10-Q 1 sept10q03.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 2003 ------------------ Commission file number: 33-850626 --------- FULTON BANCSHARES CORPORATION ----------------------------- (Exact name of registrant as specified in its charter) Commonwealth of Pennsylvania 25-1598464 ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 Lincoln Way East McConnellsburg, Pennsylvania 17233 ---------------------------- --------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (717) 485-3144 ---------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at November 5, 2003 ----------------------------- ------------------------------- (Common stock, .625 par value) 492,810 Page 1 of 30 FULTON BANCSHARES CORPORATION INDEX Page PART I - FINANCIAL INFORMATION Condensed consolidated balance sheets - September 30, 2003 and December 31, 2002 4 Condensed consolidated statements of income - three months ended September 30, 2003 and 2002 5 Condensed consolidated statements of comprehensive income - three months ended September 30, 2003 and 2002 6 Condensed consolidated statements of income - nine months ended September 30, 2003 and 2002 7 Condensed consolidated statements of comprehensive income - nine months ended September 30, 2003 and 2002 8 Condensed consolidated statements of cash flows- nine months ended September 30, 2003 and 2002 9 Notes to condensed consolidated financial statements 10 - 12 Management's discussion and analysis of financial condition and results of operations 13 - 20 PART II - OTHER INFORMATION 22 Signatures 23 Exhibits 24 - 30 Page 2 of 30 PART I - FINANCIAL INFORMATION Page 3 of 30 FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 30, December 31, 2003 2002 (Unaudited) (000 Omitted) ASSETS Cash and due from banks $ 4,330 $ 5,214 Available-for-sale securities 29,446 37,675 Federal Reserve, Atlantic Central Bankers Bank, Federal Home Loan Bank, at cost which approximates market 1,744 1,772 Loans, net of allowance for loan losses 103,588 107,236 Bank building, equipment, furniture & fixtures, net 3,820 3,938 Other real estate owned 53 0 Accrued interest/dividends receivable 1,107 939 Cash surrender value of life insurance 5,176 4,658 Other assets 880 850 -------------- ----------- Total assets $ 150,144 $ 162,282 ============== ============ LIABILITIES Deposits: Noninterest-bearing deposits $ 15,432 $ 16,155 Interest-bearing deposits: Savings deposits 34,385 32,877 Time deposits 60,370 63,993 -------------- ----------- Total deposits 110,187 113,025 Accrued interest payable 249 314 Other borrowed money 22,175 31,250 Other liabilities 1,175 1,034 -------------- ----------- Total liabilities 133,786 145,623 -------------- ----------- STOCKHOLDERS' EQUITY Capital stock, common, par value - $ 0.625; 4,000,000 shares authorized; 495,000 shares issued at September 30, 2003 and December 31, 2002 310 310 Surplus 2,051 2,051 Retained earnings 14,462 14,262 Net unrealized gains/(losses) available - for-sale securities ( 377) 124 Treasury stock: 2,190 and 2,230 shares, respectively at cost ( 88) ( 88) --------------- ---------- Total stockholders' equity 16,358 16,659 -------------- ----------- Total liabilities and stockholders' equity $ 150,144 $ 162,282 ============== ========== * Condensed from audited financial statements

The accompanying notes are an integral part of these Condensed financial statements. Page 4 of 30 FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) September 03, September 03, 2003 2002 (000 Omitted) Interest & Dividend Income $ 1,773 $ 1,923 Interest & fees on loans Interest & dividends on investment securities: U.S. Government securities 175 230 Obligations of state & political subdivisions 9 27 Interest on federal funds sold 0 7 Other interest & dividend income 158 313 ------------- ------------- Total interest & dividend income 2,115 2,500 ------------- ------------- Interest Expense Interest on deposits 522 878 Interest on federal funds purchased 0 2 Interest on other borrowed money 254 238 ------------- ------------- Total interest expense 776 1,118 ------------- ------------- Net interest income before provision for loan losses 1,339 1,382 Provision for loan losses 1,030 115 ------------- ------------- Net interest income after provision for loan losses 309 1,267 ------------- ------------- Other Income Service charges on deposit accounts 54 55 Other fee income 59 38 Other non-interest income 70 64 Securities gains (losses) 0 0 ------------- ------------- Total other income 183 157 Other Expense Salaries and employee benefits 438 452 Fixed asset expenses (including depreciation) 198 175 FDIC insurance premiums 4 5 Other noninterest expenses 362 333 ------------- ------------- Total other expenses 1,002 965 ------------- ------------- Net income (loss) before income taxes ( 510) 459 Applicable income taxes (benefit) ( 280) 78 ------------- ------------- Net income (loss) ($ 230) $ 381 ============= ============= Weighted average number of shares outstanding $ 492,810 $ 492,770 Net income (loss) per share ($ 0.47) $ 0.77 Cash dividends declared per share $ 0.27 $ 0.26

The accompanying notes are an integral part of these condensed financial statements. Page 5 of 30 FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) 2003 2002 Net income (loss) ($ 230) $ 381 Other comprehensive income, net of tax Unrealized gain (loss) on investments available for sale ( 493) 306 -------- ------- Comprehensive income (loss) ($ 723) $ 687 ======== =======

The accompanying notes are an integral part of these condensed financial statements. Page 6 of 30 FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) 2003 2002 (000 Omitted) Interest & Dividend Income Interest & fees on loans $ 5,250 $ 5,773 Interest & dividends on investment securities: U.S. Government securities 385 717 Obligations of state & political subdivisions 46 79 Interest on federal funds sold 0 12 Other interest & dividend income 774 937 --------- --------- Total interest & dividend income 6,455 7,518 --------- --------- Interest Expense Interest on deposits 1,634 2,617 Interest on federal funds purchased 0 3 Interest on other borrowed money 798 694 --------- --------- Total interest expense 2,432 3,314 --------- --------- Net interest income before provision for loan losses 4,023 4,204 Provision for loan losses 1,265 240 --------- --------- Net interest income after provision for loan losses 2,758 3,964 --------- --------- Other Income Service charges on deposit accounts 166 146 Other fee income 185 120 Other non-interest income 225 208 Securities gains (losses) 150 1 --------- --------- Total other income 726 475 --------- --------- Other Expense Salaries and employee benefits 1,247 1,311 Fixed asset expenses (including depreciation) 602 552 FDIC insurance premiums 13 15 Other noninterest expenses 1,079 956 --------- --------- Total other expenses 2,941 2,834 --------- --------- Net income before income taxes 543 1,605 Applicable income taxes (benefit) ( 16) 351 --------- --------- Net income $ 559 $ 1,254 ========= ========= Weighted average number of shares outstanding $ 492,810 $ 492,770 Net income per share $ 1.13 $ 2.54 Cash dividends declared per share $ 0.73 $ 0.70

The accompanying notes are an integral part of these condensed financial statements. Page 7 of 30 FULTON BANCSHARES CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) 2003 2002 Net income $ 559 $ 1,254 Unrealized gain (loss) on investments ( 501) 309 available for sale, net of tax Reclassification adjustment for gains (losses) included in net income 150 1 -------- ------- Comprehensive income $ 208 $ 1,564 ======= =======

The accompanying notes are an integral part of these condensed financial statements. Page 8 of 30 FULTON BANCSHARES, CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) 2003 2002 Cash flows from operating activities: Net income $ 559 $ 1,254 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 288 248 Provision for loan losses 1,265 240 Gain on sale - Securities ( 150) ( 1) Gain on sale - OREO 0 ( 9) Other - Net ( 29) ( 428) ---------- ---------- Net cash provided by operating activities 1,933 1,304 ---------- ---------- Cash flows from investing activities: Purchase of investment securities - Available-for-sale ( 10,465) ( 21,478) Purchase (redemption) of Federal Home Loan Bank Stock 28 ( 255) Sales of available-for-sale securities 1,614 825 Maturities of available-for-sale securities 16,457 14,426 Net (increase) in loans 2,383 ( 2,394) (Purchase) sale of OREO ( 53) 92 Purchase of directors and officers life insurance ( 353) 0 Purchases of & deposits on bank premises and equipment - net ( 156) ( 493) ---------- ---------- Net cash provided (used) by investing activities 9,455 ( 9,277) ---------- ---------- Cash flows from financing activities: Net increase (decrease) in deposits ( 2,838) ( 1,559) Dividends paid ( 359) ( 345) Net increase (decrease) in other borrowed money ( 9,075) 8,175 ---------- ---------- Net cash provided (used) by financing activities ( 12,272) 6,271 ---------- ---------- Net increase (decrease) in cash and cash equivalents ( 884) ( 1,702) Cash and cash equivalents, beginning balance 5,214 5,529 ---------- ---------- Cash and cash equivalents, ending balance $ 4,330 $ 3,827 ========= ========= Supplemental disclosure of cash flows information: Cash paid during the period for: Interest $ 2,497 $ 3,148 Income taxes 387 572 Supplemental schedule of noncash investing and financing activities: Change in net unrealized gain on investments available for sale (net of deferred taxes) ( 501) 310

The accompanying notes are an integral part of these condensed financial statements. Page 9 of 30 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 (UNAUDITED) Review of Interim Financial Statements The condensed consolidated financial statements as of and for the nine months ended September 30, 2003 and 2002 have been reviewed by independent certified public accountants. Their report on the review is attached as Exhibit 99 to the 10-Q filing. Note 1. Basis of Presentation The financial information presented at and for the three and nine months ended September 30, 2003 and 2002 is unaudited. Information presented at December 31, 2002 is condensed from audited year-end financial statements. However, unaudited information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim period. Note 2. Principles of Consolidation The consolidated financial statements include the accounts of the corporation and its wholly-owned subsidiaries, Fulton County National Bank & Trust Company and the Fulton County Community Development Corporation. All significant intercompany transactions and accounts have been eliminated. Note 3. Cash Flows For purposes of the statements of cash flows, the corporation has defined cash and cash equivalents as those amounts included in the balance sheet captions "cash and due from banks" and "federal funds sold". As permitted by Statement of Financial Accounting Standards No. 104, the corporation has elected to present the net increase or decrease in deposits in banks, loans and time deposits in the statements of cash flows. Note 4. Federal Income Taxes For financial reporting purposes the provision for loan losses charged to operating expense is based on management's judgment, whereas for federal income tax purposes, the amount allowable under present tax law is deducted. Additionally, certain expenses are charged to operating expense in the period the liability is incurred for financial reporting purposes, whereas for federal income tax purposes, these expenses are deducted when paid. As a result of these timing differences, deferred income taxes are provided in the financial statements. Federal income taxes were computed after reducing pretax accounting income for nontaxable municipal and loan income. Page 10 of 30 Note 5. Other Commitments In the normal course of business, the Corporation makes various commitments and incurs certain contingent liabilities which are not reflected in the accompanying financial statements. These commitments include various guarantees and commitments to extend credit and the Corporation does not anticipate any losses as a result of these transactions. Note 6. Investment Securities The carrying amounts of investment securities and their approximate fair values at September 30, 2003 were as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value Debt securities available for sale: FNMA/FHLMC non - cumulative preferred stocks $ 17,401,071 $ 85,500 ($ 740,196) $ 16,746,375 State & municipal Securities 726,861 68,025 0 794,886 U.S. Government Agencies 8,264,411 35,366 ( 3,736) 8,296,041 Mortgage-backed Securities 3,492,202 5,830 ( 19,629) 3,478,403 Equity securities 132,000 2,300 ( 4,000) 130,300 ------------ ------------ ------------- ------------ $ 30,016,545 $ 197,021 ($ 767,561) $ 29,446,005 ============ ============ ============= ============

There were no securities categorized "Held-to-maturity" or "Trading" at September 30, 2003. Note 7. Comprehensive Income Comprehensive income is defined as the change in equity from transactions and other events from nonowner sources. It includes all changes in equity except those resulting from investments by owners and distributions to owners. Consequently, a "Statement of Comprehensive Income" has been included in this filing. Page 11 of 30 Note 8. Contingency As of November 13, 2003, the Fulton County National Bank & Trust Company is in the process of a regulatory examination being performed by the Office of the Comptroller of the Currency (OCC). As a result of preliminary results of the OCC exam, management has increased the allowance for loan losses to the level unofficially required by the examiners. Management does not expect any significant changes to the allowance as a result of finalizing the OCC examination. However, it is reasonably possible that the final OCC examination results may require an additional provision to the allowance. Page 12 of 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net after tax income for the first nine months of 2003 was $ 559,000 compared to $ 1,254,000 for the same period in 2002, representing a decrease of $ 695,000, or 55.4%. Net income on an adjusted per share basis for the first nine months of 2003 was $ 1.13, a decrease of $ 1.41 from the $ 2.54 per share realized during the nine months ended September 30, 2002. RESULTS OF OPERATIONS Third Quarter 2003 vs. Third Quarter 2002 Interest income for the third quarter of 2003 was $ 2,115,000 compared with $ 2,500,000 earned during the same period in 2002, for a decrease of $ 385,000, or 15.4%. The decrease was due primarily to a significant decrease in interest rates earned on loans and investments in 2003 compared with the same period in 2002. Management expects average rates earned for the rest of 2003 to increase slowly. Interest expense for the third quarter of 2003 was $ 776,000, a decrease of $ 342,000, or 30.5% from the $ 1,118,000 incurred for the same period in 2002. The decrease was due primarily to a decrease in interest rates paid on deposits and short-term borrowings. Management expects average rates paid for the rest of 2003 to increase slowly. Net interest income for the third quarter of 2003 totaled $ 1,339,000, down $ 43,000, or 3.1%, from the third quarter of 2002. Nine Months 2003 vs. Nine Months 2002 Interest income for the first nine months of 2003 was $ 6,455,000 compared with $ 7,518,000 for the nine months ended September 30, 2002, for a decrease of $ 1,063,000, or 14.1%. The decrease was due primarily to a significant decrease in interest rates earned on loans and investments in 2003 compared with the same period in 2002. Management expects average rates paid for the rest of 2003 to increase slowly. Interest expense for the first nine months of 2003 was $ 2,432,000, a decrease of $ 882,000, or 26.6% over the $ 3,314,000 incurred for the same period in 2002. The decrease was due primarily to a significant decrease in time deposits, which pays higher rates than savings deposits, and a decrease in interest rates paid on deposits and short-term borrowings in 2003 compared with the same period in 2002. Management expects average rates paid for the rest of 2003 to increase slowly. Page 13 of 30 NET INTEREST MARGIN The net interest margin for the first nine months of 2003 was 3.70% compared with 3.99% for the first nine months of 2002. Liquidity and interest rate risk are continuously monitored through Asset-Liability Committee reports. Management plans to protect its net interest margin by competitively pricing loans and deposits and by structuring interest-earning assets and liabilities in such a way that they can be repriced in response to changes in market interest rates. NON-INTEREST INCOME Third Quarter 2003 vs. Third Quarter 2002 Third quarter 2003 non-interest income increased to $ 183,000 from $ 157,000, or 16.5%. Service charges on deposit accounts were $ 54,000 for the third quarter 2003 compared with $ 55,000 for the same period in 2002. Other fee income increased $ 21,000, or 55.2%, primarily as a result of fee income generated on the sale of mortgages to the Federal Home Loan Bank. Other non- interest income increased $ 6,000, or 9.3%, primarily as a result of the earnings on $ 353,000 additional directors and officers' life insurance that was purchased in late June 2003. No securities gains or losses were reported for the third quarter of 2003 or 2002. Nine Months 2003 vs. Nine Months 2002 Non-interest income for the first nine months of 2003 and the same period in 2002 was $ 726,000 and $ 475,000, respectively. Service charges on deposit accounts increased $ 20,000, or 13.6%. Other fee income increased $ 65,000, or 54.1%, primarily as a result of fee income generated on the sale of mortgages to the Federal Home Loan Bank. Other non-interest income increased $ 17,000, or 8.1%, primarily due to a $ 24,000 gain on sale of student loans in 2003 which was partially offset by a $ 9,000 gain on sale of OREO reported in 2002. Securities gains totaling $ 150,000 were reported for the first nine months of 2003 compared with $ 1,000 for the same period in 2002. NON-INTEREST EXPENSES Third Quarter 2003 vs. Third Quarter 2002 Non-interest expenses for the third quarter of 2003 totaled $ 1,002,000, an increase of $ 37,000, or 3.8%, over the $ 965,000 for the third quarter of 2002. Salaries and employee-related expenses decreased $ 14,000 or 3%. Fixed asset expenses increased $ 23,000 or 13.1%. Other non-interest expenses increased by $ 29,000, or 8.7%, due to increases in advertising and promotion costs, OCC assessments, data processing, PA shares tax, telephone, and other operating expenses. Page 14 of 30 Nine Months 2003 vs. Nine Months 2002 Non-interest expenses for the first nine months of 2003 totaled $ 2,941,000, an increase of $ 107,000, or 3.8%, over the $ 2,834,000 for the same period of 2002. Salaries and employee-related expenses were down $ 64,000, or 4.8%, primarily due to turnover of employees. Fixed asset expenses increased $ 50,000, or 9.0%, primarily due to equipment and building maintenance costs and depreciation. Other non-interest expenses increased by $ 123,000, or 12.8%, due to increases in advertising and promotion costs, OCC assessments, data processing, PA shares tax, telephone, and other operating expenses. INCOME TAXES The income tax provision for the third quarter of 2003 was ($ 280,000) compared with $ 78,000 for the third quarter of 2002, while the provision was ($ 16,000) for the nine months ended September 30, 2003 compared to $ 351,000 for the first nine months of 2002. The significant change between 2003 and 2002 was a result of the deferred tax benefit related to the large increase in the provision for loan losses and the increase in non-taxable income as a percentage of total income. Effective income tax rates (compared to the marginal federal income tax bracket of 34% applicable to each period) were as follows: Nine Months Ended September 30 2003 2002 (2.9%) 21.9% PROVISION FOR LOAN LOSSES A $ 1,265,000 provision for loan losses was made for the first nine months of 2003 compared with $ 240,000 for the first nine months of 2002. The provision for the third quarter 2003 was $ 1,030,000, compared to $ 115,000 for 2002. The provisions were based on management's evaluation of the reserve for possible loan losses at September 30, 2003 and 2002. Page 15 of 30 A summary of the allowance for loan losses is as follows: ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (In 000's) Nine Months Ended September 30, September 30, 2003 2002 Allowance for loan losses Beginning of period $ 1,031 $ 845 ------------- ------------- Loans charged-off during the period: Real estate loans 0 0 Installment loans 23 50 Commercial and all other loans 363 4 ------------- ------------- Total charge-offs 386 54 ------------- ------------- Recoveries of loans previously charged-off: Real estate loans 0 0 Installment loans 7 3 Commercial and all other loans 0 1 ------------- ------------- Total recoveries 7 4 ------------- ------------- Net loans (charged-off) recovered ( 379) ( 50) Provision for loan losses charged to operations 1,265 240 ------------- ------------- Allowance for loan losses - end of period $ 1,917 $ 1,035 ============= =============

Loans 90 days or more past due (still accruing interest) and those on nonaccrual status were as follows at September 30: NONPERFORMING LOANS (In 000's) 90 Days or More Past Due and Still Accruing Nonaccrual Status 2003 2002 2003 2002 Real estate loans $ 0 $ 1,580 $ 2,426 $ 80 Installment loans 0 5 0 0 Commercial and all other loans 0 94 1,020 0 ---------- ---------- --------- --------- Total loans $ 0 $ 1,679 $ 3,446 $ 80 ========== ========== ========= =========

There were no restructured loans for any of the time periods set forth above. Page 16 of 30 The bank utilizes a comprehensive systematic review of its loan portfolio on a quarterly basis in order to determine the adequacy of the allowance for loan losses. Each quarter the loan portfolio is categorized into various pools as follows: Pool #1 Specific allowances for any individually identified problem loans Pool #2 Commercial Pool #3 Residential Real Estate Pool #4 Consumer Demand and Installment Pool #5 Farm Loans Commercial borrowing relationships over $ 500,000 and agribusiness borrowing relationships over $ 250,000 are individually reviewed. Also, loans that are 90 days or more past due or which have been previously classified as substandard are individually reviewed. Allocations to the allowance for loan losses are based upon classifications assigned to those specific loans. Loan classifications utilized are based on past experience and are as follows: Allowance Factors ----------------- Loss Charge-off Doubtful 50% Substandard 5% Special mention 1% The remaining portion of the pools are evaluated as groups with allocations made to the allowance based on historical loss experience, current and anticipated trends in delinquencies, trends in volume and terms of loans, concentrations of credit, and general economic conditions within the bank's trading area. Management is not aware of any problem loans that are indicative of trends, events, or uncertainties that would significantly impact operations, liquidity, or capital. The reasons for the increase in the provision for loan losses for the nine months ended September 30, 2003 compared to 2002 are significant increases in delinquent and classified loans. Loans past due 90 days or more still accruing interest have decreased significantly over the past four quarters. No loans were past-due 90 days or more still accruing at September 30, 2003 compared with $ 1,600,000 at September 30, 2002. However, farm loans to one borrower totaling $ 2,140,000 that were past due 90 days or more still accruing interest at March 31, 2003 were placed on nonaccrual status during the second quarter 2003. During the third quarter 2003, loans totaling 1,306,000, to two other borrowers were placed on nonaccrual status. Seventy percent of the loans in nonaccrual status are fully collateralized with real estate. Classified loans on September 30, 2003 were $ 4,281,000 compared with $ 4,873,000 on September 30, 2002. The Bank has identified farm loans as a concentration of credit. At September 30, 2003, farm loans comprised $ 2,742,000, or 64.1%, of the classified loans. Page 17 of 30 In addition, the allowance has been adjusted in the third quarter based on preliminary results of an OCC examination conducted in July and August for which an official report has not yet been received. As a result of the increased delinquencies and classified loans, the examiners have suggested increasing the allowance to a level more in line with the bank's peer group (as a percentage of total loans) as a way to provide for the perceived increase in the overall risk associated with the bank's loan portfolio. FINANCIAL CONDITION Assets Total assets on September 30, 2003 were $ 150,144,000 compared to $ 162,282,000, on December 31, 2002, a decrease of 7.4%. Management intends to contain growth and concentrate on maintaining adequate profit margins. Net loans on September 30, 2003 stood at $ 103,588,000, a decrease of 3.4% from $ 107,236,000 on December 31, 2002. The loan loss reserve at September 30, 2003 was $ 1,917,000 and is considered adequate, in management's judgment, to absorb possible loan losses on existing loans. Liabilities Total deposits decreased 2.5% to $ 110,187,000 as of September 30, 2003 compared with $ 113,025,000 at December 31, 2002. Interest-bearing savings deposits increased 4.5%, while non-interest-bearing demand deposits and interest-bearing time deposits decreased 4.6% and 5.6%, respectively. Capital Total equity as of September 30, 2003 was $ 16,358,000 representing 10.8% of total assets compared with $ 16,659,000, or 10.3% of total assets, reported on December 31, 2002. Accumulated earnings for the first nine months of 2003 were offset by dividends declared and paid of $ 359,000 and $ 377,000 net unrealized losses on available-for-sale securities. On July 20, 2000, the Board of Directors announced the approval of a plan to purchase, in open market and private negotiated transactions, up to 2% of its shares of outstanding common stock. As of September 30, 2003, the company had repurchased 2,190 shares, representing 0.44% of its outstanding common stock. It is the intention of management and the Board of Directors to continue to pay a fair return on the stockholders' investment while retaining adequate earnings to allow for continued growth. Page 18 of 30 REGULATORY CAPITAL The Company maintains capital ratios that are well above the minimum total capital levels required by federal regulatory authorities, including risk-based capital guidelines. A comparison of Fulton Bancshares Corporation's capital ratios to regulatory minimum requirements at September 30, 2003 is as follows: Fulton Regulatory Bancshares Minimum Corporation Requirements Leverage ratio 10.97% 4.00% Risk based capital ratios: Tier I (core capital) 14.62% 4.00% Combined tier I and tier II (core capital plus allowance for loan losses) 15.87% 8.00%

BALANCE SHEET ANALYSIS The following table highlights the changes in the balance sheet. Since quarter-end balances can be distorted by one-day fluctuations, an analysis of changes in the quarterly averages is provided to show balance sheet trends. BALANCE SHEET ANALYSIS (In 000's) Balance Sheets Condensed Average Third Third Quarter 2003 Quarter 2002 ASSETS Federal funds sold $ 0 $ 1,577 Securities available for sale 30,901 38,258 Other investments 1,744 965 Loans 107,078 105,617 -------------- ------------ Total interest-earning assets 139,723 146,417 Cash and due from banks 3,725 3,517 Bank premises and equipment 3,844 3,936 All other assets 6,137 6,025 Allowance for loan losses ( 904) ( 931) -------------- ------------ Total assets $ 152,525 $ 158,964 ============== ============ LIABILITIES Interest-bearing deposits in domestic offices $ 95,305 $ 109,047 Federal funds purchased 0 362 Other short-term borrowings 23,800 17,121 -------------- ------------ Total interest-bearing liabilities 119,105 126,530 -------------- ------------ Noninterest-bearing deposits 15,324 15,479 All other liabilities 975 971 -------------- ------------ Total liabilities 135,404 142,980 -------------- ------------ STOCKHOLDERS' EQUITY Common stockholders' equity 17,241 15,891 Net unrealized holding losses, net of tax ( 120) 93 -------------- ------------ Total stockholders' equity 17,121 15,984 -------------- ------------ Total liabilities and stockholders' equity $ 152,525 $ 158,964 ============== ============

Page 19 of 30 CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. The company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the chief executive and chief financial officers of the company concluded that the company's disclosure controls and procedures were adequate. (b) Changes in internal controls. The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of the controls by the Chief Executive or Chief Financial officers. Page 20 of 30 PART II - OTHER INFORMATION Page 21 of 30 PART II - OTHER INFORMATION Item 1 - Legal Proceedings None Item 2 - Changes in Securities None Item 3 - Defaults Upon Senior Securities Not applicable Item 4 - Submission of Matters to a Vote of Security Holders None Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number Referred to Item 601 of Regulation S-K: Description of Exhibit: 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 99 Report of Independent Accountant on Interim Financial Statements (b) Reports on Form 8-K None Page 22 of 30 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. Date November 13, 2003 /s/Clyde H. Bookheimer ----------------- --------------------------- Clyde H. Bookheimer, President and Chief Executive Officer Date November 13, 2003 /s/Doriann Hoffman ----------------- --------------------------- Doriann Hoffman, Vice President (Chief Financial Officer) Page 23 of 30 Exhibit 31.1 CERTIFICATION I, Clyde H. Bookheimer, President/CEO, certify, that: 1. I have reviewed this quarterly report on Form 10-Q of Fulton Bancshares Corporation. 2. Based on my knowledge, the quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report. 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Page 24 of 30 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 13, 2003 By: /s/Clyde H. Bookheimer ----------------- ------------------------- Clyde H. Bookheimer, President/CEO (Chief Executive Officer) Page 25 of 30 Exhibit 31.2 CERTIFICATION I, Doriann Hoffman, Vice President and CFO, certify, that: 1. I have reviewed this quarterly report on Form 10-Q of Fulton Bancshares Corporation. 2. Based on my knowledge, the quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report. 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Page 26 of 30 5. The registrant's other certifying officer and I have disclosed,based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 13, 2003 By: /s/Doriann Hoffman ----------------- ---------------------------- Doriann Hoffman Vice President and CFO (Chief Financial Officer) Page 27 of 30 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Fulton Bancshares Corporation (the "Company") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Clyde H. Bookheimer, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Clyde H. Bookheimer ------------------------ Chief Executive Officer November 13, 2003 Page 28 of 30 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Fulton Bancshares Corporation (the "Company") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Doriann Hoffman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Doriann Hoffman ------------------------------ Chief Financial Officer November 13, 2003 Page 29 of 30 Exhibit 99 INDEPENDENT ACCOUNTANT'S REPORT Board of Directors Fulton Bancshares Corporation and Subsidiaries McConnellsburg, Pennsylvania We have reviewed the accompanying consolidated balance sheet of Fulton Bancshares Corporation and Subsidiaries as of September 30, 2003 and the related consolidated statements of income and comprehensive income for the three and nine month periods ended September 30, 2003 and 2002, and consolidated statements of cash flows for the nine months ended September 30, 2003 and 2002. These financial statements are the responsibility of the corporation's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements for them to be in conformity with generally accepted accounting principles. /s/ Smith Elliott Kearns & Company, LLC SMITH ELLIOTT KEARNS & COMPANY, LLC Chambersburg, Pennsylvania November 13, 2003 Page 30 of 30

FULTON BANCSHARES CORP 10-Q