FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number: 33-85626
FULTON BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Commonwealth of Pennsylvania 25-1598464
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Lincoln Way East
McConnellsburg, Pennsylvania 17233
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (717) 485-3144
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 shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Class Outstanding at March 9, 1998
(Common stock, .625 par value) 495,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year
ended December 31, 1997 are incorporated by reference into
Parts I and II. Portions of the Proxy Statement for 1998
Annual Meeting of Security Holders are incorporated by
reference in Part III of this Form 10-K.
- -1-
Item 1. Business.
Description of the Company
Fulton Bancshares Corporation (the "Company"), a
Pennsylvania business corporation, is a bank holding company
registered with and supervised by the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board").
The Company was incorporated on March 29, 1989 under the
business corporation law of the Commonwealth of Pennsylvania
for the purpose of becoming a bank holding company. Since
commencing operations, the Company's business has consisted
primarily of managing and supervising the Fulton County
National Bank and Trust Company (the "Bank"), and its
principal source of income has been dividends paid by the
Bank. The Company has two wholly-owned subsidiaries - the
Bank, and Fulton County Community Development Corporation
("FCCDC"), which was formed on June 7, 1996 to support
efforts of the local downtown business revitalization
project by making low interest loans to eligible small
businesses for the purpose of facade improvement. FCCDC had
minimal activity in 1997, and has no employees.
The principal executive office of the Company is
located at 100 Lincoln Way East, McConnellsburg, Fulton
County, Pennsylvania 17233. The telephone number of the
Company is (717) 485-3144.
The Company has no employees.
- -2-
Supervision and Regulation - The Company
The Company is subject to the provisions of the
Bank Holding Company Act of 1956, as amended (the "Bank
Holding Company Act"), and to supervision by the Federal
Reserve Board. The Bank Holding Company Act requires the
Company to secure the prior approval of the Federal Reserve
Board before it owns or controls, directly or indirectly,
more than five percent (5%) of the voting shares or
substantially all of the assets of any institution,
including another bank. The Bank Holding Company Act
prohibits acquisition by the Company of more than five
percent (5%) of the voting shares of, or interest in, all or
substantially all of the assets of any bank located outside
of Pennsylvania unless such acquisition is specifically
authorized by the laws of the state in which such bank is
located.
A bank holding company is prohibited from engaging
in or acquiring direct or indirect control of more than five
percent (5%) of the voting shares of any company engaged in
nonbanking activities unless the Federal Reserve Board, by
order or regulation, has found such activities to be so
closely related to banking or managing or controlling banks
as to be a proper incident thereto.
- -3-
The Company is required to file an annual report
with the Federal Reserve Board and any additional
information that the Federal Reserve Board may require
pursuant to the Bank Holding Company Act. The Federal
Reserve Board may also make examinations of the Company and
any or all of its subsidiaries.
Federal law prohibits acquisitions of control of a
bank holding company without prior notice to certain federal
bank regulators. Control is defined for this purpose as the
power, directly or indirectly, to direct the Management or
policies of the bank or bank holding company or to vote 25%
or more of any class of voting securities of the bank
holding company. A person or group holding revocable
proxies to vote 25% or more of the stock of a bank or its
holding company would presumably be deemed to control the
institution for purposes of this federal law.
Subsidiary banks of a bank holding company are
subject to certain restrictions imposed by the Federal
Reserve Act on any extensions of credit to the bank holding
company or any of its subsidiaries, on investments in the
stock or other securities of the bank holding company and on
taking of such stock or securities as collateral for loans
to any borrower.
- -4-
Permitted Activities
The Federal Reserve Board permits bank holding
companies to engage in activities so closely related to
banking or managing or controlling banks as to be a proper
incident thereto. The Company does not at this time engage
in any of the permissible activities described below, nor
does the Company have any current plans to engage in these
activities in the foreseeable future.
While the types of permissible activities are
subject to a variety of limitations and to change by the
Federal Reserve Board, the principal activities that
presently may be conducted by a bank holding company and may
in the future be engaged by the Company are: (1) making,
acquiring or servicing loans and other extensions of credit
for its own account or for the account of others, such as
would be made by consumer finance, credit card, mortgage,
commercial finance and factoring companies; (2) operating as
an industrial bank or similar entity in the manner
authorized by state law so long as the institution does not
both accept demand deposits and make commercial loans; (3)
operating as a trust company in the manner authorized by
federal or state law so long as the institution does not
make certain types of loans or investments or accept
deposits, except as may be permitted by the Federal Reserve
Board; (4) acting as an investment or financial advisor to
- -5-
investment companies and other persons; (5) leasing personal
and real property or acting as agent, broker or advisor in
leasing property; (6) making equity and debt investments in
corporations or projects designed primarily to promote
community welfare; (7) providing to others financially
oriented data processing or bookkeeping services; (8) acting
as an insurance agent or broker in relation to insurance for
itself and its subsidiaries or for insurance directly
related to extensions of credit; (9) acting as underwriter
for credit life insurance and credit accident and health
insurance: (10) providing courier services of a limited
character; (11) providing management consulting advice to
nonaffiliated banks and nonbank depository institutions;
(12) selling money orders, travelers' checks and United
States savings bonds; (13) performing appraisals of real
estate; (14) acting as intermediary for the financing of
commercial or industrial income-producing real estate by
arranging for the transfer of the title, control and risk of
such a real estate project to one or more investors; (15)
providing securities brokerage services, related securities
credit activities and incidental activities such as offering
custodial services, individual retirement accounts and cash
management services, if the securities brokerage services
are restricted to buying and selling securities solely as
- -6-
agent for the account of customers and do not include
securities underwriting or dealing or investment advice or
research services; (16) underwriting and dealing in
obligations of the United States, general obligations of
states and their political subdivisions such as bankers'
acceptances and certificates of deposit; (17) providing
general information, advisory services and statistical
forecasting with respect to foreign exchange markets; (18)
acting as a futures commission merchant in the execution and
clearance on major commodity exchanges of futures contracts
and options on futures contracts for bullion, foreign
exchange, government securities, certificates of deposit and
other money market instruments; (19) performing personal
property appraisals that require expertise regarding all
types of personal and business property, including
intangible property such as corporate securities; (20)
providing commodity trading and futures commission merchant
advice; (21) providing consumer financial counseling to
individuals on consumer-oriented financial management
matters, including debt consolidation, mortgage
applications, bankruptcy, budget management, real estate tax
shelters, tax planning, retirement and estate planning,
insurance and general investment management, so long as this
activity does not include the sale of specific products or
- -7-
investments; (22) providing tax planning and preparation
advice to corporations and individuals; (23) providing check
guaranty services to subscribing merchants; (24) operating a
collection agency and credit bureau; and (25) acquiring and
operating thrift institutions, including savings and loan
associations, building and loan associations and FDIC-
insured savings banks.
Certain Provisions of Pennsylvania Banking Law
Under the Pennsylvania Banking Code of 1965, as
amended, (the "Code"), the Company has been permitted since
March 4, 1990 to control an unlimited number of banks.
However, the Company would be subject to the requirements of
the Bank Holding Company Act as discussed in the
"Supervision and Regulation - The Company" section above.
Also since March 4, 1990, the Code authorizes
reciprocal interstate banking without any geographic
limitation. Reciprocity between states exists when a
foreign state's law authorizes Pennsylvania bank holding
companies to acquire banks or bank holding companies located
in that state on terms and conditions substantially no more
restrictive than those applicable to such an acquisition by
a bank holding company located in that state. For a further
discussion of interstate banking and branching, see the
section entitled "Legislation and Regulatory Changes" below.
- -8-
Legislation and Regulatory Changes
From time to time, legislation is enacted which
has the effect of increasing the cost of doing business,
limiting or expanding permissible activities or affecting
the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding
companies and other financial institutions are frequently
made in Congress, and before various bank regulatory
agencies. No prediction can be made as to the likelihood of
any major changes or the impact such changes might have on
the Company and its subsidiary, the Bank. Certain changes
of potential significance to the Company which have been
enacted recently are discussed below.
The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking and Branch
Act") permits interstate banking to occur. Bank holding
companies, pursuant to an amendment to the Bank Holding
Company Act, can acquire a bank located in any state, as
long as the acquisition does not result in the bank holding
company controlling more than 10% of the deposits in the
United States, or 30% of the deposits in the target bank's
state. The legislation permits states to waive the
concentration limits and require that the target institution
- -9-
be in existence for up to five years before it can be
acquired by an out-of-state bank or bank holding company.
Interstate branching and merging of existing banks is
permitted after September 29, 1997 if the bank is adequately
capitalized and demonstrates good management.
The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") was enacted in August of
1989. This law was enacted primarily to improve the
supervision of savings associations by strengthening
capital, accounting and other supervisory standards. In
addition, FIRREA reorganized the FDIC by creating two
deposit insurance funds to be administered by the FDIC: The
Savings Association Insurance Fund and the Bank Insurance
Fund. Customers' deposits held by the Bank are insured
under the Bank Insurance Fund. FIRREA also regulates real
estate appraisal standards and the supervisory/enforcement
powers and penalty provisions in connection with the
regulation of the Bank.
- -10-
Effects of Inflation
Inflation has some impact on the Company's, the
Bank's, and FCCDC's operating costs. Unlike many industrial
companies, however, substantially all of the Bank's and
FCCDC's assets and liabilities are monetary in nature. As a
result, interest rates have a more significant impact on the
Company's, the Bank's, and FCCDC's performance than the
general level of inflation. Over short periods of time,
interest rates may not necessarily move in the same
direction or in the same magnitude as prices of goods and
services.
Monetary Policy
The earnings of the Company, the Bank, and FCCDC
are affected by domestic economic conditions and the
monetary and fiscal policies of the United States Government
and its agencies. An important function of the Federal
Reserve System is to regulate the money supply and interest
rates. Among the instruments used to implement those
objectives are open market operations in United States
government securities and changes in reserve requirements
against member bank deposits. These instruments are used in
varying combinations to influence overall growth and
distribution of bank loans, investments and deposits, and
their use may also affect rates charged on loans or paid for
deposits.
- -11-
The Bank is a member of the Federal Reserve System
and, therefore, the policies and regulations of the Federal
Reserve Board have a significant effect on its deposits,
loans and investment growth, as well as the rate of interest
earned and paid, and are expected to affect the Bank's
operations in the future. The effect of such policies and
regulations upon the future business and earnings of the
Company, the Bank, and FCCDC cannot be predicted.
Environmental Regulation
There are several federal and state statutes which
regulate the obligations and liabilities of financial
institutions pertaining to environmental issues. In
addition to the potential for attachment of liability
resulting from its own actions, a bank may be held liable
under certain circumstances for the actions of its
borrowers, or third parties, when such actions result in
environmental problems on properties that collateralize
loans held by the Bank. Further, the liability has the
potential to far exceed the original amount of the loan
issued by the Bank. Currently, the Company, the Bank, and
FCCDC are not party to any pending legal proceeding pursuant
to any environmental statute, nor is the Company, the Bank,
or FCCDC aware of any circumstances which may give rise to
liability under any such statute.
- -12-
Description of the Bank
The Bank was organized on February 24, 1887 as a
Pennsylvania state-chartered banking institution. It
converted to a national banking association on September 5,
1933, and is presently under the supervision of the Office
of the Comptroller of the Currency (the "Comptroller"). The
Bank is a member of the Federal Reserve System. Customers'
deposits held by the Bank are insured by the FDIC to the
maximum extent permitted by law. The Bank's legal
headquarters are located at 100 Lincoln Way East,
McConnellsburg, Fulton County, Pennsylvania 17233.
The Bank engages in a full service commercial and
consumer banking business, including the acceptance of time
and demand deposits and the making of secured and unsecured
commercial and consumer loans, and offering trust services.
The Bank's primary service area is located in Fulton
County, Pennsylvania. Specifically, the main office of the
Bank is located in McConnellsburg, the county seat. Within
the defined service area of the Bank's main office, the
banking business is highly competitive. In addition to
local community banks, the Bank competes with regionally-
based commercial banks, all of which have greater assets,
capital and lending limits. The Bank also competes with
savings banks, savings and loan associations,
money market funds, insurance companies, stock brokerage
- -13-
firms, regulated small loan companies, credit unions and
with the issuers of commercial paper and other securities.
In order to compete effectively in this market and
to obtain business from individuals, small and medium-sized
businesses and professionals, the Bank offers specialized
services such as extended hours of operation and personal
and business checking accounts at competitive rates in
addition to traditional commercial and consumer banking and
trust services. The Bank accepts time, demand and savings
deposits, including passbook accounts, statement savings
accounts, NOW accounts, money market accounts, regular
savings accounts, certificates of deposit and club accounts.
The Bank makes secured and unsecured commercial, consumer,
mortgage and construction loans. Consumer loans include
revolving credit lines. The following support services are
offered by the Bank to make financial management more
efficient and convenient for its customers: bank by mail,
direct deposit, drive-in banking, Federal Tax Depository,
automatic teller machine, MasterCard/Visa applications and
cash advances, night deposit services, notary public
services, payroll deduction plan, personal collections, safe
deposit boxes, signature guarantees, travelers checks,
treasury securities, U.S. Savings Bonds, individual
retirement accounts, and utility and municipal payments.
The Bank also provides discount
- -14-
brokerage services, mutual funds, and other alternative
investment products to offer its customers a full range of
investment services. The Bank expects to experience a
modest increase in growth.
Lending Activities
It is the Bank's general policy to grant all of
its loans in its primary trade area. This trade area
includes all of Fulton County, Southern Huntington County
and the Hancock, Maryland area. The Bank's lending
objectives are as follows: (1) to establish a diversified
loan portfolio composed of a predetermined mix of mortgage
loans, commercial loans, consumer loans and all other loan
types; (2) to provide a satisfactory rate of return to its
shareholders by properly pricing loans to include the cost
of funds, administrative costs, bad debts, local economic
conditions, competition, customer relationships, the term of
the loan, credit risk, and collateral quality; and, (3) to
provide protection for its depositors by maintaining a
predetermined level of loans to deposits to ensure
liquidity. The Bank recognizes that the lending of money is
a community responsibility which involves a degree of credit
risk and is willing to undertake such risks by utilizing
standard banking procedures and making prudent judgments
when extending credit.
The Bank makes loans to both individual consumers
and commercial entities. The types of loans offered
include: (1) loans for businesses and individuals on a
- -15-
short term or seasonal basis; (2) mortgage and construction
loans, (3) loans to individuals for consumer purchases such
as appliances, furniture, vacations, etc.: (4) loans secured
by marketable stock and bonds providing adequate margins for
market fluctuations; (5) short term working capital loans
secured by the assignment of accounts receivable and
inventory; (6) automobile loans, and (7) second liens on
commercial and residential real estate. Loans of these
types will be considered desirable by the Bank provided such
loans meet the test of sound credit.
The Bank has adopted the following loan-to-value
ratios, in accordance with standards adopted by its bank
supervisory agencies:
<TABLE>
<S> <C> <C>
Loan Category
Loan-to-Value Limit
Raw land 65%
Land development 75%
Construction:
Commercial, multifamily, and other
nonresidential 80%
1 to 4-family residential 85%
Improved property 85%
Owner-occupied 1 to 4 family and
home equity 90%
</TABLE>
The Bank does not assume undue risk on any loan within the
loan portfolio, and takes appropriate steps to secure all
loans as necessary.
- -16-
Concentration
The Bank is neither dependent upon deposits nor
exposed to loan concentrations to a single customer or to a
single industry, the loss of any one or more of which would
have a material adverse effect on the financial condition of
the Bank.
Employees
As of December 31, 1997, the Bank has forty-four
(44) full-time equivalent employees.
Supervision and Regulation - The Bank
The operations of the Bank are subject to federal
and state statutes applicable to banks chartered under the
banking laws of the United States, to members of the Federal
Reserve System and to banks whose deposits are insured by
the FDIC. The operations of the Bank are also subject to
regulations of the Comptroller, the Federal Reserve Board
and the FDIC. The primary supervisory authority of the Bank
is the Comptroller, which regulates and examines the Bank.
The Comptroller has authority to prevent national banks from
engaging in unsafe or unsound practices in conducting their
businesses.
Federal and state banking laws and regulations
govern, among other things, the scope of a bank's business,
the investments a bank may make, the reserves against
deposits a bank must maintain, loans a bank makes and
- -17-
collateral it takes, the maximum interest rates a bank may
pay on deposits, the activities of a bank with respect to
mergers and consolidations and the establishment of
branches. Under Pennsylvania law, the Bank may establish or
acquire branch offices, subject to certain limitations, in
any county of the state. National bank branches, however
may be established within the permitted area only after
approval by the Comptroller.
As a subsidiary bank of a bank holding company,
the Bank is subject to certain restrictions imposed by the
Federal Reserve Act on any extensions of credit to the bank
holding company or its subsidiaries, or investments in the
stock or other securities as collateral for loans. The
Federal Reserve Act and Federal Reserve Board regulations
also place certain limitations and reporting requirements on
extensions of credit by the Bank to principal shareholders
of its parent holding company, among others, and to related
interests of such principal shareholders. In addition, such
legislation and regulations may affect the terms upon which
any person becoming a principal shareholder of a holding
company may obtain credit from banks with which the
subsidiary Bank maintains a correspondent relationship.
FDIC
Under the Federal Deposit Insurance Act, the
Comptroller possesses the power to prohibit institutions
- -18-
regulated by it (such as the Bank) from engaging in any
activity that would be an unsafe and unsound banking
practice or would otherwise be in violation of the law.
Moreover, the Financial Institutions Regulatory and Interest
Rate Control Act of 1978 ("FIRA") generally expanded the
circumstances under which officers or directors of a bank
may be removed by the institution's federal supervisory
agency, restricts lending by a bank to its executive
officers, directors, principal shareholders or related
interests thereof and restricts management personnel of a
bank from serving as directors or in other management
positions with certain depository institutions whose assets
exceed a specified amount or which have an office within a
specified geographic area, and restricts management
personnel from borrowing from another institution that has a
correspondent relationship with their bank. Additionally,
FIRA requires that no person may acquire control of a bank
unless the appropriate federal supervisory agency has been
given sixty (60) days prior written notice and within that
time has not disapproved the acquisition or otherwise
extended the period for disapproval. Control for purposes
of FIRA, means the power, directly or indirectly, to direct
the management or policies or to vote twenty-five percent
(25%) or more of any class of outstanding stock of a
financial institution or its respective holding company. A
- -19-
person or group holding revocable proxies to vote twenty-
five percent (25%) or more of the outstanding common stock
of a financial institution or holding company such as the
Company, would presumably be deemed to control the
institution for purposes of FIRA.
Garn-St Germain
The Garn-St Germain Depository Institutions Act of
1982 ("1982 Act") removed certain restrictions on a bank's
lending powers and liberalized its depository capabilities.
The 1982 Act also amended FIRA (see above) by eliminating
the statutory limits on lending by a bank to its executive
officers, directors, principal shareholders or related
interests thereof and by relaxing certain reporting
requirements. The 1982 Act, however, also tightened FIRA
provisions respecting management interlocks and
correspondent bank relationships involving a bank's
management personnel.
CRA
Under the Community Reinvestment Act of 1977, as
amended ("CRA"), the Comptroller is required to assess the
record of all financial institutions regulated by it to
determine if these institutions are meeting the credit needs
of the community (including low and moderate income
neighborhoods) which they serve and to take this record into
account in its evaluation of any application made by any of
such institutions for, among other things, approval of a
- -20-
branch or other deposit facility, office relocation, a
merger or an acquisition of bank shares. The Financial
Institutions Reform, Recovery and Enforcement Act of 1989
amended the CRA to require, among other things, that the
Comptroller make publicly available the evaluation of a
bank's record of meeting the credit needs of its entire
community, including low and moderate income neighborhoods.
This evaluation will include a descriptive rating and a
statement describing the basis for the rating, which is
publicly disclosed.
BSA
Under the Bank Secrecy Act ("BSA"), banks and
other financial institutions are required to report to the
Internal Revenue Service currency transactions of more than
$ 10,000 or multiple transactions of which the Bank is aware
in any one day that aggregate in excess of $ 10,000. Civil
and criminal penalties are provided under the BSA for
failure to file a required report, for failure to supply
information required by the BSA or for filing a false or
fraudulent report.
CEBA
An omnibus federal banking bill, known as the
Competitive Equality Banking Act ("CEBA"), was signed into
law in August of 1987. Included in the legislation were
measures: (1) imposing certain restrictions on transactions
- -21-
between banks and their affiliates; (2) expanding the powers
available to Federal bank regulators in assisting failed and
failing banks; (3) limiting the amount of time banks may
hold certain deposits prior to making such funds available
for withdrawal and any interest thereon; and (4) requiring
that any adjustable rate mortgage loan secured by a lien on
a one-to-four family dwelling include a limitation on the
maximum rate at which interest may accrue on the principal
balance during the term of such loan.
FDICIA
Capital Categories
In December of 1991 the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") became law.
Under FDICIA, institutions must be classified, based on
their risk-based capital ratios into one of five defined
categories, as illustrated below:
<TABLE>
<S> <C> <C> <C> <C>
Total Tier 1 Tier 1 Under a
Risk-Based Risk-Based Leverage Capital Order
Ratio Ratio Ratio or Directive
CAPITAL CATEGORY
Well capitalized > 10.0 > 6.0 > 5.0 No
Adequately
capitalized > 8.0 > 4.0 > 4.0*
Undercapitalized < 8.0 < 4.0 < 4.0*
Significantly
undercapitalized< 6.0 < 3.0 < 3.0
Critically
undercapitalized < 2.0
</TABLE>
* 3.0 for those banks having the highest available
regulatory rating.
Based on the above criteria, the Bank is classified
as "well capitalized".
- -22-
Prompt Corrective Action
In the event an institution's capital deteriorates
to the undercapitalized category or below, FDICIA prescribes
an increasing amount of regulatory intervention, including:
(1) the institution of a capital restoration plan and a
guarantee of the plan by a parent institution; and (2) the
placement of a hold on increases in assets, number of
branches or lines of business. If capital has reached the
significantly or critically undercapitalized levels, further
material restrictions can be imposed, including restrictions
on interest payable on accounts, dismissal of management and
(in critically undercapitalized situations) appointment of a
receiver. For well capitalized institutions, FDICIA
provides authority for regulatory intervention where the
institution is deemed to be engaging in unsafe or unsound
practices or receives a less than satisfactory examination
report rating for asset quality, management, earnings or
liquidity. All but well capitalized institutions are
prohibited from accepting brokered deposits without prior
regulatory approval.
Operational Controls
Under FDICIA, financial institutions are subject
to increased regulatory scrutiny and must comply with
certain operational, managerial and compensation standards
to be developed by Federal Reserve Board regulations.
- -23-
FDICIA also requires the regulators to issue new rules
establishing certain minimum standards to which an
institution must adhere including standards requiring a
minimum ratio of classified assets to capital, minimum
earnings necessary to absorb losses and minimum ratio of
market value to book value for publicly held institutions.
Additional regulations are required to be developed relating
to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth and
excessive compensation, fees and benefits.
Examinations and Audits
Annual full-scope, on site examinations are
required for all FDIC-insured institutions except
institutions with assets under $ 100 million which are well
capitalized, well managed and not subject to a recent change
in control, in which case, the examination period is every
eighteen (18) months. Banks with total assets of $ 150
million or more are required to submit to their supervising
federal and state banking agencies a publicly available
annual audit report and are subject to additional accounting
and reporting regulations.
Truth-In-Savings
A separate subtitle within FDICIA, called the
"Bank Enterprise Act of 1991", requires "truth-in-savings"
on consumer deposit accounts so that consumers can make
meaningful comparisons between the competing claims of banks
- -24-
with regard to deposit accounts and products. Under this
provision, the Bank is required to provide information to
depositors concerning the terms of their deposit accounts,
and in particular, to disclose the annual percentage yield.
There are some operational costs of complying with the
Truth-In-Savings law.
Management believes that full implementation of
the FDICIA has had no material impact on liquidity, capital
resources or reported results of operation.
Item 2. Properties
The main administrative office of the Bank which
also includes a branch, is located in McConnellsburg,
Pennsylvania. The Bank currently has four branch offices
one of which is located at Penn's Village on Route 16 at the
east end of McConnellsburg, Pennsylvania. This branch
office opened on May 11, 1981. In addition, the Bank
installed an ATM at the Penn's Village Shopping Center in
March, 1989. The Bank also serves the communities
surrounding the Pennsylvania/Maryland border through its
branch office located in Warfordsburg, Pennsylvania. This
branch opened for business on April 4, 1983. On the same
day, a third branch office was opened in Hustontown,
Pennsylvania, which services Northern Fulton County.
Finally, to service the Southern end of Huntington County,
the Bank acquired a branch in Shade Gap, Pennsylvania, on
- -25-
September 26, 1988. On January 7, 1997 ATM's were opened at
the Warfordsburg and Hustontown branches. The main office,
Warfordsburg, Hustontown and Shade Gap branches are owned by
the Bank. The Penn's Village branch is rented.
Item 3. Legal Proceedings.
Fulton Bancshares Corporation is an occasional
party to legal actions arising in the ordinary course of its
business. In the opinion of the Company's management,
Fulton Bancshares Corporation has adequate legal defenses
and/or insurance coverage respecting any and each of these
actions and does not believe that they will materially
affect the Company's operations or financial position.
Item 4. Submission of Matters to Vote of Security Holders.
None
Item 5. Market for Registrant's Common Stock and Related
Security Holder Matters.
The corporation's common stock is traded on a
limited basis in the local over-the-counter market. As of
December 31, 1997, the approximate number of shareholders of
record was 492.
<TABLE>
<S> <C> <C> <C> <C>
Market Cash Market Cash
Price Dividend Price Dividend
1997 1996
First Quarter $ 35.00 $ .16 $ 27.00 $ .15
Second Quarter 35.00 .16 32.00 .15
Third Quarter 40.00 .185 35.00 .179
Fourth Quarter 45.00 .195 35.00 .185
</TABLE>
- -26-
Item 6. Selected Financial Data.
<TABLE>
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
Income (000 omitted)
Interest income $ 7,898 $ 7,513 $ 7,298 $ 6,417 $ 6,349
Interest expense 4,036 3,725 3,732 3,269 3,575
Provision for
loan losses 20 65 62 48 70
Net interest
income after
provision for
loan losses 3,842 3,723 3,504 3,100 2,704
Securities gains
(losses) 3 ( 2) 5 2 89
Other operating
income 470 391 276 242 229
Other operating
expenses 2,626 2,425 2,304 2,236 2,097
Income before
income taxes 1,689 1,687 1,481 1,108 925
Applicable income
tax 384 455 422 319 225
Net income $ 1,305 $ 1,232 $ 1,059 $ 789 $ 700
</TABLE>
Per share amounts are based on following weighted averages:
1997 - 495,000 1995 - 480,476 1993 - 440,000
1996 - 495,000 1994 - 440,000
<TABLE>
<S> <C> <C> <C> <C> <C>
Income before
income taxes $ 3.41 $ 3.41 $ 3.08 $ 2.52 $ 2.10
Applicable income
taxes .77 .92 .88 .73 .51
Net income 2.64 2.49 2.20 1.79 1.59
Cash dividend paid .70 .66 .55 .48 .44
Book value 23.04 20.50 19.08 14.12 15.42
</TABLE>
- -27-
Item 6. Selected Financial Data (Continued).
<TABLE>
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
Income (000 omitted)
Year-End Balance Sheet Figures (000 omitted)
Total assets $ 105,770 $ 102,355 $ 96,449 $ 90,890 $ 88,349
Net loans 70,416 63,791 59,871 60,321 60,998
Total investment
securities 25,922 28,474 29,365 24,060 18,350
Deposits-non-
interest
bearing 8,159 10,000 7,959 7,266 6,930
Deposits-interest
bearing 82,062 81,632 78,399 76,728 74,220
Total deposits 90,221 91,632 86,358 83,994 81,150
Liabilities for
borrowed money 3,470 0 0 220 0
Total stock-
holders'
equity 11,407 10,149 9,445 6,214 6,785
Ratios
Average equity/
average assets 10.29 9.80 9.29 7.23 7.15
Return on
average equity 11.98 12.57 12.13 12.08 10.73
Return on
average assets 1.23 1.23 1.13 .87 .77
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Management's discussion and analysis of financial
condition and results of operations included on pages 26
through 32 of the annual report to security holders is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data,
some of which is required under Guide 3 (statistical
disclosures by bank holding companies) are shown on pages 2
through 25 of the annual shareholders report for the year
ended December 31, 1997 and are incorporated herein by
reference. Additional schedules required in addition to
those included in the annual shareholders report are
submitted herewith.
- -28-
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
For additional information concerning liquidity, refer to statistical
disclosures applicable to the investment and loan portfolio.
Closely related to the management of liquidity is the management of rate
sensitivity which focuses on maintaining stability in the net interest
margin. As
illustrated in the table below the tax equivalent net interest margin
ranged from 4.0% to
4.1% of average earning assets during the past 3 years. An asset/liability
committee
monitors and coordinates the overall asset/liability strategy.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Rates and Interest Differential Tax Equivalent Yields
Years Ended December 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
ASSETS 1997 1996
1995
Average Average Average
(000 omitted) Balance Interest Rate Balance Interest Rate Balance
Interest Rate
Investment securities:
Taxable interest
income $ 23,627 $ 1,532 6.5% $ 26,647 $ 1,651 6.2% $ 26,010 $
1,498 5.7%
Nontaxable interest
income 5,090 254 5.0 3,040 153 5.0 1,586
81 5.1
Total investment
securities 28,717 1,786 6.2 29,687 1,804 6.1 27,596
1,579 5.7
Loans (net of unearned
discounts) 68,171 6,098 8.9 62,530 5,686 9.1 61,011
5,64
9 9.3
Other short-term
investments 255 14 5.5 430 23 5.3 661
70 5.9
Total interest
earning assets 97,143 $ 7,898 8.1% 92,647 $ 7,513 8.1%
8
9,268 $ 7,298 8.2%
Allowance for loan
losses ( 475) ( 392) ( 364)
Cash and due from banks 2,847 2,638 2,399
Bank premises and
equipment 2,371 2,083 2,028
Other assets 3,978 3,211 1,440
Total assets $ 105,864 $ 100,187 $ 94,771
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand
deposits $ 15,528 $ 412 2.6% $ 15,758 $ 413 2.6% $ 14,871
$
398 2.7%
Savings deposits 13,816 368 2.7 14,578 400 2.7 14,663 417 2.8
Time deposits 53,738 3,136 5.8 49,582 2,847 5.7 47,502 2,872
6.0
Short-term borrowings 2,114 120 5.7 1,196 65 5.4
709 44 6.2
Total interest
bearing
liabilities 85,196 $ 4,036 4.7% 81,114 $ 3,725 4.6% 77,745
$
3,731 4.8%
Demand deposits 8,848 8,562 7,902
Other liabilities 927 645 394
Total liabilities 94,971 90,321 86,041
Stockholders'
equity 10,893 9,866 8,730
Total liabilities &
stockholders'
equity $ 105,864 $ 100,187 $ 94,771
Net interest income/net
yield on average
earning assets $ 3,862 4.0% $ 3,788 4.1% $ 3,567 4.0%
</TABLE>
For purposes of calculating loan yields, the average loan volume
includes
nonaccrual loans. For purposes of calculating yields on nontaxable interest
income, the
taxable equivalent adjustment is made to equate nontaxable interest on the
same basis as
taxable interest. The marginal tax rate was 34% for 1997, 1996 and 1995.
- -29-
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
CHANGES IN NET INTEREST INCOME TAX EQUIVALENT YIELDS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1997 Versus 1996 1996 Versus 1995
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
Total Total
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
(000 omitted)
Interest Income
Loans (net of
unearned
discounts) $ 502 ($ 80) $ 422 $ 138 ($ 111) $ 27
Taxable
investment
securities ( 196) 67 ( 129) 39 92 131
Nontaxable
investment
securities 103 ( 2) 101 73 ( 1) 72
Other short-term
investments ( 10) 1 ( 9) ( 12) ( 3) ( 15)
Total interest
income 399 ( 14) 385 238 ( 23) 215
Interest Expense
Interest bearing
demand ( 6) 6 0 23 ( 9) 14
Savings
deposits ( 20) ( 12) ( 32) ( 2) ( 15) ( 17)
Time deposits 241 48 289 119 ( 144) ( 25)
Short-term
borrowings 52 2 54 26 ( 4) 22
Total interest
expense 267 44 311 166 ( 172) ( 6)
Net interest
income $ 74 $ 221
</TABLE>
Changes which are attributed in part to volume and in part
to
rate are allocated in proportion to their relationships to the amounts of
changes.
- -30-
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
The following table shows the maturities of investment
securities at book value as of December 31, 1997, and weighted average
yields of such securities. Yields are shown on a tax equivalent basis,
assuming a 34% federal income tax rate.
<TABLE>
<S> <C> <C> <C> <C> <C>
After 1 year After 5 years
Within but within but within After
1 year 5 years 10 years 10 years Total
(000 omitted)
Bonds:
U. S. Treasury
Book value $ 0 $ 0 $ 0 $ 0 $ 0
Yield 0% 0% 0% 0% 0%
U. S. Government agencies
Book value 0 6,154 0 0 6,154
Yield 0% 4.02% 0% 0% 4.02%
State and municipal
Book value 100 1,171 3,879 0 5,150
Yield 6.06% 7.45% 7.63% 0% 7.56%
Mortgage-Backed
Book value 0 0 0 9,729 9,729
Yield 0% 0% 0% 4.36% 4.36%
Total book value $ 100 $ 7,325 $ 3,877 $ 9,729 $ 21,033
Yield 6.06% 4.57% 7.63% 4.36% 5.04%
Other Debt Securities:
FHLMC/FNMA non-
cumulative preferred
stock
Book value $ 4,188
Yield 8.54%
Equity Securities:
Total Equity Securities $ 577
Yield 6.59%
Total Investment Securities $ 25,798
Yield 5.64%
</TABLE>
- -31-
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
LOAN PORTFOLIO
The following table presents the loan portfolio at the end of
each of the last five years:
<TABLE>
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
(000 omitted)
Commercial, financial and
agricultural $ 7,180 $ 7,648 $ 11,135 $ 11,641 $ 10,337
Real estate - Construction 0 0 386 159 386
Real estate - Mortgage 53,624 47,519 37,822 37,196 38,221
Installment and other
personal loans (net of
unearned discount) 10,099 9,068 10,872 11,682 12,455
Total loans $ 70,903 $ 64,235 $ 60,215 $ 60,678 $ 61,399
</TABLE>
Presented below are the approximate maturities of the loan
portfolio (excluding real estate mortgages and installments) at
December 31, 1997:
<TABLE>
<S> <C> <C> <C> <C>
Under One One to Over Five
Year Five Years Years Total
(000 omitted)
Commercial, financial and
agricultural $ 4,667 $ 1,292 $ 1,221 $ 7,180
Real estate - Construction 0 0 0 0
Total $ 4,667 $ 1,292 $ 1,221 $ 7,180
</TABLE>
The following table presents the approximate amount of fixed
rate loans and variable rate loans due as of December 31, 1997:
<TABLE>
<S> <C> <C>
Fixed Rate Variable
Loans Rate Loans
(000 omitted)
Due within one year $ 5,204 $ 13,853
Due after one but within five years 11,771 5,686
Due after five years 15,885 18,504
Total $ 32,860 $ 38,043
</TABLE>
- -32-
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended December 31
1997 1996 1995 1994 1993
(000 omitted)
Average total loans
outstanding (net of
unearned income) $ 68,171 $ 62,530 $ 61,011 $ 61,062 $ 64,104
Allowance for loan losses,
beginning of period $ 444 $ 345 $ 358 $ 400 $ 376
Additions to provision
for loan losses charged
to operations 20 65 62 48 70
Loans charged off during
the year
Commercial 6 0 35 68 39
Installment 40 9 48 31 14
Total charge-off's 46 9 83 99 53
Recoveries of loans
previously charged off:
Commercial 49 33 1 6 2
Installment 20 10 7 3 5
Total recoveries 69 43 8 9 7
Net loans charged off ( 23) ( 34) 75 90 46
Allowance for loan losses, $ 487 $ 444 $ 345 $ 358 $ 400
Ratio of net loans
charged off to average
loans outstanding ( .03)% ( .05)% .12% .15% .07%
</TABLE>
The provision is based on an evaluation of the adequacy of
the allowance for possible loan losses. The evaluation includes, but is
not limited to, review of net loan losses for the year, the present and
prospective financial condition of the borrowers and evaluation of
current and projected economic conditions.
- -33-
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
LOANS
The following table sets forth the outstanding balances
of those loans on a nonaccrual status and those on accrual status
which are contractually past due as to principal or interest
payments for 30 days or more at December 31.
<TABLE>
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
(000 omitted)
Nonaccrual loans $ 413 $ 310 $ 310 $ 80 $ 249
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $ 0
30 through 89 days
past due 1,466 1,716 2,533 3,876 2,551
90 days or more
past due 431 1,041 253 85 147
Total accrual
loans $ 1,897 $ 2,757 $ 2,786 $ 3,961 $ 2,698
</TABLE>
See Note 5 of the notes to consolidated financial
statements for details of income recognized and foregone revenue on
nonaccrual loans for the past three years.
Management has not identified any significant problem
loans in the accrual loan categories shown above.
- -34-
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
The following is an allocation by loan categories of the
allowance for loan losses at December 31 for the last five years. In
retrospect the specific allocation in any particular category may prove
excessive or inadequate and consequently may be reallocated in the future
to reflect the then current conditions. Accordingly, the entire allowance
is available to absorb losses in any category:
Years Ended December 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995
Percentage Percentage Percentage
Allowance of Loans to Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
(000 omitted)
Commercial,
financial and
agri-
cultural $ 49 10.13% $ 53 11.91% $ 123 35.68%
Real estate -
Constr-
uction 0 0.00 0 0.00 2 0.64
Real estate -
Mortgage 368 75.63 328 73.98 157 45.62
Instal-
lment 70 14.24 63 14.11 63 18.06
Total $ 487 100.00% $ 444 100.00% $ 345 100.00%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Years Ended December 31
1994 1993
Percentage Percentage
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
(000 omitted)
Commercial,
financial and
agricultural $ 136 37.92% $ 144 36.05%
Real estate -
Construction 1 .27 3 .63
Real estate -
Mortgage 152 42.55 172 43.01
Installment 69 19.26 81 20.31
Total $ 358 100.00% $ 400 100.00%
</TABLE>
- -35-
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
DEPOSITS
The average amounts of deposits are summarized below:
<TABLE>
<S> <C> <C> <C>
Years Ended December 31
1997 1996 1995
(000 omitted)
Demand deposits $ 8,848 $ 8,562 $ 7,902
Interest bearing demand deposits 15,528 15,758 14,871
Savings deposits 13,816 14,578 14,663
Time deposits 53,738 49,582 47,502
Total deposits $ 91,930 $ 88,480 $ 84,938
</TABLE>
The following is a breakdown of maturities of time
deposits of $ 100,000 or more as of December 31, 1997:
Maturity (000 omitted)
Certificates of Deposit
Three months or less $ 1,982
Over three months through six months 1,692
Over six months through twelve months 1,744
Over twelve months 4,749
$ 10,167
RETURN ON EQUITY AND ASSETS (APPLYING DAILY AVERAGE BALANCES)
The following table presents a summary of significant
earnings and capital ratios:
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Assets $ 105,864 $ 100,187 $ 94,771
Net income $ 1,305 $ 1,232 $ 1,059
Equity $ 10,893 $ 9,866 $ 8,730
Cash dividends paid $ 347 $ 327 $ 272
Return on assets 1.23% 1.23% 1.13%
Return on equity 11.98% 12.49% 12.13%
Dividend payout ratio 26.6% 26.5% 25.7%
Equity to asset ratio 10.29% 9.85% 9.21%
</TABLE>
- -36-
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December 31
<TABLE>
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
(000 omitted)
Interest income $ 7,898 $ 7,513 $ 7,298 $ 6,417 $ 6,349
Interest expense 4,036 3,725 3,732 3,269 3,575
Net interest income 3,862 3,788 3,566 3,148 2,774
Provision for loan losses 20 65 62 48 70
Net interest income after
provision for loan
losses 3,842 3,723 3,504 3,100 2,704
Other income:
Trust 63 43 42 41 30
Service charges - Deposits 146 130 99 102 127
Other service charges,
collection and exchange,
charges, commission fees 93 102 69 80 67
Other operating income 171 114 71 21 94
Total other income 473 389 281 244 318
Income before operating
expense 4,315 4,112 3,785 3,344 3,022
Operating expenses:
Salaries and employees
benefits 1,178 1,129 1,072 957 934
Occupancy and equipment
expense 465 418 370 325 258
Other operating expenses 983 878 862 954 905
Total operating
expenses 2,626 2,425 2,304 2,236 2,097
Income before income taxes 1,689 1,687 1,481 1,108 925
Income tax 384 455 422 319 225
Net income applicable
to common stock $ 1,305 $ 1,232 $ 1,059 $ 789 $ 700
Per share data:
Earnings per common share $ 2.64 $ 2.49 $ 2.20
$
1.79 $ 1.59
Cash dividend - Common .70 .66 $ .55 * $ .48 $ .44
Weighted average number
of common shares 495,000 495,000 480,476 440,000 440,000
</TABLE>
* Based on 495,000 shares outstanding
- -37-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES
<TABLE>
<S> <C> <C> <C> <C> <C>
($ 000 omitted) 1997 1996 1995 1994 1993
LOANS
Lines of credit $ 3,290 $ 3,492 $ 3,556 $ 3,606 $ 3,611
Tax free 2,201 2,458 3,027 1,930 2,846
Commercial 13,966 12,702 10,356 10,533 11,873
Mortgage 35,415 32,833 33,430 34,458 34,793
Consumer 13,299 11,045 10,642 10,535 10,981
Total loans 68,171 62,530 61,011 61,062
64,104
INVESTMENT SECURITIES
U.S. Government 0 254 404 564 665
U.S. Government agencies 6,931 6,984 5,361 4,743 6,206
State & municipal 5,090 3,040 1,586 906 553
Mortgage-backed securities 13,861 18,730 19,777 17,744 13,741
FNMA & FHLMC preferred
stock 2,443 124 0 0 0
Other 392 679 468 407 468
Total investment
securities 28,717 29,687 27,596 24,364 21,633
OTHER SHORT-TERM INVESTMENTS
Federal funds sold 255 430 661 536 1,713
TOTAL EARNING ASSETS 97,143 92,647 89,268 85,962 87,450
TOTAL ASSETS $ 105,864 $ 99,844 $ 93,959 $ 90,315 $ 91,297
Percent increase 6.0% 6.3% 4.0% (1.1)% 5.0%
DEPOSITS
Interest-bearing demand $ 15,528 $ 15,758 $ 14,871 $ 14,876 $ 15,431
Savings 13,816 14,578 14,663 16,641 16,052
Time 53,738 49,582 47,502 43,919 44,283
Total interest-
bearing deposits 83,082 79,918 77,036 75,436 75,766
OTHER BORROWINGS
Federal funds purchased 276 908 524 408 0
Liabilities for borrowed
money 1,838 288 185 200 1,030
TOTAL INTEREST-BEARING
LIABILITIES 85,196 81,114 77,745 76,044 76,796
</TABLE>
- -38-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
AVERAGE RATES EARNED
% % % % %
Loans
Commercial 9.11 9.31 9.95 8.90 7.77
Mortgage 8.67 8.64 8.99 7.94 7.42
Consumer 8.89 9.58 10.09 10.14 10.42
Tax free 5.62 5.91 6.05 6.73 6.21
Lines of credit 9.19 9.13 9.84 8.63 7.31
Total 8.73 9.09 9.22 8.45 7.92
Investment Securities
U.S. Government 0.00 6.40 6.40 6.11 5.90
U.S. Government agencies 6.17 6.09 5.86 5.35 5.34
State & municipal 5.00 5.02 5.08 5.34 7.18
Mortgage-backed securities 6.46 6.50 5.94 4.87 5.59
Other 7.27 6.32 6.54 6.17 7.06
Total 6.22 6.08 5.89 5.03 5.60
Other Short-Term Investments
Federal funds sold 5.51 5.30 5.85 4.02 3.63
Total earning assets 8.13 8.11 8.15 7.44 7.24
AVERAGE RATES PAID
Time & savings deposits 4.71 4.59 4.77 4.29 4.69
Federal funds purchased 5.61 5.61 6.09 3.93 0.00
Liabilities for borrowed money 5.68 5.55 6.36 3.74 3.26
Total interest-bearing
liabilities 4.74 4.59 4.78 4.29 4.67
</TABLE>
- -39-
Item 9. Disagreements on Accounting and Financial Disclosures.
Not applicable.
- -40-
PART III
The information required by Items 10, 12 and 13 is
incorporated by reference from Fulton Bancshares
Corporation's definitive proxy statement for the 1998 Annual
Meeting of shareholders filed pursuant to Regulation 14A.
- -41-
Item 11. Executive Compensation
Shown below is information concerning the annual
compensation for services in all capacities to the Company,
the Bank, and FCCDC for the fiscal years ended December 31,
1997, 1996 and 1995 of the Chief Executive Officer. There
were no other officers of the Company, the Bank, or FCCDC
whose total annual salary and bonus during that time frame
exceeded $ 100,000.
Summary Compensation Table
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Annual Compensation Long-Term Compensation
Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted
Name and Annual Stock Options/ LTIP All Other
Principal Salary Bonus Compensation Award(s) SARs Payouts Compensation
Position Year ($) ($) ($) ($) (#) ($) ($)
Clyde H.
Bookheimer
President &
CEO 1997 $ 101,825 $ 0 $ 0 $ 0 $ 0 $ 0 $ 59,889
1996 83,200 0 0 0 0 0 60,987
1995 77,850 0 0 0 0 0 19,873
</TABLE>
Footnotes:
(1) All other compensation includes the following:
<TABLE>
<S> <C> <C> <C> <C> <C>
Fringe Benefits Deferred
(Personal Use of Bank Retirement Supplemental Executive Directors
Directors Owned Vehicle) Plan Retirement Plan Fees
1997 $ 0 $ 1,140 $ 6,081 $ 52,668 $ 0
1998 6,000 1,351 9,027 42,609 2,000
1999 2,000 875 6,939 10,059 0
</TABLE>
The supplemental executive retirement plan was funded by single premium
life insurance policies on the CEO, with the Bank named as beneficiary.
Actual payments to the CEO amounting to $ 73,000 annually will not begin
until 2005. At December 31, 1997, the cash surrender value of the policies
was $ 718,961.
- -42-
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.
(a) Certain documents filed as part of Form 10-K
Financial Statement Schedules and Exhibits
(1) Financial statements. See Item 8 of this
report for the index to financial
statements.
(2) Financial statement schedules. Not
applicable.
(3) Exhibits.
Exhibit Numbers
(2) Plan of acquisition, reorganization,
arrangement, liquidation or succession.
Not applicable.
(3) (a) Articles of incorporation. Incorporated
by reference to Exhibit 3A to the
Registrant's Registration Statement on
Form SB-2, Registration No. 33-85626.
(b) By-laws. Incorporated by reference to
Exhibit 3B to the Registrant's
Registration Statement on Form SB-2,
Registration No. 33-85626.
(4) Instruments defining the rights of
security holders including indentures.
The rights of the holders of Registrant's
common stock are contained in:
- -43-
(i) Articles of Incorporation of Fulton
Bancshares Corporation, filed as Exhibit
3A to Registrant's Registration
Statement on Form SB-2 (Registration No.
33-85626).
(ii)By-laws of Fulton Bancshares
Corporation, filed as Exhibit 3B to the
Registrant's Registration Statement on
Form SB-2 (Registration No. 33-85626).
(9) Voting trust agreement. Not applicable.
(10) Material contracts. None.
(11) Statement re: computation of per share
earnings. Not applicable.
(12) Statements re: computation of ratios. Not
applicable.
(13) Annual report to security holders, Form 10-Q
or quarterly report to security holders. Not
applicable.
(16) Letter re: change in certifying accountant.
not applicable.
(18) Letter re: change in accounting principles.
Not applicable.
(21) Subsidiaries of the registrant. Filed
herewith as Exhibit 21.
(22) Published report regarding matters submitted
to vote of security holders. Not
applicable.
- -44-
(23) Consents of experts and counsel. Not
applicable.
(24) Power of attorney. Not applicable.
(27) Financial data schedule. Filed herewith.
(28) Information from reports furnished to state
insurance regulatory authorities. Not
applicable.
(99) Additional exhibits. Not applicable.
(b) Reports on Form 8-K. None.
- -45-
SIGNATURES
In accordance with the requirements of Section 13 or
15(d) of the Securities Act of 1934, this report was signed by the
following persons on behalf of the Registrant in the capacities and
on the dates indicated.
Signature Title Date
/s/ Clyde H. Bookheimer Director, President & March , 1998
Clyde H. Bookheimer CEO (Principal Executive
Officer)
/s/ Raleigh V. Barnett Director March , 1998
Raleigh V. Barnett
/s/ David L. Seiders Director March , 1998
David L. Seiders
/s/ John J. Kelso Director & Chairman March , 1998
John J. Kelso of the Board
/s/ Cecil B. Mellott Director March , 1998
Cecil B. Mellott
/s/ Robert C. Snyder Director & Vice- March , 1998
Robert C. Snyder Chairman
/s/ Ellis L. Yingling Director March , 1998
Ellis L. Yingling
/s/ Clair R. Miller Director March ____, 1998
Clair R. Miller
- -46-
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
1. Fulton County National Bank and Trust, Pennsylvania; a
national bank organized February 24, 1887 under the
Pennsylvania Banking Code.
It converted to a national banking association on
September 5, 1933.
2. Fulton County Community Development Corporation, which
was formed on June 7, 1996 under the Pennsylvania
Business Corporation Law of 1988, as amended.
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets 2
Statements of income 3
Statements of changes in stockholders' equity 4
Statements of cash flows 5 and 6
Notes to consolidated financial statements 7 - 20
ACCOMPANYING FINANCIAL INFORMATION
Selected five year financial data 21
Changes in income and expense 22
Summary of quarterly financial data 23
Statements of average balances and average rates 24 and 25
Management's discussion and analysis of consolidated financial
condition
and results of operations 26 - 30
Stock market analysis and dividends 30
Market risk management 31
Year 2000 disclosure 32
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Fulton Bancshares Corporation
McConnellsburg, Pennsylvania
We have audited the accompanying consolidated
balance sheets of the Fulton Bancshares Corporation and its wholly-
owned subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the three years ended December 31, 1997.
These consolidated financial statements are the responsibility of the
corporation's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of the Fulton Bancshares Corporation and its wholly-owned
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years ended
December 31, 1997 in conformity with generally accepted accounting
principles.
Chambersburg, Pennsylvania
February 10, 1998
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS 1997 1996
Cash and due from banks $ 2,744,534 $ 3,731,071
Federal funds sold 0 495,000
Securities available for sale 25,344,944 27,901,699
Federal Reserve, Atlantic Central Bankers Bank and
Federal Home Loan Bank stocks 576,850 572,550
Loans, net of reserve for loan losses 1997 - $ 487,250; 1996 -
$ 443,659 70,415,725 63,791,136
Premises and equipment 2,406,729 2,148,583
Cash surrender value of life insurance 3,020,255 2,374,288
Accrued interest receivable 669,988 634,935
Real estate owned other than premises 269,451 337,117
Other assets 322,014 369,028
Total assets $ 105,770,490 $ 102,355,407
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing $ 8,158,764 $ 9,999,893
Interest bearing 82,062,522 81,632,387
90,221,286 91,632,280
Other borrowed funds 3,470,000 0
Accrued interest payable 379,773 372,949
Other liabilities 292,827 201,678
Total liabilities 94,363,886 92,206,907
Stockholders' Equity
Common stock: par value $ .625 per share, 4,000,000 shares
authorized and 495,000 shares issued at
December 31, 1997 and 1996 309,375 309,375
Additional paid-in capital 2,051,275 2,051,275
Retained earnings 8,964,410 8,006,318
Unrealized holding gains (losses), net of tax 1997 -
$ 42,008; 1996 - $ 112,544 81,544 ( 218,468)
Total stockholders' equity 11,406,604 10,148,500
Total liabilities and stockholders' equity $ 105,770,490 $
102,355,407
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -2-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
Interest Income
Interest and fees on loans $ 6,098,379 $ 5,676,179 $ 5,649,463
Interest and dividends on investment securities:
U.S. Government securities 0 15,971 25,874
Other U. S. Government agencies 427,721 415,389 313,159
Mortgage backed securities 896,014 1,185,034 1,158,881
Obligations of states and political subdivisions 254,330 152,730
80,
630
FNMA & FHLMC preferred stock 168,904 8,012 0
Interest on federal funds sold 14,059 23,106 38,599
Other interest and dividends 38,405 36,326 31,560
Total interest income 7,897,812 7,512,747
7,298,166
Interest Expense
Interest on deposits 3,915,899 3,659,385 3,687,892
Interest on federal funds purchased 15,506 49,609 31,956
Interest on other borrowed money 104,546 16,195
11,786
Total interest expense 4,035,951 3,725,189
3,731,634
Net interest income before provision
for loan losses 3,861,861 3,787,558 3,566,532
Provision for Loan Losses 20,000 65,000 62,500
Net interest income after provision
for loan losses 3,841,861 3,722,558 3,504,032
Other Income
Service charges on deposit accounts 145,539 129,633 98,609
Other service charges and fees 93,447 102,392 69,147
Earnings - Cash surrender value of life insurance 153,602 112,733 8,157
Trust department income 62,626 43,132 41,815
Gain (loss) on sale of investment securities 3,052 ( 2,044)
5,42
7
Gain (loss) on sale of other real estate 2,228 ( 1,772)
46,2
52
Other income 12,111 4,505 11,720
Total other income 472,605 388,579 281,127
Other Expenses
Salaries, fees and employee benefits 1,177,559 1,128,686 1,071,628
Net occupancy expense of bank premises and
furniture and equipment expense 464,990 417,777 370,424
FDIC insurance premiums 11,467 1,493 98,248
Other expenses 971,807 876,909 763,260
Total other expenses 2,625,823 2,424,865
2,303,560
Income before income taxes 1,688,643 1,686,272 1,481,599
Applicable income taxes 384,051 454,631 422,326
Net income $ 1,304,592 $ 1,231,641 $ 1,059,273
Earnings per common share $ 2.64 $ 2.49 $ 2.20
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -3-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
Additional Unrealized
Capital Paid-In
Retained Holding
Stock
Capital Earnings Losses
Balance - December 31, 1994 $ 275,000 $ 775,000 $ 6,314,354 ($
1,149,895)
Net income 0 0 1,059,273 0
Cash dividends ($ .55 per share) 0 0 ( 272,250) 0
Proceeds from issuance of stock 34,375 1,276,275 0 0
Unrealized gain on investment
securities available for sale,
net of tax 0 0 0
1,132,852
Balance - December 31, 1995 309,375 2,051,275 7,101,377 (
17,043)
Net income 0 0 1,231,641 0
Cash dividends ($ .66 per share) 0 0 ( 326,700) 0
Unrealized (loss) on investment
securities available for sale,
net of tax 0 0 0 (
201,425)
Balance - December 31, 1996 309,375 2,051,275 8,006,318 (
218,468)
Net income 0 0 1,304,592 0
Cash dividends ($ .70 per share) 0 0 ( 346,500) 0
Unrealized gain on investment
securities available for sale,
net of tax 0 0 0
300,012
Balance - December 31, 1997 $ 309,375 $ 2,051,275 $ 8,964,410 $
81,544
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -4-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
Cash flows from operating activities:
Net income $ 1,304,592 $ 1,231,641 $ 1,059,273
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 228,463 169,381 152,452
Provision for loan losses 20,000 65,000 62,500
Deferred income taxes ( 39,851) ( 32,037) (
2,951)
(Increase) in CSV - Officers' life insurance ( 129,967)
( 80,743) ( 7,545)
(Gain) loss on disposal of other real estate ( 2,228) 1,772
( 46,252)
(Gain) loss on sale of investment securities ( 3,052) 2,044
( 5,427)
(Increase) decrease in other assets ( 65,915) (
140,842) 30,675
(Increase) decrease in interest receivable ( 35,053) (
28,601)
( 31,705)
Increase (decrease) in interest payable 6,824 3,435 57,502
Increase (decrease) in other liabilities 89,376 (
48,502)
100,461
Net cash provided by operating activities 1,373,189 1,142,548
1,368,983
Cash flows from investing activities:
Purchases of investment securities to be held
to maturity 0 0 ( 1,365,219)
Sales of investment securities available for sale 7,954,592 5,909,298 8,204,
138
Maturities of investment securities available for sale 2,843,455 3,607,407
2,953,262
Purchases of investment securities available for sale ( 7,783,675)
( 8,713,580) ( 13,271,590)
Net decrease (increase) in loans ( 6,784,589) ( 3,985,389) 374,615
Purchases of property and equipment ( 486,609) ( 189,847)
( 149,491)
Purchases of FRB and FHLB stock ( 4,300) ( 221,900)
( 103,050)
Purchase of officers' life insurance ( 516,000) ( 1,741,000)
( 545,000)
Proceeds from sales of other real estate 218,874 16,728 243,502
Purchases of other real estate ( 8,980) ( 1,056)
( 69,684)
Net cash (used) by investing activities ( 4,567,232) ( 5,319,339)
( 3,728,517)
Cash flows from financing activities:
Proceeds from issuing common stock 0 0 1,310,650
Net increase (decrease) in deposits ( 1,410,994) 5,273,733 2,364,440
Dividends paid ( 346,500) ( 326,700) ( 272,250)
Net (decrease) increase in federal funds purchased 0 0
( 220,000)
Net increase in borrowed funds 3,470,000 0
0
Net cash provided by financing activities 1,712,506 4,947,033
3,182,840
Net increase (decrease) in cash and cash equivalents ( 1,481,537)
770,242 823,306
Cash and cash equivalents at beginning of year 4,226,071 3,455,829
2,632,523
Cash and cash equivalents at end of year $ 2,744,534 $ 4,226,071 $
3,455,829
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -5-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 4,029,127 $ 3,721,754 $ 3,674,132
Income taxes 449,509 609,193 375,406
Supplemental schedule of noncash investing and
financing activities:
Unrealized holding gain (loss), net of tax $ 300,012 ($ 201,425)
$ 1,132,852
Loans transferred to other real estate
owned $ 140,000 $ 0 $ 23,884
Other real estate owned transferred to
property and equipment $ 0 $ 69,684 $ 0
Transfer of investment securities from "held
to maturity" to "available for sale" $ 0 $ 0
$ 2,884,933
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of Operations
Fulton Bancshares Corporation's primary activity consists of
owning and supervising its subsidiaries:
O Fulton County National Bank and Trust Company, which is
engaged in providing banking and bank related services,
principally in Fulton and Huntingdon Counties. Its five branches are located
in McConnellsburg (2), Shade Gap, Warfordsburg and
Hustontown.
O Fulton County Community Development Corporation,
which was formed on June 7, 1996 to support efforts of the
local downtown business revitalization project by making low interest
loans to eligible small businesses for the purpose of facade
improvement. Future projects are expected to include
small business marketing, new business creation, small business
education, and housing for low-to-moderate income
individuals.
Principles of Consolidation
The consolidated financial statements include the accounts of the
corporation and its wholly-owned subsidiaries, the Fulton County
National Bank and Trust Company and the Fulton County
Community Development Corporation. All significant
intercompany transactions and accounts have been eliminated.
See Note 13 for parent company financial statements.
Basis of Accounting
The Bank uses the accrual basis of accounting.
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for
losses on loans and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In
connection with the determination of the allowances for losses on
loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
While management uses available information to recognize
losses on loans and foreclosed real estate, future additions to the
allowances may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral
part of their examination process, periodically review the
corporation's allowances for losses on loans and foreclosed real estate.
Such agencies may require the corporation to recognize
additions to the allowances based on their judgments about
information available to them at the time of their examination. Because
of these factors, management's estimate of credit losses inherent
in the loan portfolio and the related allowance may change in the
near term. However, the amount of the change that is reasonably
possible cannot be estimated.
- -7-
Note 1. Significant Accounting Policies (Continued)
Investment Securities
Under SFAS 115, the Bank's investments in securities are
classified in three categories and accounted for as follows.
O Trading Securities. Securities held principally for resale
in the near term are classified as
trading securities and recorded at their fair values.
Unrealized gains and losses on trading securities are included
in other income. The Bank had no trading securities in 1997
or 1996.
O Securities to be Held to Maturity. Bonds and notes for
which the Bank has the
positive intent and ability to hold to maturity are reported
at cost, adjusted for amortization of premiums and
accretion of discounts, which are recognized in interest
income using the interest method over the period to
maturity.
O Securities Available for Sale. Securities available for
sale consist of bonds and notes not
classified as trading securities nor as securities to be held
to maturity, and FNMA and FHLMC preferred stock.
These are securities that management intends to use as a
part of its asset and liability management strategy and
may be sold in response to changes in interest rates,
resultant prepayment risk and other related factors.
Unrealized holding gains and losses, net of tax, on securities
available for sale are reported as a net amount in a separate
component of stockholders' equity until realized. Gains and losses on
the sale of securities available for sale are determined using
the specific-identification method. Fair values for investment
securities are based on quoted market prices.
The Bank has classified all of its investment securities as
"available for sale" at
December 31, 1997 and 1996.
Loans and Reserve for Possible Loan Losses
The Bank grants agribusiness, commercial and residential
loans to customers primarily in Fulton County, Pennsylvania
and adjoining counties in Pennsylvania and Maryland.
Although the Bank has a diversified loan portfolio, a
significant portion of its customers' ability to honor their
contracts is dependent upon the agribusiness economic sector
(approximately 12.7% of loan portfolio).
The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if
deemed necessary upon the extension of credit, is based on
management's credit evaluation of the customer. Collateral
held varies but generally includes equipment and real estate.
Loans are stated at the amount of unpaid principal, reduced by a
reserve for loan losses and increased or decreased by net deferred
loan origination fees and costs. Interest on loans is calculated by
using the simple interest method on daily balances of the principal
amount outstanding. The reserve for loan losses is established
through a provision for loan losses charged to expense. Loans are
charged against the reserve for loan losses when management
believes that the collectibility of the principal is unlikely. The
reserve is an amount that management believes will be adequate to
absorb possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and
prior loan loss experience. The evaluations take into consideration
such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem
loans, and current economic conditions that may affect the
borrowers' ability to pay. Accrual of interest is discontinued on a
loan when management believes, after considering economic and
business conditions and collection efforts, that the borrowers'
financial condition is such that collection of interest is doubtful.
Interest accrued but not collected as of the date of placement on
nonaccrual status is reversed and charged against current income
unless fully collateralized.
- -8-
Note 1. Significant Accounting Policies (Continued)
Interest income generally is not recognized on specific
impaired loans unless the likelihood of further loss is remote.
Interest payments received on such loans are applied as a
reduction of loan principal balance. Interest income on other
impaired loans is recognized only to the extent of interest
payments received.
Loan origination fees and certain direct loan origination costs
are deferred and the net amount amortized as an adjustment
of the related loan's yield. These amounts are amortized
over the contractual life of the related loans.
Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation. Depreciation is calculated on both straight-line
and accelerated methods over the estimated useful lives of the
various assets as follows:
Years
software 3 - 5
Premises 5 - 50
Equipment and vehicles 3 - 25
Repairs and maintenance are charged to operations as
incurred.
Assets Received in Foreclosure
Assets received in foreclosure are recorded at the lower of
the outstanding principal balance of the related loans or the
estimated fair value of collateral held, less costs to sell. Any
adjustment required to write down the property to net
realizable value is charged to the allowance for loan losses.
Costs of holding and maintaining the property and
subsequent adjustments to the carrying amount of the
property are charged to expense when incurred.
Earnings per Share
Earnings per common share were computed based on:
495,000 shares of common stock outstanding in 1997 and
1996; and 480,476 shares of common stock outstanding in
1995.
Federal income taxes
As a result of certain timing differences between financial
statement and federal income tax
reporting, including depreciation, loan losses, and deferred
compensation, and loan costs, deferred income taxes are
provided in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized
or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the
provision for income taxes. See Note 9 for further details.
Statements of Cash Flows
For purposes of the Statements of Cash Flows, cash and cash
equivalents include those amounts in the balance sheet
captions "cash and due from banks" and "federal funds sold".
As permitted by Statement of Financial Accounting
Standards No. 104, the corporation has elected to present the
net change in interest bearing deposits with banks, deposits,
and loans in the Statements of Cash Flows.
- -9-
Note 1. Significant Accounting Policies (Continued)
Fair values of financial instruments
Statement of Financial Accounting Standards No. 107,
Disclosures About Fair Value of Financial Instruments, requires
disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet. In cases
where quoted market prices are not available, fair values are based
on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future
cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the
instruments. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the
corporation.
The following methods and assumptions were used by the
corporation in estimating fair values of financial instruments as
disclosed herein:
Cash and Cash Equivalents. The carrying amounts of
cash and short-term instruments approximate
their fair value.
Securities to be Held to Maturity and Securities
Available for Sale. Fair values for investment
securities are based on quoted market prices.
Loans Receivable. For variable-rate loans that reprice
frequently and have no significant change in credit risk,
fair values are based on carrying values. Fair values for fixed rate
loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values for
impaired loans are estimated using discounted cash flow
analyses or underlying collateral values, where
applicable.
Deposit Liabilities. The fair values disclosed for demand
deposits are, by definition, equal to the amount payable
on demand at the reporting date (that is, their carrying amounts). The
carrying amounts of variable-rate, fixed-term money market
accounts and certificates of deposit approximate
their fair values at the reporting date. Fair values for fixed-rate
certificates of deposits and IRA's are estimated using a
discounted cash flow calculation that applies interest rates
currently being offered to a schedule of aggregated expected monthly
maturities on time deposits.
Short-Term Borrowings. The carrying amounts of
federal funds purchased and other short- term
borrowings maturing within 90 days approximate their fair values.
Fair values of other short-term borrowings are estimated
using discounted cash flow analyses based on the Bank's
current incremental borrowing rates for similar types of
borrowing arrangements.
Accrued Interest. The carrying amounts of accrued
interest approximate their fair values.
Off-Balance-Sheet Instruments. The Bank generally
does not charge commitment fees. Fees for standby
letters of credit and their off-balance-sheet instruments are not
significant.
Advertising
The Bank expenses advertising costs as incurred.
Advertising expenses for the years ended December 31, 1997,
1996 and 1995 were $ 56,327, $ 55,332, and $ 60,361, respectively.
- -10-
Note 2. Investments
The amortized cost and fair value of investment securities available
for sale at December 31, 1997 were:
Gross
Gross
Amortized
Unrealized
Unrealized Fair
Cost Gains
Losses Value
Obligations of U. S.
Government corporations
and agencies $ 6,154,332 $ 4,820 $ 21,003 $ 6,138,149
Obligations of states and political
subdivisions 5,150,532 143,125 912 5,292,745
Mortgage-backed securities 9,728,684 23,658 26,136 9,726,206
FNMA and FHLMC preferred stock 4,187,844 0
0
4,187,844
Totals $ 25,221,392 $ 171,603 $ 48,051 $ 25,344,944
The amortized cost and fair value of investment securities available
for sale at December 31, 1996 were:
Gross
Gross
Amortized Unrealized
Unrealized Fair
Cost Gains
Losses Value
Obligations of U. S.
Government corporations
and agencies $ 7,004,547 $ 13,639 $ 63,181 $ 6,955,005
Obligations of states and
political subdivisions 4,280,094 74,717 6,432 4,348,379
Mortgage-backed securities 16,798,070 9,049 358,804
16,448,315
FNMA preferred stock 150,000 0 0
150,000
Totals $ 28,232,711 $ 97,405 $ 428,417 $ 27,901,699
The amortized cost and fair value of investment securities available
for sale at December 31, 1997, by expected maturity, are shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Amortized Fair
Cost
Value
Due in one year or less $ 100,000 $ 100,066
Due after one year through five years 7,325,159 7,341,128
Due after five years through ten years 3,879,705 3,989,700
Mortgage-backed securities 9,728,684 9,726,206
FNMA and FHLMC preferred stock 4,187,844 4,187,844
$ 25,221,392 $ 25,344,944
Proceeds from sales of securities available for sale during
1997 were $ 7,954,592. Gross gains and losses on those
sales were $ 16,412 and $ 13,360, respectively. Proceeds
from maturities of investment securities during 1997 were $
2,843,455, resulting in no gains or losses. Included in
shareholders' equity at December 31, 1997 is $ 81,544 of
unrealized holding gains on securities available for sale, net
of $ 42,008 in deferred taxes.
- -11-
Note 2. Investments (Continued)
Proceeds from sales of securities available for sale during
1996 were $ 5,909,298. Gross gains and losses on those
sales were $ 9,818 and $ 11,862, respectively. Proceeds
from maturities of investment securities during 1996 were $
3,607,407, resulting in no gains or losses. Included in
shareholders' equity at December 31, 1996 is $ 218,468 of
unrealized holding losses on securities available for sale, net
of $ 112,544 in deferred taxes.
The Bank is required to maintain minimum investments in
certain stocks, which are recorded at cost since they are not
actively traded and therefore, have no readily determinable
market value. Consequently, the Bank owns the following
equity securities at December 31:
1997 1996
Federal Home Loan Bank $ 496,000 $ 491,700
Atlantic Central Bankers Bank 10,000 10,000
Federal Reserve Bank 70,850 70,850
$ 576,850 $ 572,550
Securities with a cost basis of $ 5,500,000 (fair value of $
5,537,709) and $ 4,403,144 (fair value of $ 4,362,560) at
December 31, 1997 and 1996, respectively, were pledged to
secure public funds and for other purposes as required or
permitted by law.
Note 3. Reserve for Loan Losses
Activity in the reserve for loan losses is summarized as
follows:
1997
1996 1995
Balance at beginning of period $ 443,659 $ 344,801 $ 358,006
Recoveries 69,918 43,050 7,472
Current year provision charged to income 20,000 65,000
62,500
Total 533,577 452,851 427,978
Losses 46,327 9,192 83,177
Balance at end of period $ 487,250 $ 443,659 $ 344,801
Note 4. Premises and Equipment
A summary of bank premises and equipment is as follows:
Accumulated Depreciated
Description Cost
Depreciation Cost
1997
Premises and improvements
(including land $ 269,586) $ 2,140,074 $ 453,247 $ 1,686,827
Equipment, furniture and fixtures 1,556,497 873,505 682,992
Vehicles 52,848 15,938 36,910
$ 3,749,419 $ 1,342,690 $ 2,406,729
1996
Premises and improvements
(including land $ 269,586) $ 2,065,990 $ 399,769 $ 1,666,221
Equipment, furniture and fixtures 1,154,990 709,836 445,154
Vehicles 35,749 17,863 17,886
Construction in process 19,322 0 19,322
$ 3,276,051 $ 1,127,468 $ 2,148,583
Depreciation expense amounted to $ 228,463 in 1997, $
169,381 in 1996 and $ 152,452 in 1995.
- -12-
Note 5. Loans
Loans consist of the following at December 31 (in
thousands):
1997 1996
Real estate loans:
Secured by farmland $ 5,367 $ 6,038
Secured by 1-4 family residential 39,015 33,183
Secured by nonfarm nonresidential 7,934 8,318
Loans to finance agricultural production:
Loans to farmers 1,908 1,342
Commercial and industrial loans 5,059 4,254
Loans to individuals for household, family
and other personal expenditures 9,969 9,023
Obligations of states and political subdivisions in the U. S. 1,521
2,052
All other loans 130 25
70,903 64,235
Less: reserve for loan losses ( 487) ( 444)
$ 70,416 $ 63,791
Loans 90 days or more past due (still accruing interest) and
those on nonaccrual status were as follows at December 31 (in thousands):
90 Days or More
Nonaccrual
- - - - - - Past Due - - - - - -
- - - - - - - Status - - - - - - - -
1997 1996 1995
1997 1996 1995
Real estate mortgages $ 390 $ 1,038 $ 4 $ 361 $ 310
$ 310
Installment loans 21 3 20 0 0 0
Time and demand loans 20 0 229 52 0
0
Total $ 431 $ 1,041 $ 253 $ 413 $ 310 $ 310
The amounts of foregone interest and recognized interest
income on loans placed on nonaccrual status were:
Foregone Interest
Interest Income
at December 31
Recognized
1997 $ 43,582 $ 27,746
1996 37,278 21,030
1995 25,144 3,078
Loan balances are stated net of deferred loan origination
(fees) costs. These net (fees) costs amounted to the following
at December 31:
1997 1996
Installment $ 5,988 $ 9,625
Time and demand 1,503 534
Mortgage ( 106,566) ( 75,028)
($ 99,075) ($ 64,869)
At December 31, 1997 and 1996, the total recorded
investment in impaired loans, all of which
had allowances determined in accordance with SFAS No.
114 and No. 118, amounted to approximately $ 224,000 and
$ 172,000, respectively. The average recorded investment in
impaired loans amounted to approximately $ 198,000 and $
86,000 for 1997 and 1996, respectively. The allowance for
loan losses related to impaired loans amounted to
approximately $ 112,000 and $ 86,000 at December 31, 1997
and 1996, respectively. Interest income on impaired loans of
$ 16,233 and $ 7,956 was recognized for cash payments
received in 1997 and 1996, respectively.
- -13-
Note 6. Loans to Related Parties
The Bank has granted loans to the officers and directors of
the corporation and its subsidiary and to their associates.
Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at
the time for comparable transactions with unrelated persons
and do not involve more than normal risk of collectibility.
The aggregate dollar amount of these loans was $ 826,228
and $ 639,266 at December 31, 1997 and 1996, respectively.
During 1997, $ 728,798 of new loans were made and
repayments totaled
$ 541,836. During 1996, $ 1,524,274 of new loans were
made and repayments totaled
$ 1,720,888.
Outstanding loans to Bank employees totaled $ 915,738 and
$ 540,534 at December 31, 1997 and 1996, respectively.
Note 7. Financial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-
sheet risk in the normal course of business to meet the
financial needs of its customers and to reduce its own
exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and
standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the balance sheets. The
contract amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial
instruments.
The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument
for commitments to extend credit and standby letters of credit
and financial guarantees written is represented by the
contractual amounts of those instruments. The Bank uses the
same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
Contract or
Notional Amount
1997 1996
Financial instruments whose contract amounts
represent credit risk at December 31:
Commitments to extend credit $ 8,699,691 $ 4,800,512
Standby letters of credit and financial
guarantees written 517,461 491,045
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements.
Standby letters of credit and financial guarantees written are
conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. Those
guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing
letters of credit is essentially the same as that involved in
extending loans to customers. The Bank holds collateral
supporting those commitments when deemed necessary by
management.
- -14-
Note 8. Retirement Plan
The Bank maintains a 401-K profit-sharing plan covering
substantially all full-time employees. The plan allows
contributions of up to 15% by employees. Additional
contributions can be made at the discretion of the board of
directors. The Bank contributions made to the plan were
$ 53,291 for 1997, $ 60,000 for 1996, and $ 50,000 for
1995.
Note 9. Federal Income Taxes
The components of federal income tax expense are
summarized as follows:
1997
1996 1995
Current year provision $ 422,864 $ 487,363 $ 423,432
Deferred income taxes (benefits) ( 39,851) ( 32,037) (
2,951)
Income tax effect of securities transactions 1,038 (
695)
1,845
Applicable income taxes $ 384,051 $ 454,631 $ 422,326
Federal income taxes were computed after reducing pretax
accounting income for nontaxable interest and dividend
income in the amount of $ 494,737, $ 327,184, and $
261,107 for 1997, 1996, and 1995, respectively.
A reconciliation of the effective income tax rate to the federal
statutory rate is as follows:
1997 1996 1995
Applicable federal income tax rate 34.0% 34.0% 34.0%
Reductions resulting from:
Nontaxable investment income and other items,
net of nondeductible expenses (11.3) ( 7.0) ( 5.5)
Effective income tax rate 22.7% 27.0% 28.5%
Deferred tax liabilities have been provided for taxable
temporary differences related to accumulated depreciation
and deferred loan costs. Deferred tax assets have been
provided for deductible temporary differences related to the
allowance for loan losses and unrealized losses on available
for sale securities. The net deferred tax assets (liabilities)
included in other assets (other liabilities) in the
accompanying consolidated balance sheets include the
following components:
1997
1996 1995
Total deferred tax assets $ 159,363 $ 230,283 $ 74,239
Total deferred tax liabilities ( 164,502) ( 120,721) (
100,478)
Net deferred tax asset (liability) ($ 5,139) $ 109,562 ($
26,239)
The Bank has not recorded a valuation allowance for the
deferred tax assets as management believes that it is more
likely than not that they will be ultimately realized.
Note 10. Leases
The Bank is party to real estate leases with base monthly
rental charges of $ 2,450. These charges are to be adjusted
on specified dates and by agreed upon amounts or by the net
change in the consumer price index. The original leases
expire on January 7, 2001 and December 31, 1998,
respectively. Each lease contains a provision for renewal
under various terms at the Bank's option. In addition, the
Bank leases certain equipment on a 54 month lease which
expires in 2001. Total rental expense charged to operations
for the years ended December 31, 1997, 1996, and 1995 was
$ 60,635, $ 45,921, and $ 43,413, respectively.
- -15-
Note 10. Leases (Continued)
Based on the current monthly rent, future minimum rental
payments for the next five years are as follows:
1998 $ 58,257
1999 56,757
2000 56,757
2001 46,310
2002 35,863
Note 11. Other Assets
Other assets include the following at December 31:
1997 1996
Net deferred tax asset $ 0 $ 109,562
Prepaid expenses 190,042 98,188
Deposits on equipment 85,261 140,557
Others 46,711 20,721
$ 322,014 $ 369,028
Note 12. Deposits
Included in interest-bearing deposits at December 31 are
NOW and Money Market Account balances totaling $
14,349,172 and $ 15,555,335 for 1997 and 1996,
respectively.
Time deposits of $ 100,000 and over aggregated $
10,167,174 and $ 9,554,650 at December 31, 1997 and
1996, respectively. Interest expense on time deposits of $
100,000 and over was
$ 571,000, $ 521,000, and $ 524,000 for 1997, 1996, and
1995, respectively.
The amount of time deposits maturing over the next 5 years
is as follows:
1998 $ 31,670,275
1999 8,758,580
2000 5,176,537
2001 3,958,012
2002 4,730,860
$ 54,294,264
The Bank accepts deposits of the officers and directors of the
corporation and its subsidiaries on the same terms, including
interest rates, as those prevailing at the time for comparable
transactions with unrelated persons. The aggregate dollar
amount of deposits of officers and directors totaled $
4,154,702 and $ 3,845,539 at December 31, 1997 and 1996,
respectively.
Overdrafts of $ 130,171 and $ 24,676 at December 31, 1997
and 1996, respectively, were reclassified as loans for financial
reporting purposes.
- -16-
Note 13. Fulton Bancshares Corporation (Parent Company Only)
Financial Information
The following are the condensed balance sheets, income
statements and statements of cash flows for the parent
company as of and for the periods ended December 31:
Balance Sheets
Assets
1997 1996
Cash $ 4,674 $ 22,243
Investment in the Fulton County National Bank
& Trust Company 11,358,925 10,079,881
Investment in Fulton County Community
Development Corporation 43,005 46,376
Total assets $ 11,406,604 $ 10,148,500
Stockholders' Equity
Common stock, par value $ .625 per share, 4,000,000 shares
authorized and 495,000 shares issued at December 31, 1997
and 1996 $ 309,375 $ 309,375
Additional paid-in capital 2,051,275 2,051,275
Retained earnings 8,964,410 8,006,318
Unrealized holding gains (losses), net of tax $ 42,008 -
1997 and $ 112,544 - 1996 81,544 ( 218,468)
Total stockholders' equity 11,406,604 10,148,500
Total liabilities and stockholders' equity $ 11,406,604 $
10,148,500
1997
1996 1995
Statements of Income
Years Ended December 31
Cash dividends from wholly-owned subsidiary $ 361,000 $ 430,250
$ 283,500
Equity in undistributed income of subsidiaries 975,661 833,391 786,02
1
Printing, supplies, amortization and
other expenses ( 32,069) ( 32,000) ( 10,248)
Net income $ 1,304,592 $ 1,231,641 $ 1,059,273
- -17-
Note 13. Fulton Bancshares Corporation (Parent Company Only)
Financial Information
(Continued)
1997
1996 1995
Statements of Cash Flows
Years Ended December 31
Cash flows from operating activities:
Net income $ 1,304,592 $ 1,231,641 $ 1,059,273
Adjustments to reconcile net income
to cash provided by operating activities:
Equity in undistributed income of
subsidiary ( 975,661) ( 833,391) ( 786,021)
Net cash provided by operating activities 328,931 398,250
273,252
Cash flows from investing activities:
Investment in subsidiary 0 ( 50,000) (
1,310,650)
Cash flows from financing activities:
Dividends paid ( 346,500) ( 326,700) ( 272,250)
Net proceeds from issuing common stock 0 0 1,310,650
Net (repayments from) advances
to subsidiary 0 693 ( 1,002)
Net cash provided (used) by financing activities ( 346,500) (
326,007)
1,037,398
Net change in cash ( 17,569) 22,243 0
Beginning cash 22,243 0 0
Ending cash $ 4,674 $ 22,243 $ 0
Note 14. Compensating Balances
The corporation is required to maintain certain compensating
balances with its correspondent banks to cover processing
costs and service charges. Required compensating balances
were $ 125,000 at December 31, 1997 and 1996.
Note 15. Regulatory Matters
Dividends paid by Fulton Bancshares Corporation are
generally provided from the Fulton County National Bank
and Trust Company's dividends to it. The Federal Reserve
Board, which regulates bank holding companies, establishes
guidelines which indicate that cash dividends should be
covered by current year earnings and the debt to equity ratio
of the holding company must be below thirty percent.
Fulton County National Bank and Trust Company, as a
National Bank, is subject to the dividend restrictions set forth
by the Comptroller of the Currency. Retained earnings
available for the payment of dividends without approval of
the Comptroller amounted to $ 2,685,625,
$ 2,235,877, and $ 1,843,532 at December 31, 1997, 1996
and 1995, respectively.
The Bank is also required to maintain minimum amounts of
capital to total "risk weighted" assets, as defined by the banking
regulations. At December 31, 1997, the Bank's actual ratios and
required levels were as follows:
Required Actual
Leverage (total capital/total assets) 4.0 10.7
Tier 1 (Tier 1 core capital/risk weighted assets) 4.0 16.7
Total capital (total capital plus allowance for loan
losses/
risk weighted assets) 8.0 17.4
- -18-
Note 16. Liabilities for Borrowed Money
The Bank has established credit at Federal Home Loan Bank
(FHLB) of Pittsburgh to improve liquidity. The Bank may
borrow up to approximately $ 41 million from FHLB under
the terms of certain commitment agreements. The rates and
terms of the commitments are flexible and are not fixed until
the funds are withdrawn, but funds may not be borrowed for
more than one year. Borrowings were $ 3,470,000 and $ 0 at
December 31, 1997 and 1996, respectively. The variable
interest rate was 5.63% at December 31, 1997. Collateral
for the borrowings consists of certain investments and
mortgages approximating $ 41 million at December 31,
1998.
Note 17. Fair Value of Financial Instruments
The estimated fair values of the corporation's financial
instruments under Statement on Financial Accounting
Standards (SFAS) No. 107, Disclosure About Fair Value of
Financial Instruments were as follows at December 31, 1997
and 1996:
Carrying Amount
Fair Value
(000 Omitted)
1997 1996
1997 1996
FINANCIAL ASSETS
Cash and due from banks $ 2,745 $ 3,731 $ 2,745 $ 3,731
Federal funds sold 0 495 0 495
Securities available for sale 25,345 27,902 25,345 27,902
Other bank stock 577 573 577 573
Loans receivable (net) 70,416 63,791 71,121 63,401
Accrued interest receivable 670 635 670 635
FINANCIAL LIABILITIES
Time certificates 54,296 51,528 54,386 51,935
Other deposits 35,925 40,104 35,925 40,104
Accrued interest payable 380 373 380 373
Other borrowed funds 3,470 0 3,470 0
Note 18. Deferred Compensation and Other Benefit Programs
The Corporation has adopted several benefit programs, some
of which result in the deferral of payments for services rendered:
(1) The Supplemental Executive Retirement Plan - This Plan
is funded by single premium life insurance on the CEO
and certain other Bank executives, with the Bank as beneficiary.
Actual payments to the executives will not begin until
their retirement.
(2) The Director Emeritus Program - This plan, funded by
life insurance, will allow the Bank to reward its directors for
longevity of service to the Board. Directors who qualify would be
eligible at age 75 to receive $ 4,000 annually for up to 10
years under this program.
(3) The Director Deferred Compensation Plan - This plan,
also funded by life insurance, will allow directors to defer
up to 100% of directors fees annually. The amounts deferred will
be paid out over a period of up to 10 years beginning when
the director reaches the age of 75.
(4) The Officer Supplemental Life Insurance Plan provides
for officer life insurance coverage of generally double their
current salary level, and is also funded by single premium life
insurance.
- -19-
Note 18. Deferred Compensation and Other Benefit Programs
(Continued)
As a result of these plans, the following items are recognized
in the financial statements:
1997 1996
Cash surrender value of life insurance $ 3,020,255 $ 2,374,288
Supplemental executive retirement plan 111,366 52,668
Deferred directors fees liability 71,444 34,020
Income
Earnings on cash surrender value of life insurance 153,602 112,733
Expenses
Life insurance expense 23,635 31,990
Supplemental executive retirement expense 58,698 42,609
Deferred directors fees 37,424 34,020
Director emeritus fees 16,000 9,000
- -20-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
SELECTED FIVE-YEAR FINANCIAL DATA
1997 1996
1995 1994 1993
Income (000 omitted)
Interest income $ 7,898 $ 7,513 $ 7,298 $ 6,417 $
6,349
Interest expense 4,036 3,725 3,732 3,269
3,575
Provision for loan losses 20 65 62 48
70
Net interest income after
provision for loan losses 3,842 3,723 3,504 3,100
2,704
Securities gains (losses) 3 ( 2) 5 2
89
Other operating income 470 391 276 242 229
Other operating expenses 2,626 2,425 2,304 2,236
2,097
Income before income taxes 1,689 1,687 1,481 1,108
925
Applicable income tax 384 455 422 319
225
Net income $ 1,305 $ 1,232 $ 1,059 $ 789 $
700
Per share amounts are based on following weighted averages:
1997 - 495,000 1995 - 480,476 1993 -
440,000
1996 - 495,000 1994 - 440,000
Income before income taxes $ 3.41 $ 3.41 $ 3.08 $ 2.52
$
2.10
Applicable income taxes .77 .92 .88 .73 .51
Net income 2.64 2.49 2.20 1.79 1.59
Cash dividend paid .70 .66 * .55 .48 .44
Book value 23.04 20.50 * 19.08
14.12
15.42
* Based on 495,000 shares outstanding
Year-End Balance Sheet Figures (000 omitted)
Total assets $ 105,770 $ 102,355 $ 96,449 $ 90,890 $ 88,349
Net loans 70,416 63,791 59,871 60,321
60,9
98
Total investment securities 25,922 28,474 29,365 24,060
18,3
50
Deposits-noninterest bearing 8,159 10,000 7,959 7,266
6,930
Deposits-interest bearing 82,062 81,632 78,399 76,728
74,2
20
Total deposits 90,221 91,632 86,358 83,994
81,
150
Liabilities for borrowed money 3,470 0 0 220 0
Total stockholders' equity 11,407 10,149 9,445
6,214 6,785
Ratios
Average equity/average assets 10.29 9.80 9.29 7.23 7.15
Return on average equity 11.98 12.49 12.13 12.08
10.73
Return on average assets 1.23 1.23 1.13 .87 .77
- -21-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CHANGES IN INCOME AND EXPENSE - 1997 AND 1996
The schedule below reflects comparative changes in income and expense
included in the
Consolidated Statements of Income for 1997 and 1996 together with changes in
asset and liability volumes
associated with these income and expense items.
1997 Compared to 1996
1996 Compared to 1995
Average Volumes Income/Expense
Average Volumes Income/Expense
($ 000 omitted) $ % $ %
$ % $ %
Loans 5,641 9.0 422 7.4 1,519 2.5 27 .5
Investment securities ( 970) ( 3.3) ( 39) ( 2.2) 1,880
6.9 1
83 11.3
Other investments ( 175) (40.7) 2 5.6 211 45.1 5
15.6
Total 4,496 4.9 385 5.1 3,610 4.1 215 2.9
Interest/borrowed funds 918 76.8 54 82.4 487 68.7 22 50.4
Interest bearing demand
deposits ( 230) ( 1.5) 0 0.0 887 6.0 14 3.5
Savings deposits ( 762) ( 5.2) ( 32) ( 8.0) ( 85)
(
.1)
( 17) ( 4.3)
Time deposits 4,156 8.4 289 10.1 2,080 4.4 ( 25)
(
.9)
Total 4,082 5.0 311 8.4 3,369 4.3 ( 6)
(
.2)
Net interest income 74 2.0 221 6.2
Provision for loan losses ( 45) (69.2)
2
4.0
Net interest income after
provision for loan losses 119 3.2 219
6
.3
Security transactions 5 249.3
(
7) 137.7
Other operating income 79 20.2 115 41.7
Income before operating expense 203 4.9 327 8.6
Salaries & employee benefits 49 4.3
57 5.
3
Occupancy & equipment expense 47 11.2 48 13.0
FDIC insurance premiums 10 1,000.0
(
97) ( 98.5)
Other operating expenses 95 10.8
114
14.9
Total operating expenses 201 8.3 122 5.3
Income before income taxes 2 .1 205 13.8
Applicable income taxes ( 71) (15.6)
32 7.6
Net income 73 5.9 173 16.3
- -22-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the years
ended December 31, 1997 and 1996 are as follows:
1997
1996
($ 000 omitted Quarter Ended
Quarter Ended
except per share) Mar. 31 June 30 Sept. 30 Dec. 31
Mar. 31 June 30 Sept. 30 Dec. 31
Interest income $ 1,939 $ 1,980 $ 1,978 $ 2,001 $ 1,841
$
1,868
$ 1,922 $ 1,882
Interest expense 969 1,029 1,017 1,021 943
929
926 927
Net interest income 970 951 961 980 898 939 996 955
Provision for loan losses 15 5 0 0 0
0 50 15
Net interest income
after provision for
loan losses 955 946 961 980 898 939 946 940
Securities gains (losses) 0 0 1 2 2 ( 2) (
2) 0
Other income 106 125 116 123 77 88 91 135
Other expenses 613 670 625 718 563
615
580 667
Operating income
before income taxes 448 401 453 387 414 410 455 408
Applicable income taxes 116 85 96 87
114
103 104 134
Net income $ 332 $ 316 $ 357 $ 300 $ 300
$
307 $ 351
$ 274
Net income applicable
to common stock
Per share data:
Net income $ .67 $ .64 $ .72 $ .61 $ .61 $ .62
$
.71 $ .55
- -23-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
STATEMENTS OF AVERAGE BALANCES AND AVERAGE
RATES
($ 000 omitted) 1997 1996
1995 1994 1993
LOANS
Lines of credit $ 3,290 $ 3,492 $ 3,556 $ 3,606 $
3,611
Tax free 2,201 2,458 3,027 1,930 2,846
Commercial 13,966 12,702 10,356 10,533 11,873
Mortgage 35,415 32,833 33,430 34,458 34,793
Consumer 13,299 11,045 10,642 10,535
10,981
Total loans 68,171 62,530 61,011 61,062
64,104
INVESTMENT SECURITIES
U.S. Government 0 254 404 564 665
U.S. Government agencies 6,931 6,984 5,361 4,743
6,206
State & municipal 5,090 3,040 1,586 906 553
Mortgage-backed securities 13,861 18,730 19,777 17,744 13,741
FNMA & FHLMC preferred stock 2,443 124 0 0 0
Other 392 555 468 407
468
Total investment securities 28,717 29,687 27,596
24,364
21,633
OTHER SHORT-TERM INVESTMENTS
Federal funds sold 255 430 661
536
1,713
TOTAL EARNING ASSETS 97,143 92,647 89,268
85,962
87,450
TOTAL ASSETS $ 105,864 $ 99,844 $ 93,959 $ 90,315
$ 91,297
Percent increase 6.0% 6.3% 4.0% (1.1)% 5.0%
DEPOSITS
Interest-bearing demand $ 15,528 $ 15,758 $ 14,871 $ 14,876 $ 15,431
Savings 13,816 14,578 14,663 16,641 16,052
Time 53,738 49,582 47,502 43,919 44,283
Total interest-bearing deposits 83,082 79,918 77,036
75,436
75,766
OTHER BORROWINGS
Federal funds purchased 276 908 524 408 0
Liabilities for borrowed money 1,838 288 185
200
1,030
TOTAL INTEREST-BEARING
LIABILITIES 85,196 81,114 77,745 76,044 76,796
- -24-
FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
STATEMENTS OF AVERAGE BALANCES AND AVERAGE
RATES (CONTINUED)
1997 1996
1995 1994 1993
AVERAGE RATES EARNED
% %
% % %
Loans
Commercial 9.11 9.31 9.95 8.90 7.77
Mortgage 8.67 8.64 8.99 7.94 7.42
Consumer 8.89 9.58 10.09 10.14 10.42
Tax free 5.62 5.91 6.05 6.73 6.21
Lines of credit 9.19 9.13 9.84 8.63 7.31
Total 8.73 9.09 9.22 8.45 7.92
Investment Securities
U.S. Government 0.00 6.40 6.40 6.11 5.90
U.S. Government agencies 6.17 6.09 5.86 5.35 5.34
State & municipal 5.00 5.02 5.08 5.34 7.18
Mortgage-backed securities 6.46 6.50 5.94 4.87 5.59
Other 7.27 6.32 6.54 6.17 7.06
Total 6.22 6.08 5.89 5.03 5.60
Other Short-Term Investments
Federal funds sold 5.51 5.30 5.85 4.02 3.63
Total earning assets 8.13 8.11 8.15 7.44 7.24
AVERAGE RATES PAID
Time & savings deposits 4.71 4.59 4.77 4.29 4.69
Federal funds purchased 5.61 5.61 6.09 3.93 0.00
Liabilities for borrowed money 5.68 5.55 6.36 3.74 3.26
Total interest-bearing liabilities 4.74 4.59 4.78 4.29 4.67
- -25-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with the selected supplementary financial information
presented in this report.
OPERATING RESULTS
Net income was $ 1,305,000 for 1997, compared to
$ 1,232,000 for 1996, representing an increase of $ 73,000, or 5.9%.
Net income on an adjusted per share basis for 1997 was $ 2.64, up
$ .15 from the $ 2.49 per share realized during 1996.
Interest income for 1997 was $ 7,898,000, up $ 385,000, or
5.1% more than 1996. The increase was due primarily to higher
average balances of loans, which typically produce higher yields than
investments, compared to 1996.
Average earning assets increased 4.9% and 4.1% in 1997
and 1996, respectively. Average loan demand, which typically
produces higher yields than investments, increased 9.0% in 1997. Net
loans at December 31, 1997 stood at $ 70,416,000 compared with $
63,791,000 as of December 31, 1996, an increase of 10.4%. Average
investment securities decreased 3.3%, with most of the decrease
concentrated in mortgage-backed securities, while tax-exempt state and
political subdivisions investments increased.
Total interest expense was $ 4,036,000 for 1997, an increase
of $ 311,000, or 8.3% from the
$ 3,725,000 for 1996. Average time deposits, which pay higher
yields, increased 8.4% in 1997. Interest-bearing deposits stood at $
82,063,000 at December 31, 1997 compared with $ 81,632,000 as of
December 31, 1996, an increase of 0.5%. Average interest-bearing
demand deposits and other savings deposits decreased 1.5% and 5.2%,
respectively. Average borrowed funds increased 76.8%.
Management continues to competitively price its interest-
bearing deposits to maintain a favorable net interest margin.
Net interest income is the difference between total interest
income and total interest expense. Interest income is generated through
earning assets which include loans, deposits with other banks, and
investments. Interest income is dependent on many factors including
the volume of earning assets, the level of interest rates and the changes
in interest rates, and volumes of nonperforming loans. The cost of
funds varies with the volume of funds necessary to support earning
assets, the rates paid to maintain deposits, rates paid on borrowed
funds and the level of interest-free deposits.
Net interest income for 1997 totaled $ 3,862,000, up 2.0%
from 1996. Management continuously monitors liquidity and interest
rate risk through its Asset-Liability Committee reporting and reprices
products to maintain a desired net interest margin.
Other income represents service charges on deposit accounts,
commissions on loan insurance, fees for travelers' checks and other
services, safe deposit box rents, fees for trust services, securities gains
(losses), gains (losses) on sales of other real estate owned, and earnings
on cash surrender value of directors and officers life insurance.
Other income increased $ 84,000 from 1996 to 1997. The
increase in 1997 resulted primarily from a $ 41,000 increase in
earnings on cash surrender value of directors and officers life insurance
and a $ 20,000 increase in trust department income.
- -26-
The noninterest expenses are classified into four main
categories: salaries, fees and employee benefits; occupancy expenses
and furniture and equipment expenses that include depreciation,
maintenance, utilities, taxes, insurance and rents; FDIC insurance
premiums; and other operating expenses that include all other expenses
incurred in daily operations.
Employee related expenses increased 4.3% and 5.3% for
1997 and 1996, respectively, primarily due to salary and related benefit
increases. Occupancy and furniture and equipment expenses increased
11.2% and 13% in 1997 and 1996, respectively. These increases were
due primarily to the additional depreciation expense associated with the
purchase of a check imaging system in 1997 and local area network,
deposit and loan processing software and computer equipment in 1996.
Other operating expenses increased $ 105,000, or 12.0% over 1996.
The increase in 1997 resulted primarily from increases in data
processing costs, printing and supplies, FDIC insurance premiums and
shares taxes.
Applicable income taxes changed between 1995, 1996 and
1997 because of changes in pretax accounting income and taxable
income. The effective income tax rate for 1997 was 22.7% compared
with 27.0% and 28.5% for 1996 and 1995, respectively. The decrease
in the effective income tax rate for 1997 was due primarily to an
increase in tax-exempt interest on obligations of state and political
subdivisions, the dividends received deduction for FNMA and FHLMC
preferred stock, and the nontaxable income related to the increase in
the cash surrender value of directors and officers life insurance.
FINANCIAL CONDITION
Total assets at December 31, 1997 were $ 105,770,000, a
3.3% increase over December 31, 1996. Net loans at December 31,
1997 totaled $ 70,416,000, an increase of $ 6,624,000 over the
$ 63,791,000 at December 31, 1996.
The provision for loan losses was $ 20,000 in 1997
compared to $ 65,000 in 1996. The provisions were based on
management's evaluation of the adequacy of the reserve balance and
represent amounts considered necessary to maintain the reserve at the
appropriate level based on the quality of the loan portfolio and
economic conditions. The bank's history of net charge-offs has
traditionally been better than peer group performance with an average
rate of less than .10% of average loans outstanding over the past five
years. Though this trend is expected to continue, management intends
to maintain the reserve at appropriate levels based on an ongoing
evaluation of the loan portfolio.
Loans 90 days or more past due (still accruing interest) and
those on nonaccrual status were as follows at December 31 (in
thousands):
90 Days or More
Past Due
Nonaccrual Status
1997 1996
1997 1996
Real estate mortgages $ 390 $ 1,038 $ 361 $ 310
Installment loans 21 3 0 0
Demand and time loans 20 0 52 0
Total $ 431 $ 1,041 $ 413 $ 310
There were no restructured loans for any of the time periods
set forth above.
Total deposits decreased to $ 90,221,000 at December 31,
1997 compared to $ 91,632,000 at December 31, 1996, primarily in
noninterest-bearing demand deposits.
- -27-
Stockholders' equity reached $ 11,407,000 at December 31,
1997 for a 12.4% increase over the prior year. The increase in
stockholders' equity was due to retained earnings and a $ 300,000
increase in unrealized holding gains (losses), net of tax. Total
stockholders' equity represented 10.8% and 9.9% of total assets at the
end of 1997 and 1996, respectively. Cash dividends paid in 1997 were
$ 347,000, up
$ 20,000 over 1996. It is the intention of management and the Board
of Directors to continue to pay a fair return on the stockholders'
investment while retaining adequate earnings to allow for continued
growth.
As described in Note 1 of the Notes to Consolidated
Financial Statements, deferred income taxes have been provided for
timing differences in the recognition of certain expenses between
financial reporting and tax purposes. Deferred income taxes have been
provided at prevailing tax rates for such items as depreciation,
provision for loan losses, deferred compensation and unrealized
holding gains (losses) on available for sale securities. At
December 31, 1997, net deferred tax liabilities amounted to $ 5,000.
If all timing differences reversed in 1998, the actual income taxes
incurred by the recognition of these items would not be significantly
different from the deferred income taxes recognized for financial
reporting purposes.
FUTURE IMPACT OF RECENTLY ISSUED
ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards
Board (FASB) issued SFAS 30 "Reporting Comprehensive Income",
with the main objective of disclosing and reporting all changes in
equity that result from recognized transactions, and other economic
events of the period being reported. This statement is effective for
fiscal years beginning after December 15, 1997, with quarterly
reporting to begin March 31, 1998. The impact of this statement on
the Bank will be limited to reporting on market value adjustments
under SFAS 115 and disclosure of any activity of treasury stock.
LIQUIDITY
Liquidity and interest rate sensitivity are related but distinctly
different from one another.
Liquidity involves the bank's ability to meet cash withdrawal
needs of customers and their credit needs in the form of loans.
Liquidity is provided by cash on hand and transaction balances held at
correspondent banks. Liquidity available to meet credit demands
and/or adverse deposit flows is also made available from sales or
maturities of short-term assets. Additional sources of funds to meet
credit needs is provided by access to the marketplace to obtain interest-
bearing deposits and other borrowings, including special programs
available through Federal Home Loan Bank.
Interest rate sensitivity is the matching or mismatching of
the maturity and rate structure of the interest-bearing assets and
liabilities. It is the objective of management to control the difference
in the timing of the rate changes for these assets and liabilities to
preserve a satisfactory net interest margin. The following table
approximately reflects the matching of assets and liabilities maturing
within one year and thereafter, which management feels is adequate to
meet customer cash and credit needs while maintaining a desired
interest rate spread.
- -28-
LIQUIDITY (CONTINUED)
Due Due Due
Due Due
0-30 31-90
91-180
181-360 After
(000 omitted) Days Days Days
Days 1 Year Total
Rate Sensitive Assets
Other short-term
investments $ 0 $ 0 $ 0 $ 0
$
0
$ 0
Investment securities 3,084 2,008 3,123 4,114 12,892
25,2
21
Real estate, commercial
and consumer loans 3,523 9,982 13,544 14,456 29,398
70,903
$ 6,607 $ 11,990 $ 16,667 $ 18,570 $ 42,290 $ 96,124
Rate Sensitive Liabilities
Short-term borrowings $ 3,470 $ 0 $ 0 $ 0
$ 0
$ 3,470
Certificates of deposit
over $ 100,000 332 831 3,665 822 4,517
10,167
Other certificates
of deposit 2,569 4,190 15,479 3,134 18,755 44,127
Money market deposit
accounts 260 521 1,302 3,123 0 5,206
Other interest-bearing
deposits 564 1,128 1,692 19,179 0
22,563
$ 7,195 $ 6,670 $ 22,138 $ 26,258 $ 23,272 $ 85,533
Cumulative GAP ($ 588) $ 4,732 ($ 739) ($ 8,427) $ 10,591
Loan rates have remained relatively unchanged over the past
twelve months. Management anticipates that interest rates will
continue to remain relatively stable during 1998 since inflation appears
to be under control. As a result, management has assessed
probabilities to each time period and proportionately included variable
rate loans in rate sensitive assets of one year or less.
In monitoring and evaluating liquidity, management generally
does not consider regular savings or interest-bearing checking accounts
to be particularly rate sensitive since it is highly improbable that 100%
of these deposits will be withdrawn within the next 360 days.
Therefore, management has assessed probabilities to each time period
and proportionately included these funds in rate sensitive liabilities of
one year or less. Variable rate certificates of deposit totalling $
9,646,000, which can reprice June, 1998, have been reflected in the
91-180 days time period.
CAPITAL FUNDS
Internal capital generation has been the primary method
utilized by Fulton Bancshares Corporation to increase its capital stock.
Stockholders' equity exceeded $ 11 million at December 31, 1997.
Regulatory authorities have established capital guidelines in the form
of the "leverage" and "risk-based capital" ratios. The leverage ratio
compares capital to total balance sheet assets, while the risk-based
ratios compare capital to risk-weighted assets and off-balance-sheet
activity in order to make capital levels more sensitive to risk profiles
of individual banks. A comparison of Fulton Bancshares
Corporation's capital ratios to regulatory minimums at December 31 is
as follows:
- -29-
CAPITAL FUNDS (CONTINUED)
Fulton Bancshares
Corporation Regulatory Minimum
1997
1996 Requirements
Leverage ratio 10.7% 10.1% 4%
Risk-based capital ratio
Tier I (core capital) 16.7% 17.1% 4%
Combined Tier I and Tier II
(core capital plus allowance
for loan losses) 17.4% 17.8% 8%
Fulton Bancshares Corporation has traditionally been well
above required levels and expects equity capital to continue to exceed
regulatory guidelines and industry averages. Certain ratios are useful
in measuring the ability of a company to generate capital internally.
The following chart indicates the growth in equity capital for
the past three years.
1997
1996 1995
Equity capital at December 31
($ 000 omitted) $ 11,407 $ 10,148 $ 9,445
Equity capital as a percent of assets
at December 31 10.78% 9.91% 9.79%
Return on average assets 1.23% 1.23% 1.13%
Return on average equity 11.98% 12.49% 12.13%
Cash dividend payout ratio 26.56% 26.51% 25.70%
STOCK MARKET ANALYSIS AND DIVIDENDS
The corporation's common stock is traded inactively in the
over-the-counter market. As of December 31, 1997 the approximate
number of shareholders of record was 492.
Market Cash
Market Cash
Price
Dividend Price Dividend
1997
1996
First Quarter $ 35.00 $ .16 $ 27.00 $ .15
Second Quarter 35.00 .16 32.00 .15
Third Quarter 40.00 .185 35.00 .175
Fourth Quarter 45.00 .195 35.00 .185
- -30-
MARKET RISK MANAGEMENT
The Bank has risk management policies to monitor and limit
exposure to market risk, and works diligently to take advantage of
profit opportunities available in interest rate movements.
Management continuously monitors liquidity and interest rate
risk through its ALCO reporting, and reprices products in order to
maintain desired net interest margins. Management expects to continue
to direct its marketing efforts toward attracting more low cost retail
deposits while competitively pricing its time deposits in order to
maintain favorable interest spreads, while minimizing structural interest
rate risk.
The following table sets forth the projected maturities and
average rates for all rate sensitive assets and liabilities based on the
following assumptions. All fixed and variable rate loans were based on
original maturities since the bank has not experienced, and does not
expect, a significant rewriting of loans. Investments are based on
maturity date except certain long-term agencies, which are classified by
call date. The bank has historically experienced very little deposit
runoff and has generally had net gains in deposits over the years.
Based on this experience, it was estimated that maximum runoff of
noninterest-bearing checking would be 10%, maximum runoff of NOW
checking and other savings would be 25%, and maximum runoff of
money market deposits would be 33%. It was estimated that maximum
runoff of time deposits would be 25% and these deposits are classified
by original maturity date.
- - - - - - - Principal/Notional Amount
Maturing In - - - - - - -
(In millions)
Fair
Rate sensitive assets 1998 1999 2000 2001
2002 Thereafter Total Value
Fixed rate loans $ 5,204 $ 4,085 $ 3,348 $ 2,508 $ 1,830 $ 15,885
$
32,860
$ 33,565
Average interest rates 8.99% 9.01% 8.59% 8.71% 8.81% 8.94%
8.93%
Variable rate loans 13,853 1,408 1,425 1,438 1,415 18,504
38,043 38,043
Average interest rates 9.13% 8.44% 8.47% 8.35% 8.33% 8.27%
8.63%
Fixed rate securities 3,696 1,295 1,476 3,161 617 8,029
18,27
4 18,379
Average interest rates 6.29% 5.31% 5.74% 5.10% 5.84% 5.92%
5.80%
Variable rate securities 1,176 1,234 1,296 1,361 1,429
451 6
,947 6,966
Average interest rates 6.71% 6.71% 6.71% 6.71% 6.71% 6.71%
6.71%
Rate sensitive liabilities
Noninterest-bearing
checking 816 734 661 595 535 4,818 8,159 8,159
Average interest rates N/A N/A N/A N/A N/A N/A N/A
Savings and interest-
bearng checking 7,358 5,381 3,944 2,896 2,130 6,057
27,76
6 27,766
Average interest rates 2.62% 2.62% 2.62% 2.62% 2.62% 2.62%
2.62%
Time deposits 7,918 8,128 7,390 6,533 6,082 18,245 54,296
54,386
Average interest rates 5.70% 5.72% 5.85% 5.87% 5.91% 5.91%
5.83%
Variable rate borrowings 3,470 3,470 3,470
Average interest rates 5.63% 5.63%
- -31-
Year 2000 Disclosure
The Bank has begun to prepare for the Year 2000 changes to
its computer systems. A Year 2000 plan and budget have been
developed and approved by the Bank's board of directors.
Implementation of the plan began during the fourth quarter of 1997.
All vendors that supply Year 2000 sensitive products have been
contacted and testing of those products is expected to begin in the
spring of 1998. All personal computers that are not Year 2000
compliant will be updated or replaced during 1998. The Bank's data
processing outsourcer, FiServ, is scheduled to have all systems tested
by December 31, 1998. Currently, the Bank does not expect any
problems with any conversion.
- -32-
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
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