================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20459 ---------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003, 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 [_] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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 - 105,219,000 shares outstanding as of July 31, 2003. ================================================================================ 1
FULTON FINANCIAL CORPORATION FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2003 INDEX ----- Description Page - ----------- ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): (a) Consolidated Balance Sheets - June 30, 2003 and December 31, 2002 ......................................3 (b) Consolidated Statements of Income - Three and six months ended June 30, 2003 and 2002 ........................4 (c) Consolidated Statements of Shareholders' Equity - Six months ended June 30, 2003 and 2002 ..................................5 (d) Consolidated Statements of Cash Flows - Six months ended June 30, 2003 and 2002 ..................................6 (e) Notes to Consolidated Financial Statements - June 30, 2003 ...............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 ...........23 Item 4. Controls and Procedures ..............................................26 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K .....................................27 Signatures ...................................................................28 Exhibit Index ................................................................29 2
Item 1. Financial Statements - ------------------------------------------------------------------------------ FULTON FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED) - ------------------------------------------------------------------------------ (Dollars in thousands, except per-share data) June 30 December 31 2003 2002 ------------ ------------ ASSETS - ------------------------------------------------------------------------------ Cash and due from banks ....................... $ 354,238 $ 314,857 Interest-bearing deposits with other banks .... 5,737 7,899 Mortgage loans held for sale .................. 59,874 70,475 Investment securities: Held to maturity (Fair value: $31,738 in 2003 and $34,135 in 2002) .............. 30,620 32,684 Available for sale ......................... 2,518,169 2,383,607 Loans, net of unearned income ................. 5,391,398 5,317,068 Less: Allowance for loan losses ............ (72,240) (71,920) ------------ ------------ Net Loans ............................... 5,319,158 5,245,148 ------------ ------------ Premises and equipment ........................ 121,367 123,450 Accrued interest receivable ................... 31,969 35,527 Goodwill ...................................... 61,048 61,048 Other assets .................................. 117,107 113,083 ------------ ------------ Total Assets ............................ $ 8,619,287 $ 8,387,778 ============ ============ LIABILITIES - ------------------------------------------------------------------------------ Deposits: Noninterest-bearing ........................ $ 1,295,098 $ 1,118,227 Interest-bearing ........................... 5,141,925 5,127,301 ------------ ------------ Total Deposits .......................... 6,437,023 6,245,528 ------------ ------------ Short-term borrowings: Securities sold under agreements to repurchase ............................. 347,361 297,556 Federal funds purchased .................... 250,000 330,000 Demand notes of U.S. Treasury .............. 2,634 4,638 ------------ ------------ Total Short-Term Borrowings ............. 599,995 632,194 ------------ ------------ Accrued interest payable ...................... 24,290 27,608 Other liabilities ............................. 144,364 77,651 Federal Home Loan Bank Advances and long-term debt ............................... 534,456 535,555 Corporation-obligated mandatorily redeemable capital securities of subsidiary trust ............................. 5,500 5,500 ------------ ------------ Total Liabilities ....................... 7,745,628 7,524,036 ------------ ------------ SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------ Common stock, $2.50 par value, 400 million shares authorized, 109.2 million shares issued ....................................... 272,941 259,943 Additional paid-in capital .................... 558,087 481,028 Retained earnings ............................. 82,091 138,501 Accumulated other comprehensive income ........ 25,929 34,801 Treasury stock (3.8 million shares in 2003 and 3.0 million shares in 2002) ........ (65,389) (50,531) ------------ ------------ Total Shareholders' Equity .............. 873,659 863,742 ------------ ------------ Total Liabilities and Shareholders' Equity ................................. $ 8,619,287 $ 8,387,778 ============ ============ - ------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements 3
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Dollars in thousands, except per-share data) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30 June 30 ------------------------------ ------------------------------ 2003 2002 2003 2002 -------------- ------------- -------------- ------------- INTEREST INCOME - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Loans, including fees ....................... $ 84,541 $ 94,246 $ 169,653 $ 188,905 Investment securities: Taxable .................................. 18,390 21,185 39,124 40,814 Tax-exempt ............................... 2,526 2,491 5,046 4,872 Dividends ................................ 1,153 902 2,301 1,956 Other interest income........................ 556 63 1,226 139 -------------- ------------- -------------- ------------- Total Interest Income ................. 107,166 118,887 217,350 236,686 INTEREST EXPENSE - --------------------------------------------------------------------------------------------------------------- Deposits .................................... 24,000 30,840 49,707 64,414 Short-term borrowings ....................... 1,692 2,057 3,445 3,570 Long-term debt .............................. 7,104 6,432 14,190 12,814 -------------- ------------- -------------- ------------- Total Interest Expense ................ 32,796 39,329 67,342 80,798 -------------- ------------- -------------- ------------- Net Interest Income ................... 74,370 79,558 150,008 155,888 PROVISION FOR LOAN LOSSES ................... 2,490 2,680 5,325 5,460 -------------- ------------- -------------- ------------- Net Interest Income After Provision for Loan Losses ............ 71,880 76,878 144,683 150,428 -------------- ------------- -------------- ------------- OTHER INCOME - --------------------------------------------------------------------------------------------------------------- Investment management and trust services .... 8,809 7,583 17,152 14,743 Service charges on deposit accounts ......... 9,501 9,300 18,717 18,084 Other service charges and fees .............. 4,708 4,273 9,294 8,378 Mortgage banking income ..................... 5,841 2,782 11,792 6,064 Investment securities gains ................. 4,809 1,972 7,038 3,370 Other ....................................... 866 809 2,206 2,763 -------------- ------------- -------------- ------------- Total Other Income .................... 34,534 26,719 66,199 53,402 OTHER EXPENSES - --------------------------------------------------------------------------------------------------------------- Salaries and employee benefits .............. 34,494 32,618 67,814 63,665 Net occupancy expense ....................... 4,807 4,263 9,887 8,555 Equipment expense ........................... 2,588 2,716 5,268 5,515 Data processing ............................. 2,776 2,950 5,640 6,163 Advertising ................................. 1,787 1,860 3,019 3,653 Intangible amortization ..................... 360 360 719 719 Other ....................................... 11,253 11,737 21,600 23,162 -------------- ------------- -------------- ------------- Total Other Expenses .................. 58,065 56,504 113,947 111,432 -------------- ------------- -------------- ------------- Income Before Income Taxes ............ 48,349 47,093 96,935 92,398 INCOME TAXES ................................ 14,287 14,103 28,830 27,178 -------------- ------------- -------------- ------------- Net Income ............................ $ 34,062 $ 32,990 $ 68,105 $ 65,220 ============== ============= ============== ============= PER-SHARE DATA: Net income (basic) .......................... $ 0.32 $ 0.30 $ 0.64 $ 0.60 Net income (diluted) ........................ 0.32 0.30 0.64 0.60 Cash dividends .............................. 0.160 0.143 0.303 0.272 - --------------------------------------------------------------------------------------------------------------- </TABLE> See Notes to Consolidated Financial Statements 4
FULTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2003 AND 2002 <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per-share data) Accumulated Other Number of Additional Comprehen- Shares Common Paid-In Retained sive Income Treasury Outstanding Stock Capital Earnings (Loss) Stock Total - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 2002 ............ 106,162,000 $ 259,943 $ 481,028 $ 138,501 $ 34,801 $ (50,531) $ 863,742 Comprehensive Income: Net income ........................ 68,105 68,105 Other - net unrealized loss on securities (net of $2.3 million tax benefit) ............. (4,297) (4,297) Less - reclassification adjustment for gains included in net income (net of $2.5 million tax expense) .. (4,575) (4,575) ---------- Total comprehensive income ..... 59,233 ---------- Stock issued ...................... 378,000 (2,432) 6,461 4,029 Stock dividend - 5% ............... 12,998 79,491 (92,526) (37) Acquisition of treasury stock ..... (1,181,000) (21,319) (21,319) Cash dividends - $0.303 per share . (31,989) (31,989) ------------------------------------------------------------------------------------- Balance at June 30, 2003 ................ 105,359,000 $ 272,941 $ 558,087 $ 82,091 $ 25,929 $ (65,389) $ 873,659 ----------- ---------- ---------- ---------- ----------- ---------- ---------- Balance at December 31, 2001 ............ 108,429,000 $ 207,962 $ 536,235 $ 65,649 $ 12,970 $ (11,362) $ 811,454 Comprehensive Income: Net income ........................ 65,220 65,220 Other - net unrealized gain on securities (net of $ 10.8 million tax expense) ............. 19,997 19,997 Less - reclassification adjustment for gains included in net income (net of $1.2 million tax expense) ....... (2,191) (2,191) ---------- Total comprehensive income...... 83,026 ---------- Stock issued ......................... 342,000 (2,551) 5,005 2,454 Stock split paid in the form of a 25% stock dividend .................. -- 51,981 (52,050) (69) Acquisition of treasury stock ........ (350,000) (6,068) (6,068) Cash dividends - $0.272 per share .... (29,535) (29,535) ------------------------------------------------------------------------------------- Balance at June 30, 2002 ................ 108,421,000 $ 259,943 $ 481,634 $ 101,334 $ 30,776 $ (12,425) $ 861,262 =========== ========== ========== ========== =========== ========== ========== - ---------------------------------------------------------------------------------------------------------------------------------- </TABLE> See Notes to Consolidated Financial Statements 5
FULTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - ------------------------------------------------------------------------------- (In thousands) Six Months Ended June 30 ----------------------- 2003 2002 ----------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income ........................................ $ 68,105 $ 65,220 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ...................... 5,325 5,460 Depreciation and amortization of premises and equipment ..................................... 6,232 6,314 Net amortization of investment security premiums ...................................... 9,195 660 Investment security gains ...................... (7,038) (3,370) Net decrease (increase) in mortgage loans held for sale ................................. 10,601 (28,753) Amortization of intangible assets .............. 719 719 Decrease in accrued interest receivable ........ 3,558 3,327 Decrease (increase) in other assets ............ 32 (2,904) Decrease in accrued interest payable ........... (3,318) (7,979) (Decrease) increase in other liabilities ....... (6,713) 1,780 ---------- ---------- Total adjustments .......................... 18,593 (24,746) ---------- ---------- Net cash provided by operating activities ... 86,698 40,474 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale ......................................... 295,665 17,067 Proceeds from maturities of securities held to maturity ...................................... 9,404 10,281 Proceeds from maturities of securities available for sale ............................... 777,870 263,605 Purchase of securities held to maturity ........... (7,375) (1,672) Purchase of securities available for sale ......... (1,152,114) (477,579) Decrease in short-term investments ................ 2,162 3,850 Net increase in loans ............................. (79,337) (5,723) Net purchases of premises and equipment ........... (4,149) (4,633) ---------- ---------- Net cash used in investing activities ....... (157,874) (194,804) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in demand and savings deposits ........... 282,544 146,505 Decrease in time deposits ........................ (91,049) (104,444) Decrease in long-term debt ........................ (1,099) (7,522) (Decrease) increase in short-term borrowings ...... (32,199) 77,245 Dividends paid .................................... (30,350) (28,147) Net proceeds from issuance of common stock ........ 4,029 2,454 Acquisition of treasury stock ..................... (21,319) (6,068) ---------- ---------- Net cash provided by financing activities ... 110,557 80,023 ---------- ---------- Net Increase (Decrease) in Cash and Due From Banks. 39,381 (74,307) Cash and Due From Banks at Beginning of Period .... 314,857 356,539 ---------- ---------- Cash and Due From Banks at End of Period .......... $ 354,238 $ 282,232 ========== ========== Supplemental Disclosures of Cash Flow Information Cash paid during the period for: Interest ....................................... $ 70,660 $ 88,777 Income taxes ................................... 27,645 25,225 - -------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements 6
FULTON FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE A - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. 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: Three months Six months ended June 30 ended June 30 ----------------------------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Weighted average shares outstanding (basic) .......... 105,437 108,350 105,678 108,344 Impact of common stock equivalents .................. 741 758 727 750 -------- -------- -------- -------- Weighted average shares outstanding (diluted) ........ 106,178 109,108 106,405 109,094 ======== ======== ======== ======== NOTE C - Stock Dividend The Corporation declared a 5% stock dividend on April 15, 2003, which was paid on May 23, 2003 to shareholders of record on April 30, 2003. All share and per-share information has been restated to reflect the impact of this stock dividend. NOTE D - Disclosures about Segments of an Enterprise and Related Information The Corporation does not have any operating segments which require disclosure of additional information. While the Corporation owns ten separate banks, each engages in similar activities, provides similar products and services, and operates in the same general geographical area. The Corporation's non-banking activities are immaterial and, therefore, separate information has not been disclosed. NOTE E - Goodwill and Intangible Assets In October 2002, the Corporation adopted Statement of Financial Accounting Standards No. 147 "Acquisitions of Certain Financial Institutions" (Statement 147). Statement 147 changed the accounting for certain branch acquisitions to allow the purchase price paid in excess of net assets acquired to be accounted for as goodwill. Per Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets", goodwill is not amortized, but is tested at least annually for impairment. Adoption of Statement 147 resulted in the restatement of results for the three and six-month periods ended 2002. The following table summarizes the results of this restatement (in thousands, except per share amounts): 7
Three Six Months Months Ended June Ended June 30, 2002 30, 2002 ---------- ---------- Net income, originally reported ................ $ 64,937 $ 32,848 Amortization of goodwill, net of taxes ......... 283 142 ---------- ---------- Net income, as restated ........................ $ 65,220 $ 32,990 ---------- ---------- Basic net income per share, originally reported (1) .................................. $ 0.60 $ 0.30 Amortization of goodwill, net of taxes ......... -- -- ---------- ---------- Basic net income per share, as restated ........ $ 0.60 $ 0.30 ---------- ---------- Diluted net income per share, originally reported (1) .................................. $ 0.60 $ 0.30 Amortization of goodwill, net of taxes ......... -- -- ---------- ---------- Diluted net income per share, as adjusted ...... $ 0.60 $ 0.30 ---------- ---------- (1) As restated for the impact of stock dividends and splits. In prior filings, goodwill and intangible assets were combined for presentation purposes in the consolidated balance sheets. Goodwill is now presented as a separate line item and intangible assets totaling $10.5 million in 2003 and $11.2 million in 2002 are included with other assets. NOTE F - Acquisition of Premier Bancorp, Inc. On August 1, 2003, the Corporation completed its acquisition of Premier Bancorp, Inc. (Premier), of Doylestown, Pennsylvania. Premier was a $600 million financial holding company whose primary subsidiary was Premier Bank, which operates eight community banking offices in Bucks, Northampton and Montgomery Counties, Pennsylvania. Under the terms of the merger agreement, each of the approximately 3.5 million shares of Premier's common stock was exchanged for 1.407 shares of the Corporation's common stock. In addition, each of the options to acquire Premier's stock was converted to options to purchase the Corporation's stock. As a result of the acquisition, Premier was merged into the Corporation and Premier Bank became a wholly owned subsidiary. In connection with the transaction, the outstanding shares of Premier's preferred stock was redeemed and the Corporation assumed Premier's trust preferred securities. The acquisition is being accounted for as a purchase. Purchase accounting requires the Corporation to allocate the total purchase price of the acquisition to the assets acquired and liabilities assumed, based on their respective fair values at the acquisition date, with any remaining acquisition cost being recorded as goodwill. Resulting goodwill balances are then subject to an impairment review on at least an annual basis. The results of Premier's operations will be included in the Corporation's financial statements prospectively from the date of the acquisition. The total purchase price of approximately $90 million includes the value (based on the price as of the announcement date) of the Corporation's stock issued, Premier options converted, and certain acquisition related costs. The carrying value of the net assets of Premier as of August 1, 2003 was approximately $40.6 million and accordingly, the purchase price exceeds the carrying value of the net assets by $49.4 million. The total purchase price will be allocated to the net assets acquired, based on fair market values. The Corporation expects to record a core deposit intangible asset and goodwill as a result of the acquisition accounting. The Corporation is in the process of completing its fair value analysis and will determine the allocation of the purchase price to the fair value of net assets acquired and goodwill during the third quarter of 2003. 8
NOTE G - Stock-Based Compensation In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (Statement 148). Statement 148 clarifies the accounting for options issued in prior periods when a company elects to transition from Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) accounting to Statement 123, "Accounting for Stock-Based Compensation" (Statement 123) accounting. It also requires additional disclosures with respect to accounting for stock-based compensation. Finally, Statement No. 148 amends Accounting Principles Board Opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. The Corporation has elected to continue application of APB 25 and related interpretations in accounting for its stock-based employee compensation plans and, accordingly, no compensation expense is reflected in net income. The Corporation did not grant any stock options during the first six months of 2003 or 2002. As such, had stock-based compensation expense been recognized using the fair value method consistent with Statements 123 and 148, there would have been no impact on net income or net income per share for these periods as stock options vest immediately upon grant. NOTE H - Reclassifications Certain amounts in the 2002 consolidated financial statements and notes have been reclassified to conform to the 2003 presentation. NOTE I - New Accounting Pronouncement In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" (Statement 150). Statement 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both debt and equity. The Statement requires an issuer to classify certain instruments as liabilities (or assets in some circumstances) that were previously required to be reported as equity. The Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning on or after June 15, 2003. The Corporation does not expect the implementation of Statement 150 to have any material impact on its financial statements. 9
Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations - --------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (Management's 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. FORWARD LOOKING STATEMENTS - -------------------------- The Corporation has made, and may continue to make, certain forward-looking statements with respect to its management of net interest income and margin, mergers and acquisitions, the ability to realize gains on equity investments, allowance and provision for loan losses, expected levels of certain non-interest expenses and the liquidity position of the Corporation and Parent Company. 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. RESULTS OF OPERATIONS - --------------------- Quarter ended June 30, 2003 versus Quarter ended June 30, 2002 - --------------------------------------------------------------- Fulton Financial Corporation's net income for the second quarter of 2003 increased $1.1 million, or 3.2%, in comparison to net income for the second quarter of 2002. Diluted net income per share increased $0.02, or 6.7%, compared to 2002. The increase from 2002 resulted from increases in other income and investment securities gains and a lower loan loss provision, offset by a decrease in net interest income and increases in expenses. Net Interest Income - ------------------- Net interest income decreased $5.2 million, from $79.6 million in 2002 to $74.4 million in 2003. This decrease was due to continued low interest rates and slow overall loan growth. The Corporation's average prime lending rate decreased from 4.75% in the second quarter of 2002 to 4.24% in the second quarter of 2003 as a result of the FRB reducing short-term interest rates in November, 2002 and June, 2003. These reductions in an already low interest rate environment negatively impacted the Corporation's net interest margin as average yields on earning-assets decreased faster than the average cost of deposits. The June, 2003 reduction by the FRB may result in further net interest margin compression in the third quarter of 2003. The average yield on earning assets decreased 104 basis points (a 16.0% decline) during the period while the cost of interest-bearing liabilities decreased 60 basis points (a 22.3% decline). This resulted in a 57 basis point decrease in net interest margin compared to the same period in 2002. 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. The following table provides a comparative average balance sheet and net interest income analysis for the second quarter of 2003 as compared to the same period in 2002. All dollar amounts are in thousands. 10
<TABLE> <CAPTION> Quarter Ended June 30, 2003 Quarter Ended June 30, 2002 -------------------------------------- -------------------------------------- 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 .................... $ 5,384,692 $ 84,541 6.30% $ 5,426,851 $ 94,246 6.97% Taxable investment securities ....... 2,044,602 18,390 3.61 1,529,697 21,185 5.55 Tax-exempt investment securities .... 251,813 2,526 4.02 232,691 2,491 4.29 Equity securities ................... 128,378 1,153 3.60 109,048 902 3.32 ------------- ---------- --------- ------------- ----------- -------- Total Investment securities ............ 2,424,793 22,069 3.65 1,871,436 24,578 5.27 Short-term investments .............. 40,526 556 5.50 16,755 63 1.51 ------------- ---------- --------- ------------- ----------- -------- Total interest-earning assets .......... 7,850,011 107,166 5.48% 7,315,042 118,887 6.52% Noninterest-earning assets: Cash and due from banks ............. 278,657 238,775 Premises and equipment .............. 121,811 124,501 Other assets ........................ 245,293 233,272 Less: Allowance for loan losses ..... (72,787) (73,058) ------------- ------------- Total Assets ..................... 8,422,985 $ 7,838,532 ============= ============= Quarter Ended June 30, 2003 Quarter Ended June 30, 2002 -------------------------------------- -------------------------------------- Average Yield/ Average Yield/ LIABILITIES AND EQUITY Balance Interest Rate (1) Balance Interest Rate (1) - ---------------------------------------- ------------- ---------- --------- ------------- ----------- ------- Interest-bearing liabilities: Demand deposits ..................... $ 1,085,855 $ 1,496 0.55% $ 848,303 $ 1,368 0.65% Savings deposits .................... 1,596,578 2,744 0.69 1,529,307 4,293 1.13 Time deposits ....................... 2,461,038 19,760 3.22 2,529,819 25,179 3.99 ------------- ---------- --------- ------------- ----------- -------- Total Interest-bearing deposits ........ 5,143,471 24,000 1.87 4,907,429 30,840 2.52 Short-term borrowings ............... 596,312 1,692 1.14 503,366 2,057 1.64 Long-term debt ...................... 540,413 7,104 5.27 457,977 6,432 5.63 ------------- ---------- --------- ------------- ----------- -------- Total interest-bearing liabilities ..... 6,280,196 32,796 2.09% 5,868,772 39,329 2.69% Noninterest-bearing liabilities: Demand deposits ..................... 1,181,072 1,042,356 Other ............................... 96,381 97,135 ------------- ------------- Total Liabilities ................ 7,557,649 7,008,263 Shareholders' equity ................... 865,336 830,269 ------------- ------------- Total Liabilities and Shareholders' Equity ............ $ 8,422,985 $ 7,838,532 ============= ============= Net interest income .................... $ 74,370 $ 79,558 ========== =========== Net interest margin (FTE) .............. 3.91% 4.48% ========= ======== <FN> <F1> (1) Yields on tax-exempt securities are not fully taxable equivalent (FTE). </FN> </TABLE> 11
The following table summarizes the changes in interest income and expense due to changes in average balances (volume) and changes in rates. 2003 vs. 2002 Increase (decrease) due To change in Volume Rate Net -------- -------------- --------- (in thousands) Interest income on: Loans and leases ................... $ (743) $ (8,962) $ (9,705) Taxable investment securities ...... 6,911 (9,706) (2,795) Tax-exempt investment securities ... 218 (183) 35 Equity securities .................. 163 88 251 Short-term investments ............. 90 403 493 -------- -------------- --------- Total interest-earning assets ... $ 6,639 $ (18,360) $ (11,721) ======== ============== ========= Interest expense on: Demand deposits .................... $ 356 $ (228) $ 128 Savings deposits ................... 193 (1,742) (1,549) Time deposits ...................... (692) (4,727) (5,419) Short-term borrowings .............. 378 (743) (365) Long-term debt ..................... 1,192 (520) 672 -------- -------------- --------- Total interest-bearing liabilities .................... $ 1,427 $ (7,960) $ (6,533) ======== ============== ========= Interest income decreased $11.7 million, or 9.9%, mainly as a result of the 104 basis point decrease in average yields on earning assets, which accounted for an $18.4 million decline in interest income. This decrease was partially offset by an increase in interest income due to growth in average investment securities balances, mainly in taxable investment securities. The interest income increase attributable to volume was $6.6 million. The decrease in the average yield on earning assets from the second quarter of 2002 was due to several factors. First was the general decrease in interest rates as a result of the previously mentioned actions of the FRB. Second, an approximately $250 million change in the mix of the loan portfolio from fixed rate to floating rate loans occurred which trended the Corporation toward greater asset sensitivity to interest-rate changes. Finally, investment securities - which generally have lower yields than loans - became a larger component of total average earning assets. Average investment securities increased $553.4 million, or 29.6%, as the growth in deposits and borrowings exceeded loan growth. The Corporation used the excess funds to purchase investment securities, particularly mortgage-backed securities, which grew $517.4 million, or 37.7%. The average yield on investment securities declined 162 basis points from 5.27% in 2002 to 3.65% in 2003. The Corporation's average loan portfolio decreased $42.2 million as increases in commercial mortgages ($87.8 million, or 5.9%), and commercial loans ($158.7 million, or 10.2%) were more than offset by decreases in consumer loans ($69.2 million, or 11.6%) and residential mortgages ($226.0 million, or 15.6%). Residential mortgages continued to decline as low mortgage rates fueled refinance activity and most qualifying originated fixed rate mortgages were sold in the secondary market. In addition, in August 2002 the Corporation sold approximately $96 million of existing residential mortgages for asset/liability management purposes. Consumer loans decreased due to payoffs as consumer debt was replaced with mortgage debt and the Corporation electing not to compete with manufacturer-sponsored automobile loan rate incentives. Interest expense decreased $6.5 million, or 16.6%, mainly due to the decline in interest rates. The 60 basis point decline in the average cost of interest-bearing funds resulted in an $8.0 million decrease in interest expense. The net $411.4 million, or 7.0%, increase in average interest-bearing liabilities resulted in only a 12
$1.4 million increase in interest expense due to the change in the composition of these liabilities from higher rate time deposits to lower rate demand and savings accounts. Interest bearing demand and savings deposits increased $304.8 million, or 12.8%, while time deposits decreased $68.8 million, or 2.7%. This change in the deposit mix reflects depositors' reluctance to reinvest maturing time deposits at the current low rates. Short-term borrowings increased $92.9 million, or 18.5%, and long-term debt increased $82.4 million, or 18.0%. The increase in average short-term borrowings was realized in customer repurchase agreements ($31.0 million, or 11.1%) and Federal funds purchased ($62.6 million, or 28.3%). Federal funds purchased were used to reduce interest rate sensitivity to the previously mentioned change in the loan mix from fixed to floating rates. Long-term debt increased $82.4 million, or 18.0%, from the same period in 2002. The Corporation locked in longer term funding through the use of advances from the Federal Home Loan Bank (FHLB) in order to take advantage of the low interest rate environment. Provision and Allowance for Loan Losses - --------------------------------------- The following table summarizes loans outstanding (including unearned income) as of the dates shown: <TABLE> <CAPTION> June 30 December 31 June 30 2003 2002 2002 ------------- -------------- ------------- (in thousands) <S> <C> <C> <C> Commercial, financial and agricultural ........................ $ 1,713,529 $ 1,679,100 $ 1,551,856 Real estate - construction ........... 270,468 248,565 241,769 Real estate - residential mortgage ... 1,216,674 1,244,781 1,403,604 Real estate - commercial mortgage .... 1,596,368 1,527,144 1,517,856 Consumer ............................. 523,196 543,040 585,288 Leasing and other .................... 71,163 74,438 73,839 ------------- -------------- ------------- Total Loans ....................... $ 5,391,398 $ 5,317,068 $ 5,374,212 ============= ============== ============= </TABLE> 13
The following table summarizes the activity in the Corporation's allowance for loan losses: Three Months Ended June 30 --------------------------- 2003 2002 ------------ ------------ (dollars in thousands) Loans outstanding at end of period (net of unearned) .............................. $ 5,391,398 $ 5,374,212 ============ ============ Daily average balance of loans and leases ....... $ 5,384,692 $ 5,426,851 ============ ============ Balance at beginning of period ................. $ 71,786 $ 72,083 Loans charged-off: Commercial, financial and agricultural ....... 1,127 1,548 Real estate - mortgage ....................... 659 156 Consumer ..................................... 1,109 1,199 Leasing and other ............................ 67 132 ------------ ------------ Total loans charged-off ...................... 2,962 3,035 ------------ ------------ Recoveries of loans previously charged-off: Commercial, financial and agricultural ....... 224 100 Real estate - mortgage ....................... 156 191 Consumer ..................................... 509 740 Leasing and other ............................ 37 42 ------------ ------------ Total recoveries ............................. 926 1,073 ------------ ------------ Net loans charged-off ........................... 2,036 1,962 Provision for loan losses ....................... 2,490 2,680 ------------ ------------ Balance at end of period ........................ $ 72,240 $ 72,801 ============ ============ Net charge-offs to average loans (annualized) ... 0.15% 0.14% ============ ============ Allowance for loan losses to loans outstanding .. 1.34% 1.35% ============ ============ The following table summarizes the Corporation's non-performing assets as of the indicated dates. June 30 Dec. 31 June 30 2003 2002 2002 --------- --------- --------- Nonaccrual loans ..................... $ 26,811 $ 24,090 $ 20,983 Loans 90 days past due and accruing .. 11,266 14,095 10,588 Other real estate owned (OREO) ....... 808 938 1,373 --------- --------- --------- Total non-performing assets .......... $ 38,885 $ 39,123 $ 32,944 ========= ========= ========= Non-accrual loans/Total loans ........ 0.50% 0.45% 0.39% Non-performing assets/Total assets ... 0.45% 0.47% 0.42% Allowance/Non-performing loans ....... 190% 188% 231% The provision for loan losses for the second quarter of 2003 totaled $2.5 million, a decrease of $190,000, or 7.1%, from the same period in 2002. Net charge-offs totaled $2.0 million, or 0.15% of average loans on an annualized basis, during the second quarter of 2003, a $74,000, or 3.8% increase from $2.0 million, or 0.14%, in net charge-offs for the second quarter of 2002. Non-performing assets increased to $38.9 million, or 0.45% of total assets, at June 30, 2003, from $32.9 million, or 0.42% of total assets, at June 30, 2002. 14
The provision for loan losses resulted from the Corporation's allowance allocation procedures. Trends that would indicate the need for a higher provision include the general national and regional economies and the continued growth in the Corporation's commercial loan and commercial mortgage portfolios, which are inherently more risky than residential mortgages. Despite these factors, the Corporation's asset quality measures have remained consistent over the past several years. Total non-performing assets decreased slightly from year-end and increased from June 30, 2002 as a result of one commercial account for which an appropriate allocation of the allowance has been made. Despite a consistent level of net charge-offs compared to 2002, a decrease in the provision was appropriate based on the Corporation's estimates of credit loss exposure in the loan portfolio. Management believes that the allowance balance of $72.2 million at June 30, 2003 is sufficient to cover losses inherent in the loan portfolio on that date and is appropriate based on accounting standards for the allowance and provision for loan losses. Other Income - ------------ Other income for the quarter ended June 30, 2003 was $34.5 million, an increase of $7.8 million, or 29.2%, over the comparable period in 2002. Excluding investment securities gains, which increased from $2.0 million in 2002 to $4.8 million in 2003, other income increased $5.0 million, or 20.1%. The most significant increase was realized in mortgage banking income, which increased $3.1 million, or 110.0%, to $5.8 million. In the past year, the Corporation has devoted additional resources to mortgage banking activities to provide enhanced mortgage lending services throughout its geographic markets. In addition, the national average rate for 30-year fixed rate mortgage loans decreased 129 basis points from 6.72% in June of 2002 to 5.43% in June of 2003. These factors resulted in an increase in mortgage loan originations of $176.5 million for a total of $336.1 million in the second quarter of 2003, as compared to $159.6 million in the second quarter of 2002. In order to limit interest rate risk, the Corporation generally sells the qualifying fixed rate mortgage loans it originates. These sales resulted in gains of $6.0 million in the second quarter of 2003, compared to $2.4 million in the second quarter of 2002. The national average rate for 30-year fixed rate mortgage loans increased to 5.80% in July of 2003. A sustained increase in mortgage rates may result in a reduction in mortgage banking income in the future. Investment management and trust services income increased $1.2 million, or 16.2%, due to an increase in brokerage service fee income, particularly on fixed-rate annuity sales which have become popular in the current rate and economic environment. In addition, the Corporation has increased its investment and trust services practice through its subsidiary, Fulton Financial Advisors. Service charges on deposit accounts increased $201,000, or 2.2%, due to growth in transaction accounts, such as savings and demand deposits. Other service charges and fees increased $435,000, or 10.2%, as the scope and penetration of the Corporation's other services continued to expand. Investment securities gains increased $2.8 million, or 143.9%, during the period. Improvements in the equity markets bolstered the value of the Corporation's equity portfolio during the quarter, resulting in increased realized security gains. Other Expenses - -------------- Total other expenses for the second quarter of 2003 were $58.1 million, representing an increase of $1.6 million, or 2.8%, from 2002. The increase was due to a $1.9 million, or 5.8%, increase in salaries and benefits, and an increase in occupancy expenses of $544,000, or 12.8%. Partially offsetting these increases was a decrease in equipment expense of $128,000, or 4.7%, a decrease in data processing expense of $174,000, or 5.9%, a decrease in advertising expense of $73,000, or 3.9%, and a decrease in other expense of $484,000, or 4.1%. Salary expense, excluding benefits, increased $1.6 million, or 5.6%, driven by an increase in commissions for mortgage originators and investment brokerage professionals as well as normal salary increases for 15
existing employees. Employee benefits expense increased $542,000, or 9.4% due mainly to rising retirement plan expenses. Net occupancy expense increased $544,000, or 12.8%, over the same period in 2002, due to general increases in rental expenses and real estate taxes as a result of growth in the Corporation's branch network. Equipment expense decreased $128,000, or 4.7%, due to a reduction in depreciation expense as certain equipment became fully depreciated during 2002. The 5.9% decrease in data processing expense was due to favorable renegotiations of certain contracts for data processing services. Advertising expense decreased $73,000, or 3.9%, and other expense decreased $484,000, or 4.1%, to $11.3 million in 2003. Income Taxes - ------------ Income tax expense for the second quarter of 2003 was $14.3 million, a $184,000, or 1.3%, increase from $14.1 million in 2002. The Corporation's effective tax rate was approximately 29.5% in 2003 as compared to 30.0% in 2002. The effective rate is lower than the federal statutory rate of 35% due mainly to investments in tax-free municipal securities and Federal tax credits from investments in low and moderate income housing partnerships. Six Months ended June 30, 2003 versus Six months ended June 30, 2002 - -------------------------------------------------------------------- The Corporation's net income for the first six months of 2003 increased $2.9 million, or 4.4%, in comparison to net income for the same period in 2002. Diluted net income per share increased $0.04, or 6.7%, compared to 2002. Net income for the first six months of 2003 of $68.1 million, or $0.64 per share (basic and diluted), represented an annualized return on average assets (ROA) of 1.64% and an annualized return on average equity (ROE) of 15.88%. Net Interest Income - ------------------- For the first six months of 2003, net interest income decreased $5.9 million, or 3.8%. This decrease was due to decreasing interest rates and slow overall loan growth. The Corporation's average prime lending rate decreased from 4.75% for the first six months of 2002 to 4.25% during the same period in 2003 as a result of the FRB reducing short-term interest rates in November, 2002 and June, 2003. This reduction in an already low interest rate environment negatively impacted the Corporation's net interest margin as average yields on earning-assets decreased faster than the average cost of deposits. The June, 2003 reduction by the FRB may result in further net interest margin compression in the third quarter of 2003. The following table provides a comparative average balance sheet and net interest income analysis for the first six months of 2003 as compared to the same period in 2002. All dollar amounts are in thousands. 16
<TABLE> <CAPTION> Six Months Ended June 30, 2003 Six Months Ended June 30, 2002 ----------------------------------------- ---------------------------------------- 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 .................. $ 5,365,939 $ 169,653 6.38% $ 5,408,413 $ 188,905 7.04% Taxable investment securities ..... 2,002,056 39,124 3.94 1,464,280 40,814 5.62 Tax-exempt investment securities .. 246,526 5,046 4.13 226,217 4,872 4.34 Equity securities ................. 130,825 2,301 3.55 106,050 1,956 3.72 ------------ ------------ --------- ------------ ------------ -------- Total investment securities .......... 2,379,407 46,471 3.94 1,796,547 47,642 5.35 Short-term investments ............ 47,720 1,226 5.18 15,371 139 1.82 ------------ ------------ --------- ------------ ------------ -------- Total interest-earning assets ........ 7,793,066 217,350 5.62 7,220,331 236,686 6.61 Noninterest-earning assets: Cash and due from banks ........... 268,164 241,845 Premises and equipment ............ 122,589 123,863 Other assets ...................... 241,731 230,316 Less: Allowance for loan losses ... (72,879) (72,751) ------------ ------------ Total Assets ................... $ 8,352,671 $ 7,743,604 ============ ============ Interest-bearing liabilities: Demand deposits ................... $ 1,067,839 $ 3,119 0.59% $ 834,698 $ 2,643 0.64% Savings deposits .................. 1,566,393 5,623 0.72 1,492,423 8,407 1.14 Time deposits ..................... 2,486,483 40,965 3.32 2,567,157 53,364 4.19 ------------ ------------ --------- ------------ ------------ -------- Total interest-bearing deposits ...... 5,120,715 49,707 1.96 4,894,278 64,414 2.65 Short-term borrowings ............. 603,838 3,445 1.15 444,657 3,570 1.62 Long-term debt .................... 540,659 14,190 5.29 460,825 12,814 5.61 ------------ ------------ --------- ------------ ------------ -------- Total interest-bearing liabilities ... 6,265,212 67,342 2.17 5,799,760 80,798 2.81 Noninterest-bearing liabilities: Demand deposits ................... 1,126,432 1,021,418 Other ............................. 96,036 100,316 ------------ ------------ Total Liabilities .............. 7,487,680 6,921,494 Shareholders' equity ................. 864,991 822,110 ------------ ------------ Total Liabilities and Shareholders' Equity .......... $ 8,352,671 $ 7,743,604 ============ ------------ Net interest income .................. $ 150,008 $ 155,888 ============ ============ Net interest margin (FTE) ............ 3.99% 4.46% ========= ======== <FN> <F1> (1) Yields on tax-exempt securities are not fully taxable equivalent (FTE). </FN> </TABLE> 17
The following table summarizes the changes in interest income and expense due to changes in average balances (volume) and changes in rates. Six Months Ended 2003 vs. 2002 Increase (decrease) due to change in -------------------------------------------- Volume Rate Net ------------ -------------- ------------ (in thousands) Interest income on: Loans and leases ............ $ (2,298) $ (16,954) $ (19,252) Taxable investment securities ................. 51,657 (53,347) (1,690) Tax-exempt investment securities ................. 1,033 (859) 174 Equity securities ........... 967 (622) 345 Short-term investments ...... 493 594 1,087 ------------ -------------- ------------ Total interest-earning assets .................. $ 51,852 $ (71,188) $ (19,336) ============ ============== ============ Interest expense on: Demand deposits ............. $ 1,608 $ (1,132) $ 476 Savings deposits ............ 594 (3,378) (2,784) Time deposits ............... (2,691) (9,708) (12,399) Short-term borrowings 4,320 (4,445) (125) Long-term debt .............. 4,850 (3,474) 1,376 ------------ -------------- ------------ Total interest-bearing liabilities ............. $ 8,681 $ (22,137) $ (13,456) ============ ============== ============ Interest income decreased $19.3 million, or 8.2%, as a result of the 99 basis point decrease in average yields, which caused a $71.2 million decline in interest income. This was offset by a $51.9 million increase in interest income mainly due to growth in average investment securities balances. Average investment securities increased $582.9 million, or 32.4%, as the growth in deposits and borrowings exceeded loan growth. The Corporation used the excess funds to purchase investment securities, particularly mortgage-backed securities, which grew $549.8 million, or 42.1%. The average yield on investment securities declined 141 basis points from 5.35% in 2002 to 3.94% in 2003. The Corporation's average loan portfolio decreased by approximately $42.5 million, or 0.8%. Growth in commercial mortgages ($95.7 million, or 6.5%) and commercial loans ($169.2 million, or 11.0%) was more than offset by declines in consumer loans ($76.7 million, or 12.6%) and residential mortgages ($224.7 million, or 15.4%). Residential mortgages continued to decline, as low mortgage rates fueled refinance activity and most qualifying originated fixed rate mortgages were sold in the secondary market. Consumer loans decreased due to payoffs as consumer debt was replaced with mortgage debt and the runoff of automobile loans as the Corporation elected not to compete on rate. Interest expense decreased $13.5 million, or 16.7%, due to the decline in interest rates. The 64 basis point decline in the average cost of interest-bearing funds resulted in an $22.1 million decrease in interest expense. The net $465.5 million, or 8.0%, increase in average interest-bearing liabilities resulted in only a $8.7 million increase in interest expense due to the change in the composition of these liabilities. Interest bearing demand and savings deposits increased $307.1 million, or 13.2%, while time deposits decreased $80.7 million, or 3.1%. This change in the deposit mix reflects depositors' reluctance to reinvest maturing time deposits at the current low rates. Short-term borrowings increased $159.2 million, or 35.8%, and long-term debt increased $79.8 million, or 17.3%. The increase in average short-term borrowings was realized in customer repurchase agreements ($25.8 million, or 9.24%) and Federal funds purchased ($135.2 million or 83.8%). Federal funds purchased were 18
used to reduce interest rate sensitivity to the change in the loan mix from fixed to floating rates. Long-term debt increased $79.8 million, or 17.3%, from the same period in 2002. Provision for Loan Losses - ------------------------- The following table summarizes the activity in the Corporation's allowance for loan losses: Six Months Ended June 30 --------------------------- 2003 2002 ------------ ------------ (dollars in thousands) Loans outstanding at end of period (net of unearned) .............................. $ 5,391,398 $ 5,374,210 ============ ============ Daily average balance of loans and leases ....... $ 5,365,939 $ 5,408,413 ============ ============ Balance of allowance for loan losses at beginning of period ......................... $ 71,920 $ 71,872 Loans charged-off: Commercial, financial and agricultural ....... 2,936 2,353 Real estate - mortgage ....................... 1,303 966 Consumer ..................................... 2,445 2,923 Leasing and other ............................ 227 321 ------------ ------------ Total loans charged-off ...................... 6,911 6,563 ------------ ------------ Recoveries of loans previously charged-off: Commercial, financial and agricultural ....... 534 478 Real estate - mortgage ....................... 371 229 Consumer ..................................... 952 1,282 Leasing and other ............................ 49 43 ------------ ------------ Total recoveries ............................. 1,906 2,032 ------------ ------------ Net loans charged-off ........................... 5,005 4,531 Provision for loan losses ....................... 5,325 5,460 ------------ ------------ Balance at end of period ........................ $ 72,240 $ 72,801 ============ ============ Net charge-offs to average loans (annualized) ... 0.19% 0.17% ============ ============ Allowance for loan losses to loans outstanding .. 1.34% 1.35% ============ ============ The provision for loan losses for the first six months of 2003 totaled $5.3 million, a decrease of $135,000, or 2.5%, from the same period in 2002. Net charge-offs totaled $5.0 million, or 0.19% of average loans on an annualized basis, during the first six months of 2003, a $474,000, or 10.5% increase from $4.5 million, or 0.17%, in net charge-offs for the first six months of 2002. Non-performing assets increased to $38.9 million, or 0.45% of total assets, at June 30, 2003, from $32.9 million, or 0.42% of total assets, at June 30, 2002. The provision for loan losses resulted from the Corporation's allowance allocation procedures. Trends that would indicate the need for a higher provision include the general national and regional economies and the continued growth in the Corporation's commercial loan and commercial mortgage portfolios, which are inherently more risky than residential mortgages. Despite these factors, the Corporation's asset quality measures have remained consistent over the past several years. Total non-performing assets decreased slightly from year-end and increased from June 30, 2002 as a result of one commercial account for which an appropriate allocation of the allowance has been made. 19
Despite a consistent level of net charge-offs compared to 2002, a decrease in the provision was appropriate based on the Corporation's estimates of credit loss exposure in the loan portfolio.. Other Income - ------------ Other income for the six months ended June 30, 2003 was $66.2 million. This was an increase of $12.8 million, or 24.0%, over the comparable period in 2002. Excluding investment security gains, which increased $3.7 million, or 109.0%, to $7.0 million in 2003, other income increased $9.1 million, or 18.2%. The most significant increase in other income for the first six months of 2003 was realized in mortgage banking income, which increased $5.7 million, or 94.5%, to $11.8 million. The Corporation has devoted additional resources to mortgage banking activities to provide enhanced mortgage lending services throughout its geographic markets. In addition, the national average rate for new fixed rate mortgage loans decreased 173 basis points from 7.16% in January of 2002 to 5.43% in June of 2003. These factors contributed to a $106.9 million increase in mortgage loan originations to $594.9 million in the first six months of 2003 as compared to $488.0 million in the first six months of 2002. In order to limit interest rate risk, the Corporation generally sells the qualifying fixed rate mortgage loans it originates. These sales resulted in gains of $11.7 million for the first six months of 2003, compared to $5.3 million in the first six months of 2002. The national average rate for 30-year fixed rate mortgage loans increased to 5.80% in July of 2003. A sustained increase in mortgage rates may result in a reduction in mortgage banking income in the future. Investment management and trust services income increased $2.4 million, or 16.3%, due to an increase in brokerage service fee income, particularly on fixed-rate annuities which have become popular in the current rate and economic environment. Service charges on deposit accounts increased $633,000, or 3.5%, mainly due to growth in savings and demand deposits. Other service charges and fees increased $916,000, or 10.9%, as the scope and penetration of the Corporation's other services continued to expand. Income from debit card transactions increased $315,000, or 13.5%, to $2.6 million for the first six months of 2003 due to an increase in purchase volumes. In response to recent legal settlements between VISA and MasterCard and a third party, the earnings rate paid by these companies on debit card purchase volumes is expected to decrease by at least one third from August 1, 2003 through the end of 2003. Due to uncertainties created by the terms of these settlements, the impact on debit card income for the Corporation beyond 2003 cannot reasonably be projected. Other income decreased $557,000 to $2.2 million, mainly due to a reversal of $848,000 of negative goodwill during the first six months of 2002. Investment securities gains increased $3.7 million, or 108.8%. Investment securities gains during the first six months of 2003 consisted of realized gains of $7.0 million on the sale of equity securities and $3.2 million on the sale of available for sale debt securities. These gains were offset by $3.2 million of losses recognized for equity securities exhibiting other than temporary impairment. Improvements, in the equity markets, particularly in the second quarter of 2003, bolstered the value of the Corporation's equity portfolio, resulting in increased realized security gains. Other Expenses - -------------- Total other expenses for the first six months of 2003 were $113.9 million, a $2.5 million, or 2.3%, increase over the same period in 2002. The largest increases were in salaries and benefits, which increased $4.1 million, or 6.5%, and occupancy expense, which increased $1.3 million, or 15.6%. These increases were partially offset by decreases in equipment expense of $247,000, or 4.5%, data processing expense of $523,000 or 8.5%, advertising of $634,000, or 17.4% , and other expense of $1.6 million, or 6.7%. Salaries and employee benefits increased $4.1 million, or 6.5 %, to $67.8 million in comparison to the first six months of 2002 of $63.7 million. The salary expense component increased $3.1 million, or 6.1%, driven by increases in commissions paid in mortgage banking and trust services and normal salary increases for 20
existing employees. The employee benefits component of the expense increased $823,000, or 7.4%, due mainly to rising retirement plan expenses. Net occupancy expense increased $1.3 million, or 15.6%, over the same period in 2002, due to general increases in rental costs and real estate taxes. In addition, utilities expense and snow removal costs increased significantly during the first quarter of 2003 due to the relatively harsh winter in the Corporation's geographic locations. Equipment expense decreased $247,000, or 4.5%, due to a reduction in depreciation expense as certain equipment became fully depreciated during the period. Data Processing expense decreased $523,000, or 8.5% due to favorable renegotiations of certain third-party contracts. Advertising expense decreased $634,000, or 17.4%, due to a significant branding campaign at the Corporation's lead bank in 2002. Other expense decreased $1.6 million, or 6.7%, to $21.6 million in 2003. Income Taxes - ------------ Income tax expense for the six months ended June 30, 2003 was $28.8 million, a $1.7 million, or 6.1%, increase from $27.2 million in 2002. The Corporation's effective tax rate was approximately 29.7% in 2003 as compared to 29.4% in 2002. 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 June 30, 2003 increased $231.5 million, or 2.8%, to $8.6 billion at June 30, 2003 from $8.4 billion at December 31, 2002. Investment securities increased $132.5 million, or 5.5%, as the growth in deposits and borrowings exceeded loan growth. The Corporation used the excess funds to purchase investment securities, particularly mortgage-backed securities, which grew $92.8 million, or 5.0%. Loans outstanding, net of unearned income, increased $74.3 million, or 1.4%, during the period. Commercial loans and commercial mortgages increased $103.6 million, or 3.2%, offset by a decrease in residential mortgages ($28.1 million, or 2.3%) as a result of refinance activity. In addition, consumer loans and leases declined $23.1 million, or 3.7%. Cash and due from banks increased $39.4 million, or 12.5%, during the period due to fluctuations in the normal course of business. Accrued interest receivable decreased $3.6 million to $32.0 million at June 30, 2003 as a result of decreases in interest rates. Other assets increased $4.0 million to $117.1 million due to an increase in deferred tax assets as the net unrealized gain on investment securities decreased. Deposits increased $191.5. million, or 3.1%, from December 31, 2002. Savings deposits and demand deposits increased by $215.1 million and $67.5 million, respectively, while time deposits decreased $91.1 million. This reflects a continuing sentiment in the financial community that interest rates will start to rise in the future, leaving consumers reluctant to invest in time deposits at the current lower rates. Short-term borrowings, which consist mainly of Federal funds purchased and customer cash management accounts, decreased $32.2 million, or 5.1%, during the first six months of 2003. Federal funds purchased decreased $80 million, or 24.2%, while customer cash management accounts increased $49.8 million, or 16.7%. Federal funds purchased decreased as a result of the increase in deposits exceeding the demand for loans. Long-term debt decreased $1.1 million, or 0.2%, as a result of maturing Federal Home Loan Bank advances. Other liabilities increased $66.7 million, or 85.9%, mainly due to $73.0 million of investment securities which were purchased in June, but had not yet settled at June 30, 2003. 21
Capital Resources - ----------------- Total shareholders' equity increased $9.9 million during the first six months of 2003. Increases due to net income of $68.1 million and $4.0 million in issuances of stock, were offset by $32.0 million in cash dividends to shareholders, $21.3 million of stock repurchases and $8.9 million in net unrealized losses on securities. The Corporation and its subsidiary banks are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that could have a material effect on the Corporation's financial statements. The regulations require that banks maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and Tier I capital to average assets (as defined). As of June 30, 2003, the Corporation and each of its bank subsidiaries met the minimum capital requirements. In addition, the Corporation and each of its bank subsidiaries' capital ratios exceeded the amounts required to be considered "well-capitalized" as defined in the regulations. On December 17, 2002, the Board of Directors approved a program to repurchase up to 3.2 million shares through June 30, 2003 (the plan was subsequently extended to December 31, 2003). Stock repurchased was added to the Corporate treasury to be used for general corporate purposes. During the first six months of 2003, the Corporation repurchased 1.2 million shares under this plan. Liquidity - --------- The Corporation must maintain a sufficient level of liquid assets to meet the cash needs of its customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity is provided through scheduled and unscheduled principal and interest payments on outstanding loans and investments and through the availability of deposits and borrowings. In addition, the Corporation can borrow on a secured basis from the Federal Home Loan Bank to meet short-term liquidity needs. The Corporation's sources and uses of cash were discussed in general terms in the net interest income section of Management's Discussion. The Consolidated Statements of Cash Flows provide additional information. The Corporation generated $86.7 million in cash from operating activities during the first six months of 2003, mainly due to net income. Investing activities resulted in a net cash outflow of $157.9 million, compared to a net cash outflow of $194.8 million in 2002, as proceeds from sales and maturities of investment securities increased in proportion to purchases, as compared to the prior year. Finally, financing activities resulted in a net inflow of $110.6 million as excess funds from net deposit growth exceeded payments of borrowings and net common stock activity. Liquidity must also be managed at the Fulton Financial Corporation Parent Company level. For safety and soundness reasons, banking regulations limit the amount of cash that can be transferred from subsidiary banks to the Parent Company in the form of loans and dividends. Generally, these limitations are based on the subsidiary banks' regulatory capital levels and their net income. The Parent Company has historically been able to meet its cash needs through normal, allowable dividends and loans. If additional cash needs arise that cannot be met through such dividends and loans, the Parent Company may need to pursue alternative funding sources, including stock or debt issuances. 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk - ------------------------------------------------------------------------------- Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by financial institutions 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 primarily of common stocks of publicly traded financial institutions with a cost basis of approximately $73.8 million and a fair value of $82.9 million at June 30, 2003. The Corporation's financial institutions stock portfolio had gross unrealized gains of approximately $11.0 million at June 30, 2003. Although the carrying value of equity investments accounted for less than 1.0% 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. 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 table on page 24, as such investments do not have maturity dates. Certain of the Corporation's equity investments had shown negative returns in tandem with the general performance of equity markets, as of the end of the first quarter of 2003. The Corporation had evaluated, based on current and proposed accounting guidance, whether the decreases in value of any of these investments constituted "other than temporary" impairment which would require a write-down through a charge to earnings. During the first quarter of 2003, the Corporation recorded a pre-tax charge of $3.2 million for specific equity securities which were determined to exhibit "other than temporary" impairment in value as of March 31, 2003. During the second quarter of 2003, these securities showed unrealized gains of $600,000 compared to their adjusted carrying amounts. The Corporation continues to monitor its portfolio and will record additional impairment charges if appropriate. In addition to its equity portfolio, the Corporation's investment management and trust services revenue could be impacted by fluctuations in the securities markets. A portion of the Corporation's trust revenue is based on the value of the underlying investment portfolios. If securities markets contract, the Corporation's revenue could be negatively impacted. In addition, the ability of the Corporation to sell its equities brokerage services is dependent, in part, upon consumers' level of confidence in the outlook for rising securities prices. Interest Rate Risk - ------------------ Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the Corporation's liquidity position and could affect its ability to meet obligations and continue to grow. Second, movements in interest rates can create fluctuations in the Corporation's net income and changes in the economic value of its equity. The Corporation employs various management techniques to minimize its exposure to interest rate risk. An Asset/Liability Management Committee (ALCO), consisting of key financial and senior management personnel, meets on a weekly basis. The ALCO is responsible for reviewing the interest rate sensitivity position of the Corporation, approving asset and liability management policies, and overseeing the 23
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. 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. <TABLE> <CAPTION> Expected Maturity Period ----------------------------------------------------------------------------- Estimated 2003 2004 2005 2006 2007 Beyond Total Fair Value ----------- ----------- ----------- ----------- ----------- ------------ ----------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Fixed rate loans (1) .... $ 933,973 $ 624,337 $ 438,576 $ 295,556 $ 187,412 $ 448,648 $ 2,928,502 $ 3,168,897 Average rate ......... 6.76% 7.00% 6.95% 7.02% 6.95% 7.09% 6.93% Floating rate loans (1) . 935,635 302,082 219,685 180,739 141,282 683,473 2,462,896 2,430,298 Average rate ......... 5.08% 5.27% 5.31% 5.34% 4.52% 4.33% 4.90% Fixed rate investments (2) ........ 1,267,779 526,641 222,952 123,332 110,653 128,290 2,379,647 2,410,429 Average rate ......... 3.89% 3.74% 3.91% 4.31% 4.53% 3.76% 3.90% Floating rate investments (2) ........ 1,000 -- -- -- -- 6,612 7,612 7,612 Average rate ......... 7.48% -- -- -- -- 3.35% 3.89% Other interest-earning assets ................. 65,611 -- -- -- -- -- 65,611 65,611 Average rate ......... 5.78% -- -- -- -- -- 5.78% ------------------------------------------------------------------------------------------------------- Total ................... $ 3,203,998 $ 1,453,060 $ 881,213 $ 599,627 $ 439,347 $ 1,267,023 $ 7,844,268 $ 8,082,847 Average rate ......... 5.11% 5.46% 5.77% 5.96% 5.56% 5.24% 5.36% ------------------------------------------------------------------------------------------------------- Fixed rate deposits (3) . $ 1,234,086 $ 517,051 $ 174,787 $ 177,079 $ 94,482 $ 74,293 $ 2,271,778 $ 2,335,977 Average rate ......... 2.56% 3.53% 3.58% 4.76% 4.29% 4.80% 3.18% Floating rate deposits (4) ........... 1,588,009 155,933 155,933 155,933 155,933 1,953,504 4,165,245 4,165,245 Average rate ......... 0.97% 0.12% 0.12% 0.12% 0.12% 0.11% 0.44% Fixed rate borrowings (5) ......... 41,281 5,262 78,257 10,272 140,417 258,967 534,456 580,683 Average rate ......... 4.61% 6.38% 6.29% 3.44% 4.72% 5.13% 5.13% Floating rate borrowings (6) ......... 599,995 -- -- -- -- -- 599,995 599,995 Average rate ......... 1.00% -- -- -- -- -- 1.00% ------------------------------------------------------------------------------------------------------- Total ................... $ 3,463,371 $ 678,246 $ 408,977 $ 343,284 $ 390,832 $ 2,286,764 $ 7,571,474 $ 7,681,900 Average rate ......... 1.59% 2.77% 2.78% 2.61% 2.78% 0.83% 1.64% ------------------------------------------------------------------------------------------------------- <FN> Assumptions: - ----------- <F1> (1) Based on contractual maturities, adjusted for expected prepayments. <F2> (2) Based on contractual maturities, adjusted for expected prepayments on mortgage-backed securities. <F3> (3) Based on contractual maturities of time deposits. <F4> (4) Money market and Super NOW deposits are shown in first year. NOW and savings accounts are spread based on history of deposit flows. <F5> (5) Amounts are based on expected payoffs and calls of Federal Home Loan Bank advances. <F6> (6) Amounts are Federal funds purchased and securities sold under agreements to repurchase, which mature in less than 90 days. </FN> </TABLE> 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 repricing periods based on contractual repricings and maturities and other assumptions. The assumptions used are monitored and periodically revised based on current market conditions. Core deposits not having a contractual maturity are placed into repricing periods based upon historical balance performance. Repricing for mortgage loans held and for mortgage-backed securities reflect both 24
contractual maturities and estimated prepayments based upon industry projections for prepayment speeds. The Corporation's policy provides that the cumulative 6-month gap should be managed to within plus or minus 15% of total earning assets. In the current interest rate environment, the Corporation's gap has continued to trend positive as the majority of the commercial loan growth has been floating rate and significant amounts of long-term fixed rate residential mortgages have prepaid. The Corporation will continue to focus on strategies to reduce the gap in the third quarter. 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. These results are not necessarily indicative of future operating results, nor do they reflect certain actions that the Corporation may take in response to future interest rate changes. Annual change in net interest Rate Shock income % Change - ---------- --------------- --------- +300 bp +$ 34.6 million + 12.2% +200 bp +$ 26.5 million + 9.4% +100 bp +$ 16.7 million + 5.9% -100 bp -$ 17.5million - 6.2% 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 re-pricing 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 -$ 31.5million + 2.3% +200 bp +$ 34.1million + 2.4% +100 bp +$ 43.2million + 3.1% -100 bp -$ 38.1million - 2.7% 25
Item 4. Controls and Procedures - -------------------------------------------------------------------------------- The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's management, including the Corporation's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Corporation's Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, the Corporation's disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Corporation reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no changes in our internal control over financial reporting during the fiscal quarter covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 26
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: (1) Form 8-K dated April 15, 2003 reporting a presentation made at Fulton Financial Corporation's Annual Meeting of Shareholders which provided an overview of the Corporation's 2002 performance. (2) Form 8-K dated April 15, 2003 filing the Corporation's press release of financial results for the quarter-ended March 31, 2003. (3) Form 8-K dated June 11, 2003 reporting a presentation at an investor meeting to provide an overview of the Corporation's strategy and performance. (4) Form 8-K dated July 15, 2003 filing the Corporation's press release of financial results for the quarter-ended June 30, 2003. (5) Form 8-K dated July 29, 2003 reporting a presentation at an investor meeting to provide an overview of the Corporation's strategy and performance. (6) Form 8-K dated August 4, 2003 reporting the effective date of the Premier Bancorp, Inc. acquisition. 27
(7) FULTON FINANCIAL CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FULTON FINANCIAL CORPORATION Date: August 13, 2003 /s/ Rufus A. Fulton, Jr. ------------------------ -------------------------------------- Rufus A. Fulton, Jr. Chairman and Chief Executive Officer Date: August 13, 2003 /s/ Charles J. Nugent ------------------------ -------------------------------------- Charles J. Nugent Senior Executive Vice President and Chief Financial Officer 28
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. 31 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.1 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 29