UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20459 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 , or -------------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- ------------ Commission File No. 0-10587 ------- FULTON FINANCIAL CORPORATION ---------------------------------------------------------------- (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2195389 ---------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Penn Square, P.O. Box 4887 Lancaster, Pennsylvania 17604 ------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (717) 291-2411 ------------------------------------------------------------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $2.50 Par Value - 82,532,052 shares outstanding as of April 30, - ----------------------------------------------------------------------------- 2002. - ---- 1
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2002 INDEX ----- <TABLE> <CAPTION> Description Page ----------- ---- <S> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): (a) Consolidated Balance Sheets - March 31, 2002 and December 31, 2001 ..........................................................3 (b) Consolidated Statements of Income - Three months ended March 31, 2002 and 2001 ....................................................4 (c) Consolidated Statements of Shareholders' Equity - Three months ended March 31, 2002 and 2001 ....................................................5 (d) Consolidated Statements of Cash Flows - Three months ended March 31, 2002 and 2001 ....................................................6 (e) Notes to Consolidated Financial Statements - March 31, 2002 ...................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................10 Item 3. Quantitative and Qualitative Disclosures about Market Risk ...............................18 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K .........................................................22 SIGNATURES ........................................................................................23 Exhibit Index .....................................................................................24 </TABLE> 2
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) - -------------------------------------------------------------------------------- (Dollars in thousands, except per-share data) <TABLE> <CAPTION> March 31 December 31 2002 2001 ----------------------------------- ASSETS - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash and due from banks .............................................................. $ 256,490 $ 356,539 Interest-bearing deposits with other banks ........................................... 4,456 6,968 Mortgage loans held for sale ......................................................... 31,980 18,374 Investment securities: Held to maturity (Fair value: $46,263 in 2002 and $50,492 in 2001) .............. 45,415 49,557 Available for sale .............................................................. 1,846,626 1,687,787 Loans, net of unearned income ........................................................ 5,365,864 5,373,020 Less: Allowance for loan losses ................................................ (72,083) (71,872) ------------ ------------ Net Loans ................................................... 5,293,781 5,301,148 ------------ ------------ Premises and equipment ............................................................... 124,650 125,617 Accrued interest receivable .......................................................... 41,155 43,388 Intangible assets .................................................................... 73,558 73,286 Other assets ......................................................................... 106,821 108,047 ------------ ------------ Total Assets ................................................ $ 7,824,932 $ 7,770,711 ============ ============ LIABILITIES - -------------------------------------------------------------------------------------------------------------------------------- Deposits: Noninterest-bearing ............................................................ $ 1,062,594 $ 1,094,158 Interest-bearing ............................................................... 4,881,181 4,892,646 ------------ ------------ Total Deposits .............................................. 5,943,775 5,986,804 ------------ ------------ Short-term borrowings: Securities sold under agreements to repurchase .................................. 298,834 289,659 Federal funds purchased ......................................................... 158,000 105,000 Demand notes of U.S. Treasury ................................................... 5,493 5,676 ------------ ------------ Total Short-Term Borrowings ................................. 462,327 400,335 ------------ ------------ Accrued interest payable ............................................................. 32,226 35,926 Other liabilities .................................................................... 102,164 71,890 Federal Home Loan Bank Advances and long-term debt ................................... 451,382 456,802 Corporation-obligated mandatorily redeemable Capital securities of subsidiary trust .......................................... 7,500 7,500 ------------ ------------ Total Liabilities ........................................... 6,999,374 6,959,257 ------------ ------------ SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------------------------------------------------------- Common stock, $2.50 par; Authorized - 400 million shares; Issued - 83.2 million; Outstanding - 82.5 million in 2002 and 82.6 million in 2001 ..................... 207,962 207,962 Capital surplus ...................................................................... 534,224 536,235 Retained earnings .................................................................... 83,693 65,649 Accumulated other comprehensive income ............................................... 13,618 12,970 Treasury stock, at cost (671,000 shares in 2002 and 572,000 shares in 2001) .......... (13,939) (11,362) ------------ ------------ Total Shareholders' Equity .................................. 825,558 811,454 ------------ ------------ Total Liabilities and Shareholders' Equity .................. $ 7,824,932 $ 7,770,711 ============ ============ </TABLE> - -------------------------------------------------------------------------------- See notes to consolidated financial statements 4
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Dollars in thousands, except per-share data) <TABLE> <CAPTION> Three Months Ended March 31 -------------------------------------- 2002 2001 ------------ ------------ <S> <C> <C> INTEREST INCOME - ----------------------------------------------------------------------------------------------------------------------------------- Loans, including fees .............................................................. $ 94,482 $ 111,730 Investment securities: Taxable ....................................................................... 19,629 17,264 Tax-exempt .................................................................... 2,381 2,395 Dividends ..................................................................... 1,054 1,495 Other interest income .............................................................. 76 369 ------------ ------------ Total Interest Income .................................... 117,622 133,253 INTEREST EXPENSE - ----------------------------------------------------------------------------------------------------------------------------------- Deposits ........................................................................... 33,574 50,423 Short-term borrowings .............................................................. 1,513 5,854 Long-term debt ..................................................................... 6,382 7,118 ------------ ------------ Total Interest Expense .................................... 41,469 63,395 ------------ ------------ Net Interest Income ....................................... 76,153 69,858 PROVISION FOR LOAN LOSSES .......................................................... 2,780 3,179 ------------ ------------ Net Interest Income After Provision for Loan Losses .............................. 73,373 66,679 ------------ ------------ OTHER INCOME - ----------------------------------------------------------------------------------------------------------------------------------- Investment management and trust services ........................................... 7,160 6,533 Service charges on deposit accounts ................................................ 8,784 6,977 Other service charges and fees ..................................................... 4,338 4,017 Mortgage banking income ............................................................ 3,282 1,927 Investment securities gains ........................................................ 1,398 2,909 ------------ ------------ Total Other Income ........................................ 24,962 22,363 OTHER EXPENSES - ----------------------------------------------------------------------------------------------------------------------------------- Salaries and employee benefits ..................................................... 31,047 28,195 Net occupancy expense .............................................................. 4,292 4,210 Equipment expense .................................................................. 2,799 2,951 Data processing .................................................................... 3,213 2,841 Intangible amortization ............................................................ 576 826 Other .............................................................................. 11,320 9,997 ------------ ------------ Total Other Expenses ...................................... 53,247 49,020 ------------ ------------ Income Before Income Taxes ................................ 45,088 40,022 INCOME TAXES ....................................................................... 12,999 11,771 ------------ ------------ Net Income ................................................ $ 32,089 $ 28,251 ============ ============ PER-SHARE DATA: - ----------------------------------------------------------------------------------------------------------------------------------- Net income (basic) ................................................................. $ 0.39 $ 0.34 Net income (diluted) ............................................................... 0.39 0.34 Cash dividends ..................................................................... 0.170 0.152 </TABLE> - -------------------------------------------------------------------------------- See notes to consolidated financial statements 4
FULTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2002 AND 2001 <TABLE> <CAPTION> Shares Common Capital Retained (Dollars in thousands, except per-share data) Outstanding Stock Surplus Earnings - ------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Balance at December 31, 2001 ...................... 82,612,000 $ 207,962 $ 536,235 $ 65,649 Comprehensive income: Net income ................................... 32,089 Other - net unrealized gain on securities (net of $349,000 tax expense) .............. Total comprehensive income .............. Treasury stock issued ............................. 168,000 (2,011) Acquisition of treasury stock ..................... (267,000) Cash dividends - $0.170 per share ................. (14,045) ------------------------------------------------------------------- Balance at March 31, 2002 ......................... 82,514,000 $ 207,962 $ 534,224 $ 83,693 =================================================================== Balance at December 31, 2000 ...................... 81,968,000 $ 198,612 $ 472,829 $ 76,615 Comprehensive income: Net income ................................... 28,251 Other - net unrealized gain on securities (net of $4.9 million tax expense) ..... Total comprehensive income .............. Stock dividends declared - 5% ..................... 3,607,000 9,018 61,410 (70,428) Stock issued ...................................... 60,000 149 345 Treasury stock issued ............................. 409,000 393 Cash dividends - $0.152 per share ................. (12,190) ------------------------------------------------------------------- Balance at March 31, 2001 ........................ 82,437,000 $ 207,779 $ 534,977 $ 22,248 =================================================================== <CAPTION> Accumulated Other Comprehen- Treasury sive Income Stock Total - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> (Dollars in thousands, except per-share data) - --------------------------------------------------- Balance at December 31, 2001 ...................... $ 12,970 $ (11,362) $ 811,454 Comprehensive income: Net income ................................... 32,089 Other - net unrealized gain on securities (net of $349,000 tax expense) .............. 648 648 -------------- Total comprehensive income .............. 32,737 -------------- Treasury stock issued ............................. 3,491 1,480 Acquisition of treasury stock ..................... (6,068) (6,068) Cash dividends - $0.170 per share ................. (14,045) -------------------------------------------------- Balance at March 31, 2002 ......................... $ 13,618 $ (13,939) $ 825,558 ================================================== Balance at December 31, 2000 ...................... $ 1,148 $ (18,033) $ 731,171 Comprehensive income: Net income ................................... 28,251 Other - net unrealized gain on securities (net of $4.9 million tax expense) ..... 9,109 9,109 -------------- Total comprehensive income .............. 37,360 -------------- Stock dividends declared - 5% ..................... -- Stock issued ...................................... 494 Treasury stock issued ............................. 5,370 5,763 Cash dividends - $0.152 per share ................. (12,190) -------------------------------------------------- Balance at March 31, 2001 ........................ $ 10,257 $ (12,663) $ 762,598 ================================================== </TABLE> - -------------------------------------------------------------------------------- See notes to consolidated financial statements 5
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - -------------------------------------------------------------------------------- (In thousands) <TABLE> <CAPTION> Three Months Ended March 31 -------------------------------- 2002 2001 -------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income ........................................................................... $ 32,089 $ 28,251 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ....................................................... 2,780 3,179 Depreciation and amortization of premises and equipment ......................... 3,148 3,243 Net amortization of investment security premiums ................................ 247 105 Investment security gains ....................................................... (1,398) (2,909) Net increase in mortgage loans held for sale .................................... (13,606) (8,992) Amortization of intangible assets ............................................... 576 826 Decrease in accrued interest receivable ......................................... 2,233 1,544 Decrease in other assets ........................................................ 26 11,469 (Decrease) increase in accrued interest payable ................................. (3,700) 114 Increase in other liabilities ................................................... 3,246 6,473 ------------- ------------- Total adjustments ......................................................... (6,448) 15,052 ------------- ------------- Net cash provided by operating activities .................................. 25,641 43,303 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale ................................. 10,555 37,452 Proceeds from maturities of securities held to maturity .............................. 5,442 17,556 Proceeds from maturities of securities available for sale ............................ 141,734 154,743 Purchase of securities held to maturity .............................................. (1,469) (926) Purchase of securities available for sale ............................................ (281,783) (167,936) Increase (decrease) in short-term investments ........................................ 2,512 (41,403) Net decrease in loans ................................................................ 4,587 14,862 Net cash paid for Dearden Maguire .................................................... -- (14,624) Purchase of premises and equipment ................................................... (2,181) (6,716) ------------- ------------- Net cash used in investing activities ...................................... (120,603) (6,992) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand and savings deposits .......................................... 40,109 8,634 Net (decrease) increase in time deposits ............................................. (83,138) 103,075 Decrease in long-term debt ........................................................... (5,420) (65,235) Increase (decrease) in short-term borrowings ......................................... 61,992 (97,777) Dividends paid ....................................................................... (14,042) (12,177) Net proceeds from issuance of common stock ........................................... 1,480 6,257 Acquisition of treasury stock ........................................................ (6,068) -- ------------- ------------- Net cash used in financing activities ...................................... (5,087) (57,223) ------------- ------------- Net Decrease in Cash and Due From Banks .............................................. (100,049) (20,912) Cash and Due From Banks at Beginning of Period ....................................... 356,539 282,586 ------------- ------------- Cash and Due From Banks at End of Period ............................................. $ 256,490 $ 261,674 ============= ============= Supplemental Disclosures of Cash Flow Information Cash paid during the period for: Interest ........................................................................ $ 45,169 $ 63,281 Income taxes .................................................................... 1,492 56 - -------------------------------------------------------------------------------------------------------------------------------- </TABLE> 8 - -------------------------------------------------------------------------------- See notes to consolidated financial statements 6
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE A - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. NOTE B - Net Income Per Share The Corporation's basic net income per share is calculated as net income divided by the weighted average number of shares outstanding. For diluted net income per share, net income is divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation's common stock equivalents consist solely of outstanding stock options. A reconciliation of the weighted average shares outstanding used to calculate basic net income per share and diluted net income per share follows (in thousands): <TABLE> <CAPTION> Three months ended March 31 ----------------------------- 2002 2001 ------------ ------------ <S> <C> <C> Weighted average shares outstanding (basic) ................. 82,544 82,302 Impact of common stock equivalents .......................... 564 592 ------------ ------------ Weighted average shares outstanding (diluted) ............... 83,108 82,894 ============ ============ </TABLE> NOTE C - 5-for-4 Stock Split The Corporation declared a 5-for-4 stock split on March 19, 2002. The stock split will be paid in the form of a 25% stock dividend on May 20, 2002 to shareholders of record on April 24, 2002. Share and per-share information presented in this report have not been restated to reflect the impact of this stock split as the market price of the Corporation's stock will not adjust until after the issuance of this report. The following table presents pro-forma per-share information, restated for the impact of the stock split. <TABLE> <CAPTION> Three months ended March 31 ----------------------------- 2002 2001 ------------ ------------ <S> <C> <C> Net income (basic) .......................................... $ 0.31 $ 0.27 Net income (diluted) ........................................ 0.31 0.27 Cash dividends .............................................. 0.136 0.122 </TABLE> 7
NOTE D - Comprehensive Income The following table summarizes the reclassification adjustment for realized security gains (net of taxes) for each of the indicated periods (in thousands): <TABLE> <CAPTION> Three Months Ended March 31 ----------------------------- 2002 2001 ------------ ------------ <S> <C> <C> Unrealized holding gains arising during period .............. $ 1,557 $ 11,000 Less: reclassification adjustment for gains included in net income ....................................... (909) (1,891) --------- --------- Net unrealized gains on securities .......................... $ 648 $ 9,109 ========= ========= </TABLE> NOTE E - New Accounting Standards Business Combinations and Intangible Assets - In June 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards Nos. 141, "Business Combinations" (Statement 141) and 142 "Goodwill and Other Intangible Assets" (Statement 142). Statement 141 requires that the purchase method of accounting be used for all business combinations and eliminated the use of pooling of interests for transactions initiated subsequent to June 30, 2001. Statement 142 eliminated the amortization to expense of goodwill recorded as a result of such combinations, but requires periodic evaluation of the goodwill for impairment. Write-downs of the balance, if necessary, are to be charged to results of operations. Goodwill existing prior to the issuance of the statement was required to be amortized through December 31, 2001. The Corporation evaluated its recorded goodwill under Statement 142 as of January 1, 2002 and concluded that there was no impairment at that date. As a result, no write-off during 2002 is expected. In addition, as a result of eliminating amortization of goodwill in 2002, the Corporation expects to realize a pre-tax benefit of $3.1 million for the entire year. For the first quarter of 2002, the benefit was approximately $781,000. The following table summarizes the Corporation's intangible assets and the amortization expense recognized during the first three months of 2002 and 2001. <TABLE> <CAPTION> Balance Amortization ------------------------ ------------------------- Type of 1/st/ Quarter 1/st/ Quarter Description Asset Acquisition Date 3/31/02 3/31/01 2002 2001 - --------------------- --------- ------------------ ----------- ----------- ----------- ----------- (in thousands) <S> <C> <C> <C> <C> <C> <C> Branch Acquisition (1) June, 2001 $ 29,698 $ - $ 453 $ - Dearden Maguire Goodwill January, 2001 15,108 14,084 - 178 Skylands Comm. Bank Goodwill August, 2000 15,832 16,706 - 324 Central PA Fin. Corp. Goodwill September, 1994 8,808 9,645 - 279 Other (2) Various 4,112 3,563 123 45 ----------- ----------- ----------- ----------- $ 73,558 $ 43,998 $ 576 $ 826 =========== =========== =========== =========== </TABLE> (1) Consists of $8.6 million of a core deposit intangible asset and $21.1 million of an unidentifiable intangible asset as defined by Statement of Financial Accounting Standards No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions" (Statement 72). (2) Consists of Statement 72 unidentifiable intangible assets as of March 31, 2002. 8
NOTE F - Acquisitions Drovers Bancshares Corporation - On July 1, 2001, the Corporation completed its acquisition of Drovers Bancshares Corporation (Drovers), an $820 million bank holding company located in York, Pennsylvania. Under the terms of the merger agreement, each of the 5.2 million shares of Drovers common stock was exchanged for 1.302 shares of the Corporation's common stock. In addition, each of the options to acquire Drovers stock was exchanged for options to purchase the Corporation's common stock. As a result of the acquisition, Drovers was merged with and into Fulton Financial Corporation and its wholly owned bank subsidiary, The Drovers & Mechanics Bank, was merged into Fulton Bank, the Corporation's largest subsidiary bank. The acquisition of Drovers was accounted for as a pooling of interests and, as such, all financial information presented for periods prior to the merger has been restated. Branch Acquisition - On June 8, 2001, the Corporation assumed $315 million of deposits and purchased $53 million in loans in an acquisition of 18 branches located in New Jersey, Delaware and Pennsylvania. This transaction was accounted for as a purchase and the Corporation recorded a core deposit intangible asset of $9.9 million and an unidentifiable intangible asset of $21.7 million. The core deposit intangible asset is being amortized on a straight-line basis over 10 years. Since this was a branch acquisition, the unidentifiable intangible asset does not qualify for the non-amortization provisions of Statement 142 and will continue to be amortized to expense over a straight-line basis over 25 years. Dearden, Maguire, Weaver and Barrett, LLC - On January 2, 2001, the Corporation completed its acquisition of investment management and advisory company Dearden, Maguire, Weaver and Barrett, LLC (Dearden Maguire). The acquisition was accounted for as a purchase, and goodwill of approximately $16.0 million was recorded as the initial purchase price paid in excess of the fair value of net assets acquired. Additional payments of up to $5.0 million may become payable upon Dearden Maguire achieving certain revenue goals through December 31, 2005. The goals and the dates of such payments are specified in the purchase agreement. Upon payment of any such amounts, goodwill will be increased. The goodwill was being amortized to expense on a straight-line basis over 20 years through December 31, 2001. Effective January 1, 2002, the goodwill is no longer being amortized to expense as required by Statement 142, but will be evaluated periodically for impairment. NOTE G - Reclassifications Certain amounts in the 2001 consolidated financial statements and notes have been reclassified to conform to the 2002 presentation. 9
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- This discussion concerns Fulton Financial Corporation (the Corporation), a financial holding company incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly-owned subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and other financial information presented in this report. The Corporation has made, and may continue to make, certain forward-looking statements with respect to its management of net interest income and margin, the ability to realize gains on equity investments, allowance and provision for loan losses, expected levels of certain non-interest expenses and the impact of acquisitions on future results. The Corporation cautions that these forward-looking statements are subject to various assumptions, risks and uncertainties. Because of the possibility of changes in these assumptions, risks and uncertainties, actual results could differ materially from forward-looking statements. In addition to the factors identified herein, the following could cause actual results to differ materially from such forward looking statements: pricing pressures on loan and deposit products, actions of bank and nonbank competitors, changes in local and national economic conditions, changes in regulatory requirements and regulatory oversight of the Corporation, actions of the Federal Reserve Board (FRB) and the Corporation's success in merger and acquisition integration. The Corporation's forward-looking statements are relevant only as of the date on which such statements are made. By making any forward-looking statements, the Corporation assumes no duty to update them to reflect new, changing or unanticipated events or circumstances. CRITICAL ACCOUNTING POLICIES - ---------------------------- The following is a summary of those accounting policies that the Corporation considers to be most important to the portrayal of its financial condition and results of operations as they require management's most difficult judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain. Provision and Allowance for Loan Losses - The allowance for loan losses is - --------------------------------------- increased by the provision for loan losses when, based on the results of the Corporation's quarterly allowance review procedures, the allowance is not sufficient to absorb losses existing in the loan portfolio at the balance sheet date. The Corporation's allowance review procedures consist of the following: - Identifying large balance loans for individual review under Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan". In general, these consist of large balance commercial loans and commercial mortgages (Statement 114 loans). - Calculating the fair value, using observable market prices, discounted cash flows or the value of the underlying collateral for Statement 114 loans which are determined to be impaired as defined by Statement 114. A range of possible losses is determined for each loan. - Classifying all non-impaired large balance loans based on credit risk ratings and allocating an allowance for loan losses based on appropriate factors, including recent loss history for similar loans. - Identifying all smaller balance homogeneous loans for evaluation collectively under the provisions of Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies". In general, these loans include residential mortgages, consumer loans, installment loans, smaller balance commercial loans and mortgages and lease receivables (Statement 5 Loans). 10
- Statement 5 loans are segmented into groups with similar characteristics and an allowance for loss is allocated to each segment using a factor based on recent loss history. - Reviewing the results to determine the appropriate balance of the allowance for loan losses. This review gives additional consideration to factors such as the mix of loans in the portfolio, the balance of the allowance relative to total loans and non-performing assets, trends in the overall risk profile of the portfolio, trends in delinquencies and non-accrual loans and local and national economic conditions. The Corporation has also incorporated the guidance contained in the Securities and Exchange Commission's Staff Accounting Bulletin No. 102 in assessing the adequacy of the allowance for loan losses. The allowance review procedures are performed on a quarterly basis by the Corporation's Loan Review staff and are applied individually to each of the Corporation's subsidiary banks. The results are aggregated and reviewed by Corporation management to conclude as to the adequacy and appropriateness of the allowance as of the end of each quarterly period. Goodwill - With the adoption of Statement 142 on January 1, 2002, the - -------- Corporation discontinued the amortization of goodwill associated with qualifying acquisitions accounted for as purchases. As of January 1, 2002, and at least annually thereafter, recorded goodwill is subject to impairment testing to determine whether write-downs of the recorded balances are necessary. The Corporation tests for impairment by first allocating its goodwill to defined reporting units. A fair value is then determined for each reporting unit under three methodologies: a primary market valuation based on observable sales transactions of comparable businesses; a secondary market valuation based on values of comparably sized, publicly traded entities; and discounted cash flows. The results under each method are reviewed to determine an appropriate range of valuations. Assuming that the fair values of the reporting units exceed their book values, no write-down of the recorded goodwill is necessary. If the fair value is less than the book value, an additional test is necessary to assess the proper carrying value of the goodwill. As of January 1, 2002, the Corporation determined that no impairment write-offs were necessary. Business unit valuation is inherently subjective, with a number of factors based on assumptions and management judgments. Among these are future growth rates for the reporting units, discount rates and earnings capitalization rates. The Corporation computes a range of fair values based on worst through best case assumptions and reviews the results to determine the most reasonable value. RESULTS OF OPERATIONS - --------------------- Quarter ended March 31, 2002 versus Quarter ended March 31, 2001 - ------------------------------------------------------------------ Fulton Financial Corporation's net income for the first quarter of 2002 increased $3.8 million, or 13.6%, in comparison to net income for the first quarter of 2001. Diluted net income per share increased $0.05, or 14.7%, compared to 2001. The increase from 2001 resulted from an increase in net interest income, higher other income and fees and a lower provision for loan losses, offset by increases in expenses and lower investment securities gains. Net Interest Income - ------------------- During the past twelve months, two events occurred which impacted the Corporation's net interest income. First, beginning in January, 2001, the FRB enacted its first of 11 reductions to short term interest rates. The total reduction to the Federal funds rate and, therefore, the Corporation's prime lending rate was 475 basis points during 2001. The second event was the Corporation's June, 2001 acquisition of 18 branches (Acquired Branches), which included approximately $300 million in deposits and $50 million in loans. 11
The rate reduction initially had a negative impact on the Corporation's net interest income and net interest margin as its assets - particularly floating rate loans - repriced to lower rates more quickly than its time deposits. In addition, the deposits assumed from the Acquired Branches replaced some of the Corporation's short-term borrowings which were becoming less expensive as rates declined. While this resulted in further compression of the net interest margin in the short term, this acquisition is expected to be beneficial from a long-term asset/liability management perspective. The Corporation's net interest margin reached a low of 4.22% in the third quarter of 2001 and has since rebounded to reach 4.43% for the first quarter of 2002, reflecting the eventual repricing of time deposits as maturing accounts were reinvested at lower rates or were held in lower cost demand and savings deposits. For the first quarter of 2002, net interest income increased $6.3 million, or 9.0%, as compared to the same period in 2001, and the net interest margin improved to 4.43% from 4.27% a year ago. The following table provides a comparative average balance sheet and net interest income analysis for the first quarter of 2002 as compared to the same period in 2001. All dollar amounts are in thousands. <TABLE> <CAPTION> Quarter Ended March 31, 2002 Quarter Ended March 31, 2001 --------------------------------------- ------------------------------------ Average Yield/ Average Yield/ ASSETS Balance Interest Rate (1) Balance Interest Rate (1) - -------------------------------------------- --------- ---------- ---------- --------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Interest-earning assets: Loans and leases ......................... $ 5,389,770 $ 94,482 7.11% $ 5,377,957 $ 111,730 8.43% Taxable investment securities ............ 1,398,133 19,629 5.69 1,097,851 17,264 6.38 Tax-exempt investment securities ......... 219,671 2,381 4.40 218,763 2,395 4.44 Equity securities ........................ 103,018 1,054 4.15 106,983 1,495 5.67 Short-term investments ................... 13,972 76 2.21 24,926 369 6.00 ------------- ------------- ------- ------------- ------------ ------- Total interest-earning assets .............. 7,124,564 117,622 6.70% 6,826,480 133,253 7.92% Noninterest-earning assets: Cash and due from banks .................. 244,949 236,550 Premises and equipment ................... 123,220 119,051 Other assets ............................. 227,330 187,549 Less: Allowance for loan losses .......... (72,441) (66,709) ------------- ------------- Total Assets ..................... $ 7,647,622 $ 7,302,921 ============= ============= <CAPTION> Quarter Ended March 31, 2002 Quarter Ended March 31, 2001 --------------------------------------- ------------------------------------ Average Yield/ Average Yield/ LIABILITIES AND EQUITY Balance Interest Rate (1) Balance Interest Rate (1) - -------------------------------------------- --------- ---------- ---------- --------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Interest-bearing liabilities: Demand deposits .......................... $ 820,944 $ 1,275 0.63% $ 668,413 $ 2,408 1.46% Savings deposits ......................... 1,455,128 4,114 1.15 1,218,457 7,955 2.65 Time deposits ............................ 2,604,909 28,185 4.39 2,738,630 40,060 5.93 Short-term borrowings .................... 385,296 1,513 1.59 442,970 5,854 5.36 Long-term debt ........................... 463,706 6,382 5.58 522,974 7,118 5.52 ------------- ------------- ------- ------------- ------------ ------- Total interest-bearing liabilities ......... 5,729,983 41,469 2.94% 5,591,444 63,395 4.60% Noninterest-bearing liabilities: Demand deposits .......................... 1,000,248 852,112 Other .................................... 103,531 117,584 ------------- ------------- Total Liabilities ................ 6,833,762 6,561,140 Shareholders' equity ....................... 813,860 741,781 ------------- ------------- Total Liabilities and Shareholders' Equity ........... $ 7,647,622 $ 7,302,921 ============= ============= Net interest income ........................ $ 76,153 $ 69,858 ============= ============= Net interest margin (FTE) .................. 4.43% 4.27% ======= ======= </TABLE> (1) Yields on tax-exempt securities are not fully taxable equivalent (FTE). 12
The following table summarizes the changes in interest income and expense due to changes in average balances (volume) and changes in rates. <TABLE> <CAPTION> 2002 vs. 2001 Increase (decrease) due To change in Volume Rate Net ---------- ---------------- ----------- (in thousands) <S> <C> <C> <C> Interest income on: Loans and leases ................... $ 247 $ (17,495) $ (17,248) Taxable investment securities ...... 4,684 (2,319) 2,365 Tax-exempt investment securities ... 8 (22) (14) Equity securities .................. (55) (386) (441) Short-term investments ............. (162) (131) (293) ------------ ------------ ------------ Total interest-earning assets .... $ 4,722 $ (20,353) $ (15,631) ============ ============ ============ Interest expense on: Demand deposits .................... $ 549 $ (1,682) $ (1,133) Savings deposits ................... 1,547 (5,388) (3,841) Time deposits ...................... (1,954) (9,921) (11,875) Short-term borrowings .............. (764) (3,577) (4,341) Long-term debt ..................... (809) 73 (736) ------------ ------------ ------------ Total interest-bearing liabilities $ (1,432) $ (20,494) $ (21,926) ============ ============ ============ </TABLE> Interest income decreased $15.6 million, or 11.7%, mainly as a result of the 122 basis point decrease in rates, which accounted for a $20.4 million decline in interest income. As previously discussed, average yields decreased from the first quarter of 2001, due to a general decrease in interest rates as a result of the actions of the FRB. The Corporation's prime lending rate averaged 8.58% during the first quarter of 2001, dropping to an average of 4.75% during the same period in 2002. The Corporation's average loan portfolio was essentially flat, increasing by only $11.8 million. Increases in commercial mortgages ($90.4 million, or 5.8%) and commercial loans ($96.4 million, or 6.8%) were offset by decreases in consumer loans ($104.1 million, or 14.4%) and residential mortgages ($81.9 million, or 5.1%). Consumer loans decreased mainly in indirect automobile loans due to the Corporation electing not to compete with manufacturer-sponsored loan rate incentives. The residential mortgage portfolio continued to decline as lower mortgage rates fueled refinance activity. In addition, in May, 2001 the Corporation sold approximately $100 million of existing residential mortgages for balance sheet management purposes. Average investment securities increased $286.3 million, or 19.8%, as a result of deposit growth in excess of net increases in loans. In addition to strong internal deposit growth, the Corporation also received $250 million of net funds from the Acquired Branches. The Corporation used these funds to purchase investment securities, particularly mortgage-backed securities, which grew by $349 million, or 37.3%. Interest expense decreased $21.9 million, or 34.6%. This resulted from a combination of declining interest rates, and a shift in the composition of interest-bearing liabilities from higher rate time deposits and other interest-bearing liabilities to lower rate demand and savings deposits. Interest bearing demand and savings deposits increased $389.2 million, or 20.6%, while all other interest bearing liabilities decreased by $250.6 million, or 7.7%. The Acquired Branches contributed $273.5 million to the increase in interest-bearing deposits. The $138.5 million, or 2.5%, increase in average interest-bearing liabilities actually resulted in a $1.4 million decrease in interest expense, due to the change in the composition of these liabilities. A 166 basis point decline in the average cost of interest-bearing funds resulted in a $20.5 million decrease in interest expense. 13
The average yield on earning assets decreased 122 basis points (a 15.4% decline) during the period while the cost of interest-bearing liabilities decreased 166 basis points (a 36.1% decline). This resulted in a 16 basis point increase in net interest margin compared to the same period in 2001. The Corporation continues to manage its asset/liability position and interest rate risk through the methods discussed in the "Market Risk" section of this document. Management believes that these procedures have been effective in managing the net interest margin during this period of decreasing rates. Provision and Allowance for Loan Losses - --------------------------------------- The following table summarizes loans outstanding (including unearned income) as of the dates shown: <TABLE> <CAPTION> March 31 December 31 March 31 2002 2001 2001 -------------- -------------- -------------- (in thousands) <S> <C> <C> <C> Commercial, financial and agricultural $ 1,548,492 $ 1,495,380 $ 1,424,789 Real estate - construction 248,109 267,627 238,027 Real estate - residential mortgage 1,421,517 1,468,799 1,538,852 Real estate - commercial mortgage 1,461,896 1,428,066 1,382,128 Consumer 605,898 626,985 702,462 Leasing and other 79,952 86,163 70,750 ---------------- ---------------- ---------------- Total Loans $ 5,365,864 $ 5,373,020 $ 5,357,008 ================ ================ ================ </TABLE> 14
The following table summarizes the activity in the Corporation's allowance for loan losses: <TABLE> <CAPTION> Three Months Ended March 31 -------------------------------- 2002 2001 ------------ ------------ (dollars in thousands) <S> <C> <C> Loans outstanding at end of period (net of unearned) ........... $ 5,365,864 $ 5,357,008 ============== ============== Daily average balance of loans and leases ...................... $ 5,389,770 $ 5,377,957 ============== ============== Balance of allowance for loan losses at beginning of period .................................... $ 71,872 $ 65,640 Loans charged-off: Commercial, financial and agricultural ..................... 805 1,720 Real estate - mortgage ..................................... 810 263 Consumer ................................................... 1,724 1,802 Leasing and other .......................................... 189 153 -------------- -------------- Total loans charged-off .................................... 3,528 3,938 -------------- -------------- Recoveries of loans previously charged-off: Commercial, financial and agricultural ..................... 378 142 Real estate - mortgage ..................................... 38 189 Consumer ................................................... 542 813 Leasing and other .......................................... 1 5 -------------- -------------- Total recoveries ........................................... 959 1,149 -------------- -------------- Net loans charged-off .......................................... 2,569 2,789 Provision for loan losses ...................................... 2,780 3,179 -------------- -------------- Balance at end of period ....................................... $ 72,083 $ 66,030 ============== ============== Net charge-offs to average loans (annualized) .................. 0.19% 0.21% ============== ============== Allowance for loan losses to loans outstanding ................. 1.34% 1.23% ============== ============== </TABLE> The following table summarizes the Corporation's non-performing assets as of the indicated dates. <TABLE> <CAPTION> Mar. 31 Dec. 31 Mar 31 (Dollars in thousands) 2002 2001 2001 ------------------ --------------- ---------------- <S> <C> <C> <C> Nonaccrual loans .................................. $ 22,054 $ 22,794 $ 22,902 Loans 90 days past due and accruing ............... 10,870 9,368 8,957 Other real estate owned (OREO) .................... 1,718 1,817 1,242 ------------------ --------------- ---------------- Total non-performing assets ....................... $ 34,642 $ 33,979 $ 33,101 ================== =============== ================ Non-performing loans/Total loans .................. 0.61% 0.60% 0.59% Non-performing assets/Total assets ................ 0.44% 0.44% 0.43% Non-performing assets/Total loans and OREO ........ 0.65% 0.65% 0.62% Allowance/Non-performing loans .................... 219% 223% 207% </TABLE> As a percentage of total loans, commercial loans and mortgages increased to 56.1% of the total portfolio at March 31, 2002 from 52.4% at March 31, 2001. This shift reflects increases in these loan types as well as a decrease in residential mortgages from 28.7% in 2001 to 26.5% in 2002 resulting from refinance activity and sales of residential mortgages. The change in the loan mix is one factor considered by the Corporation in assessing the adequacy of its allowance for loan losses. 15
For the first quarter of 2002, net charge-offs totaled $2.6 million, or 0.19%, of average loans on an annualized basis. This was a $220,000, or 7.9%, improvement from the $2.8 million, or 0.21%, in net charge-offs for the first quarter of 2001. Non-performing assets increased to $34.6 million, or 0.44% of total assets, at March 31, 2002, from $33.1 million, or 0.43% of total assets, at March 31, 2001. Despite these small increases, this level of non-performing assets continued to be favorable in comparison to the industry as a whole. The total provision for loan losses decreased $399,000, or 12.6%, to $2.8 million in 2002. This decrease was consistent with the moderate downward trend in net charge-off activity during the period. See "Critical Accounting Policies" for a summary of the Corporation's procedures for assessing the adequacy of the allowance for loan losses. Other Income - ------------ Other income for the quarter ended March 31, 2002 was $25.0 million, an increase of $2.6 million, or 11.6%, over the comparable period in 2001. Excluding investment security gains, which decreased from $2.9 million in 2001 to $1.4 million in 2002, other income increased $4.1 million, or 21.1%. The most significant increase, in terms of percentage growth, was realized in mortgage banking income, which increased $1.3 million, or 21.1%, to $3.3 million. With relatively low mortgage rates in place during the quarter, consumers continued to refinance to lower rate loans. The Corporation's policy is to sell all qualifying fixed rate mortgage loans it originates in order to limit interest rate risk. This resulted in an increase in mortgage sale gains of $1.2 million for the quarter. Investment management and trust services income increased $627,000, or 9.6%, mainly due to brokerage services. Service charges on deposit accounts increased $1.8 million, or 25.9%, mainly due to strong growth in transaction accounts, such as savings and demand deposits. Other service charges and fees also realized a moderate increase of $321,000, or 8.0%, reflecting the Corporation's efforts to increase non-interest revenues. Other Expenses - -------------- Total other expenses for the first quarter of 2002 of $53.2 million increased $4.2 million, or 8.6%, from 2001. The increase was due to a $2.9 million, or 10.1%, increase in salaries and benefits, an increase in data processing of $372,000, or 13.1%, and an increase in other expenses of $2.2 million, or 21.7%. Partially offsetting these increases was a decrease in intangible amortization of $250,000, or 30.3%. Salaries and employee benefits increased $2.9 million, or 10.1%, in comparison to the first quarter of 2001. The increase is attributable to the continued growth of the Corporation, both internally and through the acquisition of additional branches and the resulting expansion of its employee base. In addition, normal merit increases and additional overtime and part-time expense to assist in recent systems conversions also contributed to the increase. The employee benefits component of the expense increased $569,000, or 12.0%, due mainly to rising health plan expenses. Net occupancy expense had a slight increase of $82,000, or 1.9%, over the same period in 2001, while equipment expenses were down by $152,000, or 5.2%. The net occupancy expense increase resulted mainly from depreciation expense and other occupancy costs related to the Corporation's new office building at its main office location. Equipment expense decreased due to operational efficiencies realized from the acquisition of Drovers in July, 2001. 19 Intangible amortization decreased $250,000, or 30.3%. The $781,000 decrease from 2001 resulting from the Corporation's adoption of Statement 142 was offset by a $531,000 increase in expense, mainly as a result of 16
unidentifiable intangible assets and core deposit intangible assets recorded in connection with the Acquired Branches (See Note E to the Consolidated Financial Statements). The 13.1% increase in data processing expense was due to an increase in the number of accounts and customers being serviced. ATM and other processing expenses accounted for $312,000, or 84%, of the increase. Other expense increased $1.3 million, or 13.2%, to $11.3 million in 2002. This was due to additional advertising costs related to a significant branding campaign at Fulton Bank ($694,000), and normal growth. Income Taxes - ------------ Income tax expense for the first quarter of 2002 was $13.0 million, a $1.2 million, or 10.4%, increase from $11.8 million in 2001. The Corporation's effective tax rate was approximately 28.8% in 2002 as compared to 29.4% in 2001. The effective rate decreased due to the non-amortization of certain non-deductible goodwill in 2002 which occurred in conjunction with the adoption of Statement 142. The effective rate is lower than the federal statutory rate of 35% due mainly to investments in tax-free municipal securities and federal tax credits from investments in low and moderate income housing partnerships. FINANCIAL CONDITION - ------------------- Total assets of the Corporation at March 31, 2002 remained almost unchanged from December 31, 2001 at $7.8 billion. Loans decreased by $7.2 million, or 0.1%, to $5.4 billion at March 31, 2002. While commercial loans and commercial mortgages increased $33.6 million, or 1.9%, residential mortgages continued to decrease ($13.5 million, or 4.6%) as a result of refinance activity. In addition, consumer loans and leases declined $27.3 million, or 3.8%. Cash and due from banks decreased $100.0 million, or 28.1%, during the period. The decrease was the result of a sharp increase in demand deposit activity at the end of December, 2001, resulting in an unusually high Federal Reserve Bank balance as of December 31, 2001. Investment securities increased $154.7 million, or 8.9% as securities purchases of $283.3 million exceeded proceeds from maturities and sales of $157.7 million. Premises and equipment decreased $967,000, or 0.8%, due to normal depreciation expense and the sale of three branch properties. Deposits decreased $43.0 million, or 0.7%, from December 31, 2001. This slight decrease represents a change in the overall composition of deposits compared to the previous period. Time deposits and demand deposits decreased by $83.1 million and $26.7 million, respectively, while savings deposits increased $66.8 million. This reflects a general mood in the financial community that interest rates will start to rise again in the near future, leaving consumers reluctant to reinvest maturing time deposits at the current lower rates. Due to the decrease in deposits, the Corporation's short-term borrowing increased during the first quarter of 2002. Federal funds purchased increased $53.0 million, or 50.5%, while customer repurchase agreements increased $9.2 million, or 3.2%. The Corporation did reduce its long-term debt by $5.4 million, or 1.2%, as a result of maturing Federal Home Loan Bank advances. Other liabilities increased $30.3 million, or 42.1%, mainly due to $27.1 million of investment securities which were purchased in March, but not yet settled at March 31, 2002. Capital Resources - ----------------- Total shareholders' equity increased $14.1 million, or 1.7%, during the first three months of 2002. This increase was due to net income of $32.1 million and a $648,000 improvement in the net unrealized gain on investment securities and $1.5 million in issuances of stock. These increases were offset by $14.0 million in cash dividends to shareholders and $6.1 million of stock repurchases. 17
Current capital guidelines measure the adequacy of a bank holding company's capital by taking into consideration the differences in risk associated with holding various types of assets as well as exposure to off-balance sheet commitments. The guidelines call for a minimum risk-based Tier I capital percentage of 4.0% and a minimum risk-based total capital percentage of 8.0%. Tier I capital includes common shareholders' equity less goodwill and non-qualified intangible assets. Total capital includes all Tier I capital components plus the allowance for loan losses. The Corporation is also subject to a "leverage capital" requirement, which compares capital (using the definition of Tier I capital) to total balance sheet assets and is intended to supplement the risk based capital ratios in measuring capital adequacy. The minimum acceptable leverage capital ratio is 3.0% for institutions such as the Corporation which are highly-rated in terms of safety and soundness. Other institutions are expected to maintain capital levels at least one or two percent above the minimum. As of March 31, 2002, the Corporation and each of its subsidiaries met the minimum capital requirements. In addition, the Corporation and each of its subsidiaries' capital ratios exceeded the amounts required to be considered "well-capitalized" as defined in the regulations. On January 15, 2002, the Board of Directors approved a plan to repurchase up to 2.5 million shares of the Corporation's common stock through June 30, 2002. Stock repurchased will be added to the Corporate treasury and will be used for general corporate purposes. Through March 31, 2002, the Corporation had repurchased 267,000 shares under this plan. MARKET RISK - ----------- Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by banking entities include interest rate risk, equity market price risk, foreign currency risk and commodity price risk. Due to the nature of its operations, only equity market price risk and interest rate risk are significant to the Corporation. Equity Market Price Risk - ------------------------ Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Corporation. The Corporation's equity investments consist of common stocks of publicly traded financial institutions (cost basis of approximately $140.8 million) and U.S. Government agency stock (cost basis of approximately $60.9 million). The Corporation's financial institutions stock portfolio had net unrealized gains of approximately $8.0 million at March 31, 2002. Although the book value of equity investments accounted for only 1.8% of the Corporation's total assets, the unrealized gains on the portfolio represent a potential source of revenue. The Corporation has a history of periodically realizing gains from this portfolio and, if values were to decline significantly, this revenue source could be lost. The Corporation manages its equity market price risk by investing primarily in regional financial institutions. Management continuously monitors the fair value of its equity investments and evaluates current market conditions and operating results of the companies. Periodic sale and purchase decisions are made based on this monitoring process. None of the Corporation's equity securities are classified as trading. Future cash flows from these investments are not provided in the "Interest Rate Sensitivity" table on the following page since none have maturity dates. Interest Rate Risk - ------------------ Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the Corporation's liquidity position and could affect its ability to meet obligations and continue to grow. 18
Second, movements in interest rates can create fluctuations in the Corporation's net income and changes in the economic value of its equity. The Corporation employs various management techniques to minimize its exposure to interest rate risk. An Asset/Liability Management Committee (ALCO), consisting of key financial and senior management personnel, meets on a weekly basis. The ALCO is responsible for reviewing the interest rate sensitivity position of the Corporation, approving asset and liability management policies, and overseeing the formulation and implementation of strategies regarding balance sheet positions and earnings. The primary goal of asset/liability management is to address the liquidity and net income risks noted above. From a liquidity standpoint, the Corporation must maintain a sufficient level of liquid assets to meet the ongoing cash flow requirements of customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity sources are found on both sides of the balance sheet. Liquidity is provided on a continuous basis through scheduled and unscheduled principal reductions and interest payments on outstanding loans and investments. Liquidity is also provided through the availability of deposits and borrowings. The following table provides information about the Corporation's interest rate sensitive financial instruments. The table provides expected cash flows and weighted average rates for each significant interest rate sensitive financial instrument, by expected maturity period. None of the Corporation's financial instruments are classified as trading. 19
<TABLE> <CAPTION> FULTON FINANCIAL CORPORATION INTEREST RATE SENSITIVITY (dollars in thousands) Expected Maturity Period ------------------------------------------------------------------------------------------- (less than) (greater than) 1 Year 1-2 Years 2-3 Years 3-4 Years 4-5 Years 5 Years ----------- ------------- ------------- ------------- ------------- ------------ <S> <C> <C> <C> <C> <C> <C> Fixed rate loans (1) $ 892,355 $ 632,534 $ 489,521 $ 314,076 $ 262,430 $ 713,089 Average rate (1) 7.34% 7.73% 7.71% 7.70% 7.58% 7.33% Floating rate loans (2) 706,966 220,578 168,619 141,401 121,197 703,098 Average rate 5.59% 6.26% 6.42% 6.56% 5.73% 5.55% Fixed rate investments (3) 540,409 425,413 219,763 122,544 85,485 322,480 Average rate 5.84% 5.88% 5.80% 5.77% 5.87% 5.55% Floating rate investments (3) - 1,000 - - - 16,683 Average rate - 7.58% - - - 4.88% Other interest-earning assets 36,436 - - - - - Average rate 6.13% - - - - - ------------------------------------------------------------------------------------------------- Total $ 2,195,429 $ 1,294,689 $ 885,737 $ 582,389 $ 472,159 $1,761,471 Average rate 6.38% 6.86% 6.98% 7.01% 6.79% 6.27% ------------------------------------------------------------------------------------------------- Fixed rate deposits (4) $ 1,607,518 $ 428,147 $ 222,570 $ 65,023 $ 115,261 $ 31,854 Average rate 3.99% 4.18% 4.60% 5.47% 4.89% 5.16% Floating rate deposits (5) 899,031 163,743 163,743 163,743 163,743 1,919,399 Average rate 1.69% 0.50% 0.50% 0.50% 0.50% 0.36% Fixed rate borrowings (6) 10,717 38,127 5,240 78,254 268 309,270 Average rate 3.84% 5.36% 6.37% 6.29% 5.44% 5.48% Floating rate borrowings (7) 466,833 - 5,000 - - - Average rate 1.63% - 2.23% - - - ------------------------------------------------------------------------------------------------- Total $ 2,984,099 630,017 $ 396,553 $ 307,020 $ 279,272 $ 2,260,523 Average rate 2.93% 3.29% 2.90% 3.03% 2.32% 1.12% ------------------------------------------------------------------------------------------------- <CAPTION> Estimated Total Fair Value --------- ------------ <C> <C> Fixed rate loans (1) $ 3,304,005 $ 3,377,327 Average rate (1) 7.52% Floating rate loans (2) 2,061,859 2,044,921 Average rate 5.79% Fixed rate investments (3) 1,716,094 1,727,844 Average rate 5.79% Floating rate investments (3) 17,683 17,894 Average rate 5.03% Other interest-earning assets 36,436 36,436 Average rate 6.13% -------------------------------- Total $ 7,136,077 $ 7,204,422 Average rate 6.59% -------------------------------- Fixed rate deposits (4) $ 2,470,373 $ 2,529,260 Average rate 4.17% Floating rate deposits (5) 3,473,402 3,222,227 Average rate 0.73% Fixed rate borrowings (6) 441,876 432,439 Average rate 5.58% Floating rate borrowings (7) 471,833 471,833 Average rate 1.64% -------------------------------- Total $ 6,857,484 $ 6,655,749 Average rate 2.34% -------------------------------- </TABLE> Assumptions: 1) Amounts are based on contractual payments and maturities, adjusted for expected prepayments. 2) Average rates are shown on a fully taxable equivalent basis using an effective tax rate of 35%. 3) Amounts are based on contractual maturities, adjusted for expected prepayments on mortgage-backed securities, and expected calls on other securities. 4) Amounts are based on contractual maturities of time deposits. 5) Money market, NOW and savings accounts are spread based on history of deposit flows. 6) Amounts are based on contractual maturities of Federal Home Loan Bank advances. 7) Amounts are Federal funds purchased and securities sold under agreements to repurchase, which generally mature in less than 90 days. 20
The Corporation uses three complementary methods to measure and manage interest rate risk. They are static gap analysis, simulation of earnings, and estimates of economic value of equity. Using these measurements in tandem provides a reasonably comprehensive summary of the magnitude of interest rate risk in the Corporation, level of risk as time evolves, and exposure to changes in interest rate relationships. Static gap provides a measurement of repricing risk in the Corporation's balance sheet as of a point in time. This measurement is accomplished through stratification of the Corporation's assets and liabilities into predetermined repricing periods. The assets and liabilities in each of these periods are summed and compared for mismatches within that maturity segment. Core deposits having noncontractual maturities are placed into repricing periods based upon historical balance performance. Repricing for mortgage loans held and for mortgage-backed securities includes the effect of expected cash flows. Estimated prepayment effects are applied to these balances based upon industry projections for prepayment speeds. The Corporation's policy limits the cumulative 6-month gap to plus or minus 15% of total earning assets. The cumulative 6-month gap as of March 31, 2002 was 1.12. Simulation of net interest income and of net income is performed for the next twelve-month period. A variety of interest rate scenarios is used to measure the effects of sudden and gradual movements upward and downward in the yield curve. These results are compared to the results obtained in a flat or unchanged interest rate scenario. Simulation of earnings is used primarily to measure the Corporation's short-term earnings exposure to rate movements. The Corporation's policy limits the potential exposure of net interest income to 10% of the base case net interest income for every 100 basis point "shock" in interest rates. A "shock' is an immediate upward or downward movement of interest rates across the yield curve based upon changes in the prime rate. The following table summarizes the expected impact of interest rate shocks on net interest income: Annual change in net interest Rate Shock income % Change -------------- --------------- ------------ +300 bp +$ 4.5 million + 1.4% +200 bp +$ 1.4 million + 0.4% +100 bp +$ 1.7 million + 0.5% -100 bp -$ 10.7 million - 3.2% -200 bp -$ 20.5 million - 6.2% -300 bp -$ 34.0 million -10.2% Economic value of equity estimates the discounted present value of asset cash flows and liability cash flows. Discount rates are based upon market prices for like assets and liabilities. Upward and downward shocks of interest rates are used to determine the comparative effect of such interest rate movements relative to the unchanged environment. This measurement tool is used primarily to evaluate the longer term repricing risks and options in the Corporation's balance sheet. A policy limit of 10% of economic equity may be at risk for every 100 basis point "shock" movement in interest rates. The following table summarizes the expected impact of interest rate shocks on economic value of equity. change in economic value Rate Shock of equity % Change -------------- --------------- ------------ +300 bp -$ 65.8 million - 5.5% +200 bp -$ 31.9 million - 2.6% +100 bp -$ 4.3 million - 0.4% -100 bp -$ 10.8 million - 0.9% -200 bp -$ 43.7 million - 3.6% -300 bp -$ 71.4 million - 5.9% 21
PART II -- OTHER INFORMATION - ---------------------------- Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits -- The following is a list of the exhibits required by Item 601 of Regulation S-K and filed as part of this report: (1) Articles of incorporation, as amended and restated, and Bylaws of Fulton Financial Corporation, as amended - Incorporated by reference from Exhibit 3 of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. (2) Instruments defining the right of securities holders, including indentures: (a) Rights Agreement dated June 20, 1989, as amended and restated on April 27, 1999 between Fulton Financial Corporation and Fulton Bank - Incorporated by reference from Exhibit 1 of the Fulton Financial Corporation Current Report on Form 8-K dated April 27, 1999. (3) Material Contracts - Executive Compensation Agreements and Plans: (a) Severance Agreements entered into between Fulton Financial and: Rufus A. Fulton, Jr., as of April 17, 1984; R. Scott Smith, Jr., as of May 17, 1988; Richard J Ashby, Jr., as of May 17, 1988; and Charles J. Nugent, as of November 19, 1992 - Incorporated by reference from Exhibit 10(a) of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. (b) Incentive Stock Option Plan adopted September 19, 1995 - Incorporated by reference from Exhibit A of Fulton Financial Corporation's 1996 Proxy Statement. (b) Reports on Form 8-K: None 22
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FULTON FINANCIAL CORPORATION Date: May 10, 2002 /s/ Rufus A. Fulton, Jr. -------------------- ----------------------------------- Rufus A. Fulton, Jr. Chairman and Chief Executive Officer Date: May 10, 2002 /s/ Charles J. Nugent -------------------- ----------------------------------- Charles J. Nugent Senior Executive Vice President and Chief Financial Officer 23
EXHIBIT INDEX Exhibits Required Pursuant to Item 601 of Regulation S-K ----------------------------- 3. Articles of incorporation, as amended and restated, and Bylaws of Fulton Financial Corporation as amended. 4. Instruments defining the rights of security holders, including indentures. (a) Rights Agreement dated June 20, 1989, as amended and restated on April 27, 1999 between Fulton Financial Corporation and Fulton Bank - Incorporated by reference to Exhibit 1 of the Fulton Financial Corporation Current Report on Form 8-K dated April 27, 1999. 10. Material Contracts (a) Severance Agreements entered into between Fulton Financial and: Rufus A. Fulton, Jr., as of April 17, 1984; R. Scott Smith, Jr., as of May 17, 1988; Charles J. Nugent, as of November 19, 1992; and Richard J Ashby, Jr., as of May 17, 1988. (b) Incentive Stock Option Plan adopted September 19, 1995 - Incorporated by reference from Exhibit A of Fulton Financial Corporation's 1996 Proxy Statement. 24