488) $ 608,334
Comprehensive income:
Net income.......................................... 47,570 47,570
Other - net unrealized gain on securities (net of
$11.6 million tax benefit)....................... (21,535) (21,535)
------------
Total comprehensive income..................... 26,035
------------
Stock dividends issued - 10% (6,617,424 shares).......... 15,754 102,099 (117,917) (64)
Stock issued (128,849 shares) (1,230) 2,733 1,503
Acquisition of treasury stock (228,795 shares)........... (4,717) (4,717)
Cash dividends - $0.273 per share........................ (19,783) (19,783)
--------------------------------------------------------------------------
Balance at June 30, 1999................................. $ 173,392 $ 394,766 $ 46,538 $ 2,084 $ (5,472) $ 611,308
==========================================================================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
(In thousands)
Six Months Ended
June 30
---------------------------------
2000 1999
---------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income........................................................................ $ 51,221 $ 47,570
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses ................................................... 4,050 4,052
Depreciation and amortization of premises and equipment ..................... 5,033 4,794
Net amortization of investment security premiums ............................ 262 726
Investment security gains ................................................... (4,541) (4,726)
Net (increase) decrease in mortgage loans held for sale...................... (2,058) 4,597
Amortization of intangible assets ........................................... 652 649
(Increase) decrease in accrued interest receivable .......................... (1,736) 1,817
Decrease in other assets .................................................... 6,346 9,374
Increase (decrease) in accrued interest payable ............................. 3,881 (2,897)
Increase in other liabilities................................................ 1,246 4,938
------------ -------------
Total adjustments...................................................... 13,135 23,324
------------ -------------
Net cash provided by operating activities .............................. 64,356 70,894
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale ............................. 19,814 11,138
Proceeds from maturities of securities held to maturity .......................... 19,458 64,836
Proceeds from maturities of securities available for sale ........................ 86,840 150,385
Purchase of securities held to maturity .......................................... (618) (357)
Purchase of securities available for sale ........................................ (70,153) (246,104)
(Increase) decrease in short-term investments .................................... (2,090) 212
Net increase in loans ............................................................ (152,825) (144,694)
Purchase of premises and equipment................................................ (10,761) (6,040)
------------ -------------
Net cash provided by (used in) investing activities .................... (110,335) (170,624)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings deposits ........................... 101,012 (59,746)
Net increase (decrease) in time deposits ......................................... 22,101 (38,095)
(Decrease) increase in long-term debt............................................. (21,613) 52,051
Increase (decrease) in short-term borrowings ..................................... 26,197 149,442
Dividends paid ................................................................... (20,488) (19,783)
Net proceeds from issuance of common stock ....................................... 1,489 1,439
Acquisition of treasury stock .................................................... (40,434) (4,717)
------------ -------------
Net cash provided by financing activities............................... 68,264 80,591
------------ -------------
Net Increase (Decrease) in Cash and Due From Banks ............................... 22,285 (19,139)
Cash and Due From Banks at Beginning of Period ................................... 245,572 247,558
------------ -------------
Cash and Due From Banks at End of Period ......................................... $ 267,857 $ 228,419
============ =============
Supplemental Disclosures of Cash Flow Information Cash paid during the
period for:
Interest .................................................................... $ 94,540 $ 88,008
Income taxes ................................................................ 19,098 14,092
--------------------------------------------------------------------------------------------------------------------------
</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 six month periods ended June
30, 2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000.
NOTE B - 5% Stock Dividend
The Corporation issued a 5% stock dividend on May 31, 2000. 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 Six months ended
June 30 June 30
---------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding (basic)............. 70,415 72,602 71,032 72,615
Impact of common stock equivalents...................... 403 433 352 416
------------- ------------ ------------ ------------
Weighted average shares outstanding (diluted)........... 70,818 73,035 71,384 73,031
============= ============ ============ ============
NOTE D - Comprehensive Income
The following table summarizes the reclassification adjustment for realized
security gains (net of taxes) for each of the indicated periods (in thousands):
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Unrealized holding losses arising during period...................... $ (7,080) $ (18,463)
Less: reclassification adjustment for gains included
in net income................................................ 2,952 3,072
------------- -------------
Net unrealized losses on securities.................................. $ (10,032) $ (21,535)
============= =============
</TABLE>
7
<PAGE>
NOTE E - New Accounting Standards
Accounting for Derivative Instruments and Hedging Activities: In June, 1998, the
FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (Statement 133). This statement
expanded the previous definition of derivatives to include certain additional
transactions. Entities are required to record derivatives at their fair values
and recognize any changes in fair value in current period earnings, unless
specific hedge criteria are met. Statement 133, as amended by Statement 137, is
effective for years beginning after June 15, 2000. The Corporation does not
expect the adoption of Statement 133 to have a material effect on its balance
sheet or net income.
NOTE F - Subsequent Events
On August 1, 2000, the Corporation completed its acquisition of Skylands
Financial Corporation (SFC) of Hackettstown, New Jersey. SFC is a $240 million
bank holding company whose sole banking subsidiary, Skylands Community Bank
(Skylands), operates eight community banking offices in Morris, Warren and
Sussex counties.
Under the terms of the merger agreement, each of the 2.5 million shares of SFC's
common stock was exchanged for 0.819 shares of the Corporation's common stock.
In addition, the 308,000 options to acquire SFC stock were also be exchanged for
options to purchase the Corporation's common stock. As a result of the
acquisition, SFC was merged with and into Fulton Financial Corporation (parent
company) and Skylands became the Corporation's twelfth banking subsidiary.
The acquisition was accounted for as a purchase and, as such, the accounts and
results of operations of Skylands are not included in the financial statements
of the Corporation as presented in this report. Skylands will be included in the
consolidated financial statements of the Corporation prospectively from the date
of the merger.
NOTE G - Reclassifications
Certain amounts in the 1999 consolidated financial statements and notes have
been reclassified to conform to the 2000 presentation.
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,
allowance and provision for loan losses and non-interest income growth
initiatives. 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 loans and deposits, actions of bank and nonbank competitors,
changes in local and national economic conditions, changes in regulatory
requirements and oversight of the Corporation and actions of the Federal Reserve
Board (FRB).
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 June 30, 2000 versus Quarter ended June 30, 1999
----------------------------------------------------------------
Fulton Financial Corporation's net income for the second quarter of 2000
increased $1.9 million, or 7.8%, in comparison to net income for the second
quarter of 1999. Diluted net income per share increased $0.04, or 12.1%,
compared to 1999. Second quarter net income of $25.9 million, or $0.37 per share
(basic and diluted), represented a return on average assets (ROA) of 1.70% and a
return on average equity (ROE) of 17.48%. This compares to 1999 net income of
$24.0 million, or $0.33 (basic and diluted -- 1.65% ROA and 15.45% ROE).
The increase in net income in 2000 resulted mainly from strong loan growth,
continued high asset quality, control of non-interest expenses and fee income
generation initiatives.
Net Interest Income
-------------------
Net interest income increased $841,000, or 1.4%, for the quarter. This small
increase reflects the recent changes in the interest rate environment as the FRB
raised the federal funds rate six times over the past year. While these actions
have caused downward pressure on the Corporation's net interest margin and have
reduced the growth rate in net interest income, the Corporation has been able to
generate strong loan and balance sheet growth.
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 second quarter of 1999 to the second
quarter of 2000 and the average interest rates thereon. All dollar amounts are
in thousands.
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
June 30 Change
-------------------------------------- -------------------------------------
2000 1999 $ %
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Interest income ................. $ 112,368 $ 103,426 $ 8,942 8.6%
Interest expense................. 50,530 42,429 8,101 19.1
----------------- ----------------- ----------------- -----------------
Net interest income.............. $ 61,838 $ 60,997 $ 841 1.4%
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
June 30
--------------------------------------
2000 1999 Change
----------------- ----------------- ----------------
<S> <C> <C> <C>
Loans................................................. $ 4,551,173 $ 4,106,462 $ 444,711
Investment securities................................. 1,220,125 1,339,539 (119,414)
Other earning assets.................................. 8,012 11,109 (3,097)
----------------------------------------------------------
Total interest-earning assets......................... $ 5,779,310 $ 5,457,110 $ 322,200
==========================================================
Yield on earning assets (fully taxable equivalent).... 7.93% 7.72% 0.21%
Deposits.............................................. $ 3,866,477 $ 3,803,803 $ 62,674
Short-term borrowings................................. 488,277 302,184 186,093
Long-term debt........................................ 321,164 301,238 19,926
----------------------------------------------------------
Total interest-bearing liabilities.................... $ 4,675,918 $ 4,407,225 $ 268,693
==========================================================
Cost of interest-bearing liabilities.................. 4.34% 3.86% 0.48%
Net interest margin (fully taxable equivalent)........ 4.41% 4.60% (0.19%)
</TABLE>
The 5.9% increase in average earning assets accounted for an interest income
increase of approximately $6.2 million. The remaining $2.7 million increase was
a result of the increase in average yields on earning assets. Average yields
increased from the second quarter of 1999 to the second quarter of 2000 due to a
general increase in interest rates as a result of the actions of the FRB.
However, the 21 basis point increase in average yields was not as pronounced as
the 152 basis point increase in the Corporation's average prime lending rate
(7.75% in 1999 and 9.27% in 2000) as a result of competition.
The Corporation's average loan portfolio grew by approximately $445 million, or
10.8%, mainly in commercial loans ($153 million, or 16.2% increase), commercial
mortgages ($168 million, or 15.5% increase) and home equity loans ($80 million,
or 25.1% increase). Loan demand has been strong due to favorable economic
conditions in the Corporation's markets.
Investment securities, excluding unrealized gains and losses, decreased $119
million, or 8.9%. Net maturities of United States Treasury and Agency securities
and mortgage backed securities ($148 million) were used to support the strong
loan growth in lieu of other funding alternatives.
The 5.7% increase in average interest-bearing liabilities resulted in a $2.6
million increase in interest expense. The remaining $5.5 million increase in
interest expense was a result of the increase in the average cost of funds. The
increase in interest-bearing liabilities was realized mainly in short-term
borrowings as deposit growth lagged the increases in loans and alternative
funding sources were used. As a result of this shift from deposits to higher
priced borrowings and the increases in rates in general, the Corporation's cost
of funds increased 48 basis points as compared to the second quarter of 1999.
As a result of the noted changes in assets, liabilities and rates, the
Corporation's net interest margin on a fully taxable equivalent basis decreased
19 basis points to 4.41% in 2000 from 4.60% in 1999. The Corporation continues
to manage its asset/liability position and interest rate risk through the
methods
10
<PAGE>
discussed in the "Market Risk" section of this document. Management believes
that these procedures have minimized the reduction in the net interest margin
during this period of increasing rates.
Provision and Allowance for Loan Losses
---------------------------------------
The following table summarizes loans outstanding (including unearned income) as
of the dates shown:
June 30 December 31
2000 1999
---------------- ----------------
(in thousands)
Commercial, financial and agricultural..... $ 1,075,286 $ 1,051,958
Real estate - construction................. 201,268 164,583
Real estate - mortgage..................... 2,492,137 2,371,764
Consumer .................................. 739,484 774,098
Leasing and other.......................... 74,484 69,627
---------------- ----------------
Totals.................................. $ 4,582,659 $ 4,432,030
================ ================
The loans summary as of December 31, 1999 as shown above has been restated to
conform to the presentation adopted in 2000 as a result of changes in the
Corporation's financial reporting system. In addition to some immaterial
classification changes, approximately $400 million of loans previously
classified as commercial mortgages are now being shown as commercial loans.
This reclassification has no impact on the Corporation's assessment of the risk
of these loans for allowance evaluation purposes. The allowance for loan loss
procedures as documented in the following section are applied to categories of
loans based on sub-system classification or to individually large credits. These
procedures are not dependent upon the ultimate classification of the loans for
financial reporting purposes.
11
<PAGE>
The following table summarizes the activity in the Corporation's allowance for
loan losses:
<TABLE>
<CAPTION>
Three Months Ended June 30
--------------------------
2000 1999
------------ ------------
(dollars in thousands)
<S> <C> <C>
Loans outstanding at end of period (net of unearned)............... $ 4,571,831 $ 4,172,560
============ ============
Daily average balance of loans and leases.......................... $ 4,551,173 $ 4,106,062
============ ============
Balance of allowance for loan losses
at beginning of period........................................ $ 58,034 $ 58,440
Loans charged-off:
Commercial, financial and agricultural......................... 1,268 148
Real estate - mortgage......................................... 282 436
Consumer....................................................... 1,571 2,458
Leasing and other.............................................. 87 51
------------ ------------
Total loans charged-off........................................ 3,208 3,093
------------ ------------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural......................... 689 791
Real estate - mortgage......................................... 52 187
Consumer....................................................... 675 532
Leasing and other.............................................. 13 -
------------ ------------
Total recoveries............................................... 1,429 1,510
------------ ------------
Net loans charged-off.............................................. 1,779 1,583
Provision for loan losses.......................................... 2,025 2,085
------------ ------------
Balance at end of period........................................... $ 58,280 $ 58,942
============ ============
Net charge-offs to average loans (annualized)...................... 0.16% 0.15%
============ ============
Allowance for loan losses to loans outstanding..................... 1.27% 1.41%
============ ============
</TABLE>
The following table summarizes the Corporation's non-performing assets as of the
indicated dates.
<TABLE>
<CAPTION>
June 30 Dec. 31 June 30
(Dollars in thousands) 2000 1999 1999
------------------ -------------- -----------------
<S> <C> <C> <C>
Nonaccrual loans..................................... $ 17,138 $ 18,653 $ 17,974
Loans 90 days past due and accruing.................. 8,541 8,516 7,528
Other real estate owned (OREO)....................... 892 917 1,442
------------------ -------------- -----------------
Total non-performing assets.......................... $ 26,571 $ 28,086 $ 26,944
================== ============== =================
Non-performing loans/Total loans..................... 0.56% 0.61% 0.61%
Non-performing assets/Total assets................... 0.43% 0.46% 0.45%
Non-performing assets/Gross loans and OREO........... 0.58% 0.63% 0.65%
</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 to absorb the losses inherent in the portfolio. 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, and
the balance of
12
<PAGE>
the allowance relative to total and nonperforming loans. 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 second quarter of 2000, net charge-offs totaled $1.8 million, or 0.16%,
of average loans on an annualized basis. This net charge-off rate was not
significantly different from the $1.6 million, or 0.15%, in the second quarter
of 1999. Non-performing loans, including loans 90 days past due and still
accruing, to total loans were 0.56% at June 30, 2000, a considerable improvement
over the 0.61% at December 31, 1999 and June 30, 1999.
The provision for loan losses decreased $60,000, or 2.9%, to $2.0 million in
2000. This decrease occurred despite a 10.8% increase in average loans
outstanding, reflecting the continued improvement in the Corporation's overall
asset quality.
The Corporation's periodic loan portfolio review and allowance calculation
resulted in an unallocated allowance for loan losses of 28% at June 30, 2000 and
32% at December 31, 1999. This fairly stable unallocated level supports the
provision for loan losses for the quarter and the balance of the allowance for
loan losses as of June 30, 2000. Management believes that the allowance balance
of $58.3 million is sufficient to cover losses incurred in the loan portfolio
and is appropriate based on applicable accounting standards.
Other Income
------------
Other income for the quarter ended June 30, 2000 was $17.0 million. This was a
increase of $2.0 million, or 13.2%, over the comparable period in 1999.
Excluding investment security gains, which increased from $1.7 million in 1999
to $2.1 million in 2000, other income increased $1.6 million, or 11.9%.
Increases were realized in every major category, except mortgage banking income.
Investment management and trust services income increased $1.0 million, or
26.0%. On May 1, 2000, the Corporation's twelfth affiliate, Fulton Financial
Advisors, N.A. (FFA), became operational. FFA, which consolidated the
Corporation's previously fragmented investment management and trust services
business, provides the structure to expand this line of business throughout the
Corporation's market.
Service charges on deposit accounts increased $713,000, or 13.8%, as a result of
an increase in cash management income ($352,000, or 41.1%, increase) and
overdraft fees (227,000, or 12.1%, increase). Other service charges and fees
increased $276,000, or 9.3%, mainly due to debit card income.
Mortgage banking income, which consists of gains on mortgage loan sales and
servicing income, decreased $437,000, or 35.9%. This decline was almost entirely
due to a decline in mortgage loan sale volume as interest rates have risen and
refinance activity has therefore decreased.
Other Expenses
--------------
Total other expenses for the second quarter of 2000 of $39.9 million were
essentially flat compared to 1999, increasing only $85,000, or 0.2%. The
Corporation's efficiency ratio, which is the ratio of noninterest expense to
fully taxable equivalent revenues (excluding security gains), decreased to 50.8%
in 2000 from 52.4% in 1999.
Salaries and employee benefits increased $496,000, or 6.5%, in comparison to the
first quarter of 1999. This increase was due to normal merit increases and an
increase in the number of full time equivalent employees from 2,327 in 1999 to
2,368 in 2000. Additional employees have been necessary to support new
initiatives such as FFA.
Other expenses, excluding salaries and benefits, decreased $411,000, or 2.3%,
from $17.7 million in 1999 to $17.3 million in 2000. The Corporation continues
to monitor and manage its expenses to produce maximum
13
<PAGE>
efficiency. Such efforts include centralization of the data processing function
and other back office procedures when practical.
Income Taxes
------------
Income tax expense for the second quarter of 2000 was $11.0 million, a $943,000,
or 9.4%, increase from $10.1 million in 1999. The Corporation's effective tax
rate remained fairly stable at 29.8% in 2000 and 29.5% in 1999. The effective
rate is lower than the federal statutory rate of 35% due mainly to investments
in tax-free municipal securities and federal tax credits from investments in low
and moderate income housing partnerships.
Six Months ended June 30, 2000 versus Six Months ended June 30, 1999
--------------------------------------------------------------------
Fulton Financial Corporation's net income for the first six months of 2000
increased $3.7 million, or 7.7%, in comparison to net income for the same period
in 1999. Diluted net income per share increased $0.07, or 10.8%, compared to
1999. Net income for the first six months of 2000 of $51.2 million, or $0.72 per
share (basic and diluted), represented an ROA of 1.69% and an ROE of 17.02%.
This compares to 1999 net income of $47.6 million, or $0.66 per share (basic)
and $0.65 per share (diluted -- 1.65% ROA and 15.54% ROE).
The increase in net income in 2000 resulted from continued growth of the
Corporation's core banking business, as shown by increases in both net interest
income and non-interest income. These increases were offset by decreases in
investment securities gains and a small increase in other expenses.
Net Interest Income
-------------------
Net interest income increased $3.3 million, or 2.8%, for the first nine months
of 1999. Overall, this increase was a result of growth in the Corporation's
balance sheet, offset by a rising cost of funds. 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 first half of 1999 to the first half of 2000 and the average interest
rates thereon. All dollar amounts are in thousands.
<TABLE>
<CAPTION>
Six Months Ended
June 30 Change
-------------------------------------- -------------------------------------
2000 1999 $ %
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Interest income ................. $221,379 $204,734 $16,645 8.1%
Interest expense................. 98,421 85,111 13,310 15.6
-------- -------- ------- ----
Net interest income.............. $122,958 $119,623 $ 3,335 2.8%
======== ======== ======= ====
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30
--------------------------------------
2000 1999 Change
----------------- ----------------- ----------------
<S> <C> <C> <C>
Loans................................................. $ 4,509,845 $ 4,073,687 $ 436,158
Investment securities................................. 1,226,205 1,327,818 (101,613)
Other earning assets.................................. 8,501 8,601 (100)
----------- ----------- -----------
Total interest-earning assets......................... $ 5,744,551 $ 5,410,106 $ 334,445
=========== =========== ===========
Yield on earning assets (fully taxable equivalent).... 7.86% 7.71% 0.15%
Deposits.............................................. $ 3,844,045 $ 3,797,097 $ 46,948
Short-term borrowings................................. 483,360 285,385 197,975
Long-term debt........................................ 330,928 298,583 32,345
----------- ----------- -----------
Total interest-bearing liabilities.................... $ 4,658,333 $ 4,381,065 $ 277,268
=========== =========== ===========
Cost of interest-bearing liabilities.................. 4.25% 3.92% 0.33%
Net interest margin (fully taxable equivalent)........ 4.42% 4.54% (0.12%)
</TABLE>
The 6.2% increase in average earning assets accounted for an interest income
increase of approximately $12.8 million, with the remaining $3.8 million coming
from the 15 basis point increase in average yields on total earning assets. As
with the second quarter, the growth in earning assets resulted mainly from loans
during the first six months of the year and the increase in average rates was a
result of the interest rate environment in general.
The Corporation's average loan portfolio grew by approximately $436 million, or
10.7%, mainly in commercial loans ($164 million, or 17.7% increase), commercial
mortgages ($152 million or 14.1% increase) and home equity loans ($69 million or
22.2% increase). Loan growth has been strong due to favorable local economic
conditions. Investment securities, excluding unrealized gains and losses,
decreased $102 million, or 7.7%. Funds from maturing investments have generally
been used to support loan growth rather than being re-invested in lower-yielding
securities.
As interest rates continued to rise during the first half of 2000, the
Corporation was able to achieve a higher yield on earning assets than it did in
1999. However, the strength of the competition in its markets and the fact that
much of the Corporation's loan portfolio has fixed rates, has not allowed the
yields to grow in proportion to the prime lending rate. The Corporation's
average prime lending rate increased 125 basis points from 7.75% in 1999 to
9.00% in 2000, whereas the yield on average loans has only increased seven basis
points, from 8.27% in 1999 to 8.34% in 2000. Refer to the "Market Risk" section
of this document for additional information on the Corporation's fixed rate
versus floating rate loan portfolio.
The 6.3% increase in average interest-bearing liabilities resulted in a $5.4
million increase in interest expense, with an additional $7.9 million increase
attributable to the 33 basis point increase in the average cost of funds.
Average short-term borrowings increased $198 million, or 69.4%, mainly as a
funding alternative to support the strong loan growth in light of sluggish
deposit growth.
Due to the shorter-term nature of the Corporation's interest bearing
liabilities, the 33 basis point increase in the cost of funds has been more
dramatic - reflecting the change in the general interest rate environment - than
that realized on the earning assets. The overall impact of this has been
downward pressure on the Corporation's net interest margin, which decreased 12
basis points to 4.42% in 2000 as compared to 4.54% in 1999.
15
<PAGE>
Provision for Loan Losses
-------------------------
The following table summarizes the activity in the Corporation's allowance for
loan losses:
<TABLE>
<CAPTION>
Six Months Ended
June 30
------------------------------
2000 1999
------------ ------------
(dollars in thousands)
<S> <C> <C>
Loans outstanding at end of period (net of unearned)............... $ 4,571,831 $ 4,172,560
============ ============
Daily average balance of loans and leases.......................... $ 4,509,845 $ 4,073,687
============ ============
Balance of allowance for loan losses
at beginning of period........................................ $ 57,631 $ 57,415
Loans charged-off:
Commercial, financial and agricultural......................... 2,084 772
Real estate - mortgage......................................... 631 593
Consumer....................................................... 3,348 3,861
Leasing and other.............................................. 180 68
------------ ------------
Total loans charged-off........................................ 6,243 5,294
------------ ------------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural......................... 1,065 1,351
Real estate - mortgage......................................... 340 471
Consumer....................................................... 1,423 947
Leasing and other.............................................. 14 -
------------ ------------
Total recoveries............................................... 2,842 2,769
------------ ------------
Net loans charged-off.............................................. 3,401 2,525
Provision for loan losses.......................................... 4,050 4,052
------------ ------------
Balance at end of period........................................... $ 58,280 $ 58,942
============ ============
Net charge-offs to average loans (annualized)...................... 0.15% 0.12%
============ ============
Allowance for loan losses to loans outstanding..................... 1.27% 1.41%
============ ============
</TABLE>
Refer to the "Provision for Loan Losses" section of Management's Discussion of
the second quarter results of operations for a summary of the Corporation's
process for establishing the provision and allowance for loan losses. For the
first six months of 2000, net charge-offs totaled $3.4 million, or 0.15%, of
average loans on an annualized basis. This compares to $2.5 million, or 0.12%,
for the first half of 1999 and 0.19% for all of 1999. Non-performing loans,
including loans 90 days past due and still accruing, to total loans were 0.56%
at June 30, 2000 as compared to 0.61% at December 31, 1999 and June 30, 1999.
The provision for loan losses of $4.1 million for the first half of 2000 was
essentially unchanged from 1999. The fact that the provision did not increase,
despite a 10.7% increase in average loans, reflects the strong asset quality of
the Corporation . The Corporation's periodic loan portfolio review and allowance
calculation resulted in an unallocated allowance for loan losses of 28% at June
30, 2000 and 32% at December 31, 1999. This fairly stable unallocated level
supports the provision for loan losses for the quarter and the balance of the
allowance for loan losses as of June 30, 2000. 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.
16
<PAGE>
Other Income
------------
Other income for the six months ended June 30, 2000 was $33.7 million. This was
an increase of $3.3 million, or 11.0%, over the comparable period in 1999.
Excluding investment security gains, which decreased from $4.7 million in 1999
to $4.5 million in 2000, other income increased $3.5 million or 13.7%. The most
significant increase, $2.5 million, or 34.3%, was realized in investment
management and trust services income as a result of the formation of FFA and the
continued roll out of brokerage services to all of the Corporation's affiliate
banks.
Service charges on deposit accounts increased $1.5 million, or 15.4%, as a
result of cash management income ($682,000, or 41.2% increase) and overdraft
fees ($460,000, or 13.0% increase). Other service charges and fees increased
$571,000, or 9.9%, as a result of higher debit card revenue ($307,000, or 27.0%
increase) and merchant fees ($318,000, or 32.3% increase) and other special fee
revenue. Mortgage banking income decreased $1.1 million, or 45.2% as a result of
higher interest rates reducing refinance volume.
Other Expenses
--------------
Total other expenses for the first six months of 2000 of $79.7 million showed a
moderate increase of $1.2 million, or 1.5%, over 1999. The Corporation's
efficiency ratio continued to improve during the first six months of 2000,
declining to 51.2% as compared to 52.9% in 1999.
Salaries and employee benefits increased $1.9 million, or 4.3%, in comparison to
the first six months of 1999. This increase was the result of an increase in the
average number of full time equivalent employees to 2,361 in 2000 from 2,328 in
1999 as well as normal merit increases. Excluding salaries and benefits expense,
other expenses decrease $706,000, or 2.0%. This decrease resulted from the
Corporation's efforts to control expenses.
Income Taxes
------------
Income tax expense for the first six months of 2000 was $21.7 million as
compared to $19.8 million for the comparable period in 1999, a $1.8 million, or
9.3% increase. The effective tax rate was fairly consistent at 29.7% in 2000 and
29.4% in 1999.
FINANCIAL CONDITION
-------------------
At June 30, 2000, the Corporation had total assets of $6.2 billion, reflecting
an increase of $114.6 million, or 1.9%, from December 31, 1999.
The increase in assets was almost entirely due to loan growth, with loans (net
of unearned) increasing $149.4 million, or 3.4%, to $4.6 billion at June 30,
2000 as compared to $4.4 billion at December 31, 1999. As discussed in the "Net
Interest Income" section, most of the recent loan growth has been in commercial
loans and mortgages.
Premises and equipment increased $5.7 million, or 7.2%, as construction
continued on the new building at the Corporation's main headquarters. Offsetting
asset growth was a $66.9 million, or 5.5%, decrease in investment securities as
proceeds from maturities and payoffs were used to support the growth in the loan
portfolio.
Total deposits increased $123.1 million, or 2.7%, mainly in non-interest
bearing, which grew $84.8 million, or 11.7%. With respect to borrowings,
long-term debt decreased $21.6 million, or 6.6%, as a result of maturities of
long-term advances from the Federal Home Loan Bank. These borrowings were
replaced by short-term borrowings ($26.2 million, or 5.4% increase) as long-term
fixed rates were not as attractive.
17
<PAGE>
Capital Resources
-----------------
Shareholders' equity decreased $18.4 million, or 3.0%, during the first six
months of 2000. This decrease was due to: 1) the Corporation continuing to buy
back its stock pursuant to the repurchase plans discussed below, resulting in a
$38.1 million, or 225%, increase in treasury stock; and 2) the net unrealized
losses on available for sale investment securities, which resulted in a $10.0
million, or 84.7%, increase in the shareholders' equity portion of the loss.
Offsetting these decreases was the net increase in retained earnings as a result
of net income for the period, less dividends paid to shareholders. The 40.2%
dividend payout ratio on total net income of $51.2 million for the first six
months of 2000 resulted in a net increase in retained earnings of $30.6 million.
Common stock, capital surplus and retained earnings were also adjusted during
the first half of the year for the impact of the 5% stock dividend paid on May
31, 2000. See Note B to the financial statements.
The Corporation's Board of Directors has approved an open market repurchase
program for the Corporation's common stock for up to 1.05 million shares through
December 31, 2000. In January, 2000, the Board also approved a second open
market repurchase program of up to 2.1 million shares. The second plan was
adopted as a means to minimize any increase in the number of outstanding shares
of the Corporation as a result of its merger with SFC. To consummate the merger,
the Corporation issued 2.1 million treasury shares acquired under these
repurchase programs.
Through June 30, 2000, 376,000 shares had been repurchased under the 1.05
million share program (310,000 shares during the first half of 2000) and 1.8
million shares had been repurchased under the 2.1 million share program.
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 percentage 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 such as the Corporation which are highly-rated in terms of safety
and soundness. Other institutions are expected to maintain capital levels at
least one or two percent above the minimum.
As of June 30, 2000, 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 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.
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.
18
<PAGE>
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 $52.6 million) and U.S. Government agency stock (cost basis of
approximately $33.4 million). The Corporation's financial institutions stock
portfolio had net unrealized gains of approximately $2.3 million at June 30,
2000.
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 trading. Future cash flows from these investments are not provided
in the "Interest Rate Sensitivity" table on the following page since none 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.
19
<PAGE>
<TABLE>
<CAPTION>
FULTON FINANCIAL CORPORATION
INTEREST RATE SENSITIVITY
Expected Maturity Period
(dollars in thousands) -------------------------------------------------------------------------------------- Estimated
Less than Greater 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) $ 808,528 $ 574,042 $ 471,748 $ 359,926 $ 238,052 $ 779,376 $ 3,231,672 $ 3,174,381
Average rate (1) 7.96% 7.85% 7.82% 7.81% 7.87% 7.72% 7.84%
Floating rate loans (2) 418,215 140,616 130,295 102,372 82,300 466,361 1,340,159 1,333,334
Average rate 9.76% 9.53% 9.62% 9.68% 8.72% 9.46% 9.55%
Fixed rate investments (3) 166,361 151,130 251,395 140,861 139,837 238,994 1,088,577 1,052,066
Average rate 6.05% 6.17% 6.18% 6.25% 6.14% 6.38% 6.22%
Floating rate investments (3) 250 50 - 1,000 - 14,593 15,893 15,535
Average rate 8.00% 7.50% - 4.17% - 6.59% 6.46%
Other interest-earning assets 6,963 - - - - - 6,963 6,963
Average rate 5.43% - - - - - 5.43%
-----------------------------------------------------------------------------------------------------
Total $ 1,400,317 $ 865,838 $ 853,437 $ 604,158 $ 460,190 $1,499,325 $ 5,683,265 $ 5,582,278
Average rate 8.26% 7.83% 7.61% 7.76% 7.50% 8.04% 7.93%
-----------------------------------------------------------------------------------------------------
Fixed rate deposits (4) $ 1,293,506 $ 592,869 $ 193,809 $ 32,268 $ 46,874 $ 15,886 $ 2,175,213 $ 2,167,547
Average rate 5.33% 5.91% 6.01% 5.46% 6.18% 5.60% 5.57%
Floating rate deposits (5) 532,529 79,753 76,226 76,226 76,226 844,156 1,685,116 1,684,917
Average rate 3.92% 1.79% 1.72% 1.72% 1.72% 1.50% 2.31%
Fixed rate borrowings (6) 67,133 77,844 90,347 67,850 353 3,110 306,637 367,661
Average rate 6.30% 4.57% 5.43% 5.05% 5.46% 5.80% 5.34%
Floating rate borrowings (7) 513,743 513,743 513,743
Average rate 5.87% 5.87%
-----------------------------------------------------------------------------------------------------
Total $ 2,406,910 $ 750,467 $ 360,382 $ 176,344 $ 123,453 $ 863,152 $ 4,680,709 $ 4,733,868
Average rate 5.16% 5.33% 4.96% 3.69% 3.42% 1.59% 4.42%
-----------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
Assumptions:
1) Amounts are based on contractual payments and 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, and expected calls on other
securities.
4) Amounts are based on contractual maturities of time deposits.
5) Money market, Super NOW, NOW and savings accounts are placed 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 one year.
20
<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 for sale 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 six months of 2000. At June 30, 2000, the cumulative
6-month gap was 0.92.
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 June 30, 2000, the
Corporation had a larger exposure to upward rate shocks, with net interest
income at risk of loss over the next twelve months of 1.8%, 0.8% and 1.4% where
interest rates are shocked upward by 100, 200 and 300 basis points,
respectively.
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 in interest rates. As of June 30, 2000, upward shocks of
100, 200 and 300 basis points were estimated to have negative effects upon
economic value of 1.8%, 4.3% and 6.9%, respectively.
21
<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 - Incorporated by
reference from Exhibit 3 of the Fulton Financial Corporation
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.
(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
from 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; Richard J Ashby, Jr., as of
May 17, 1988; and Charles J. Nugent, as of November 19,
1992- Incorporated by reference from Exhibit 10(a) of the
Fulton Financial Corporation Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.
(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 - June 30, 2000
(b) Reports on Form 8-K - None
22
<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: August 10, 2000
--------------------------------
/s/ Rufus A. Fulton, Jr.
------------------------------------
Rufus A. Fulton, Jr.
Chairman, President and
Chief Executive Officer
Date: August 10, 2000
-------------------------------
/s/ Charles J. Nugent
------------------------------------
Charles J. Nugent
Executive Vice President and
Chief Financial Officer
23
<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 - June 30, 2000.
24
