**FORM 10-Q/A**

 

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

 

**QUARTERLY REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarter ended March 31, 2005**

 

**Commissionfile number:  33-850626**

 

**FULTON BANCSHARES CORPORATION**

(Exact name of registrant asspecified 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 reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes  ý                                  No  o

 

Indicate by checkmark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act)

 

Yes  o                                  No  ý

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 
| **Class**                       | ** ** | **Outstanding at May 9, 2005** |
|---------------------------------|------------|--------------------------------|
| (Common  stock, .625 par value) |       | 492,790                        |

 

 

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FULTON BANCSHARES CORPORATION

 

INDEX

 
| PART I - FINANCIAL  INFORMATION |                                                                                                 |
|---------------------------------|------------------------------------------------------------------------------------------------------|
|                            |                                                                                                 |   |   |
|                            | Item 1 - Consolidated Financial Statements                                                           |   |
|                            |                                                                                                 |   |   |
|                            |                                                                                                 | Condensed  consolidated balance sheets - March 31, 2005 and December 31, 2004 |   |
|                            |                                                                                                 |   |   |
|                            |                                                                                                 | Condensed  consolidated statements of income - three months ended March 31, 2005  and 2004 |   |
|                            |                                                                                                 |   |   |
|                            |                                                                                                 | Condensed  consolidated statements of comprehensive income - three months ended March 31,  2005 and 2004 |   |
|                            |                                                                                                 |   |   |
|                            |                                                                                                 | Condensed  consolidated statements of cash flows - three months ended March 31,  2005 and 2004 |   |
|                            |                                                                                                 |   |   |
|                            |                                                                                                 | Notes  to condensed consolidated financial statements |
|                            |                                                                                                 |   |   |
|                            | Item 2 - Management’s discussion and  analysis of financial condition and results of operations |   |
|                            |                                                                                                 |
|                            | Item  3 - Quantitative and qualitative disclosures about market risk                                 |
|                            |                                                                                                 |   |   |
|                            | Item 4 - Controls and  procedures                                                                    |
|                            |                                                                                                 |   |   |
| PART II - OTHER INFORMATION     |                                                                                                 |
|                            |                                                                                                 |   |
|                            | Item 1 - Legal proceedings                                                                           |   |
|                            |                                                                                                 |   |
|                            | Item  2 - Unregistered sales of equity securities and use of proceeds                                |   |
|                            |                                                                                                 |   |
|                            | Item 3 -  Defaults upon senior securities                                                            |   |
|                            |                                                                                                 |   |
|                            | Item  4 - Submission of matters to a vote of security holders                                        |   |
|                            |                                                                                                 |   |
|                            | Item 5 - Other information                                                                           |   |
|                            |                                                                                                 |   |
|                            | Item 6 -  Exhibits                                                                                   |   |
|                            |                                                                                                 |   |
|                            | Signatures                                                                                           |   |
|                            |                                                                                                 |   |
|                            | Exhibits                                                                                             |   |

 

2

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PARTI - FINANCIAL INFORMATION

 

3

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FULTON BANCSHARES CORPORATIONAND SUBSIDIARIES

 

CONDENSEDCONSOLIDATED BALANCE SHEETS

($ 000 omitted )

 
| ** **                                                                                    | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                    | ** ** | **(Unaudited)**          | ** ** | **(Audited)**               | ** ** |
| **ASSETS**                                                                                    |       |                     |       |                        |       |
| Cash and due  from banks                                                                      |       | $                        | 6,034      |                        | $          | 12,809 |   |
| Interest-bearing  deposits in other banks                                                     |       | 203                      |       | 55                          |       |
| Federal  funds sold                                                                           |       | 3,000                    |       | 3,500                       |       |
| Cash and  cash equivalents                                                                    |       | 9,237                    |       | 16,364                      |       |
|                                                                                          |       |                     |       |                        |       |
| Investment  securities available for sale                                                     |       | 28,181                   |       | 18,985                      |       |
| Federal  Reserve, Atlantic Central Bankers Bank and Federal Home Loan Bank stocks             |       | 979                      |       | 1,207                       |       |
| Loans, net  of reserve for loan losses 2005-$1,885; 2004-$1,821                               |       | 90,405                   |       | 92,649                      |       |
|                                                                                          |       |                     |       |                        |       |
| Premises and  equipment                                                                       |       | 3,555                    |       | 3,596                       |       |
| Cash  surrender value of life insurance                                                       |       | 5,477                    |       | 5,430                       |       |
| Accrued  interest receivable                                                                  |       | 565                      |       | 660                         |       |
| Real estate  owned other than premises                                                        |       | 804                      |       | 1,534                       |       |
| Other assets                                                                                  |       | 1,675                    |       | 1,332                       |       |
|                                                                                          |       |                     |       |                        |       |
| Total assets                                                                                  |       | $                        | 140,878    |                        | $          | 141,757 |   |
|                                                                                          |       |                     |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                |       |                     |       |                        |       |
| Deposits                                                                                      |       |                     |       |                        |       |
| Noninterest  bearing                                                                          |       | $                        | 15,763     |                        | $          | 16,524 |   |
| Interest  bearing                                                                             |       | 93,229                   |       | 93,097                      |       |
|                                                                                          |       | 108,992                  |       | 109,621                     |       |
|                                                                                          |       |                     |       |                        |       |
| Other  borrowed funds                                                                         |       | 15,000                   |       | 15,000                      |       |
| Accrued  interest payable                                                                     |       | 240                      |       | 243                         |       |
| Other  liabilities                                                                            |       | 1,355                    |       | 1,375                       |       |
| Total  liabilities                                                                            |       | 125,587                  |       | 126,239                     |       |
|                                                                                          |       |                     |       |                        |       |
| Stockholders’  Equity                                                                    |       |                     |       |                        |       |
| Common  stock: par value $.625 per share; 4,000,000 shares authorized; 495,000 shares  issued |       | 309                      |       | 309                         |       |
| Additional  paid-in capital                                                                   |       | 2,051                    |       | 2,051                       |       |
| Retained  earnings                                                                            |       | 13,286                   |       | 13,226                      |       |
| Accumulated  other comprehensive income (loss)                                                |       | (266                     | )          | 21                          |       |
| Treasury  stock; shares at cost- 2005 - 2,210; 2004 - 2,210                                   |       | (89                      | )          | (89                         | )          |
| Total  stockholders’ equity                                                              |       | 15,291                   |       | 15,518                      |       |
| Total  liabilities and stockholders’s equity                                             |       | $                        | 140,878    |                        | $          | 141,757 |   |

 

**Notes to the Condensed Consolidated Financial Statements are anintegral part of these statements.**

 

4

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FULTON BANCSHARES CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended March 31,2005 and 2004

(UNAUDITED)

($ 000 omitted except pershare)

 
| ** **                                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                        |       |     |       |     |       |
| **Interest  Income**                                                        |       |     |       |     |       |
| Interest and  fees on loans                                                 |       | $        | 1,507      |     | $          | 1,608 |   |
| Interest and  dividends on investment securities:                           |       |     |       |     |       |
| Other U.S.  Government agencies                                             |       | 64       |       | 67       |       |
| Mortgage-backed  securities                                                 |       | 132      |       | 22       |       |
| Obligations  of state and political subdivisions- tax exempt                |       | 52       |       | 52       |       |
| FNMA and  FHLMC preferred stock                                             |       | 0        |       | 160      |       |
| Other  interest and dividends                                               |       | 10       |       | 7        |       |
| Interest on  federal funds sold                                             |       | 19       |       | 0        |       |
| Total  interest income                                                      |       | 1,784    |       | 1,916    |       |
|                                                                        |       |     |       |     |       |
| **Interest  Expense**                                                       |       |     |       |     |       |
| Interest on  deposits                                                       |       | 474      |       | 498      |       |
| Interest on  federal funds purchased                                        |       | 0        |       | 11       |       |
| Interest on  other borrowed money                                           |       | 222      |       | 225      |       |
| Total  interest expense                                                     |       | 696      |       | 734      |       |
|                                                                        |       |     |       |     |       |
| Net interest  income before provision for loan losses                       |       | 1,088    |       | 1,182    |       |
|                                                                        |       |     |       |     |       |
| **Provision  for Loan Losses**                                              |       | 70       |       | 0        |       |
|                                                                        |       |     |       |     |       |
| Net interest  income after provision for loan losses                        |       | 1,018    |       | 1,182    |       |
|                                                                        |       |     |       |     |       |
| **Other  Income**                                                           |       |     |       |     |       |
|                                                                        |       |     |       |     |       |
| Service  charges on deposit accounts                                        |       | 38       |       | 45       |       |
| Other  service charges and fees                                             |       | 52       |       | 31       |       |
| Earnings-Cash  surrender value of life insurance                            |       | 58       |       | 62       |       |
| Trust  services                                                             |       | 2        |       | 0        |       |
| Gain (loss)  on sale of investment securities                               |       | 0        |       | 4        |       |
| Gain on sale  of OREO property                                              |       | 19       |       | 4        |       |
| Gain on sale  of loans                                                      |       | 1        |       | 13       |       |
| Other income                                                                |       | 2        |       | 4        |       |
| Total other  income                                                         |       | 172      |       | 163      |       |
|                                                                        |       |     |       |     |       |
| **Other  Expenses**                                                         |       |     |       |     |       |
| Salaries,  fees and employee benefits                                       |       | 438      |       | 431      |       |
| Net  occupancy expense of bank premises and furniture and equipment expense |       | 207      |       | 212      |       |
| Professional  and loan-related fees                                         |       | 153      |       | 46       |       |
| Data  processing                                                            |       | 74       |       | 75       |       |
| FDIC  insurance premiums                                                    |       | 50       |       | 4        |       |
| Other  expenses                                                             |       | 225      |       | 246      |       |
| Total other  expenses                                                       |       | 1,147    |       | 1,014    |       |
|                                                                        |       |     |       |     |       |
| Income  (loss) before income taxes                                          |       | 43       |       | 331      |       |
| Applicable  income tax (benefit)                                            |       | (17      | )          | 48       |       |
|                                                                        |       |     |       |     |       |
| Net income                                                                  |       | $        | 60         |     | $          | 283 |   |
|                                                                        |       |     |       |     |       |
| Earnings per  common share                                                  |       | $        | 0.12       |     | $          | 0.57 |   |
| Cash  dividends declared per share                                          |       | $        | 0          |     | $          | 0.23 |   |

 

**Notes to the Condensed Consolidated Financial Statements are anintegral part of these statements.**

 

5

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FULTON BANCSHARES CORPORATION AND SUBSIDIARIES

 

CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOME

THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(UNAUDITED)

($000 omitted)

 
| ** **                                                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                   |       |     |       |     |       |
| Net Income                                                             |       | $        | 60         |     | $          | 283 |   |
|                                                                   |       |     |       |     |       |
| Unrealized  gain (loss) on investments available for sale, net of tax  |       | (287     | )          | 465      |       |
|                                                                   |       |     |       |     |       |
| Reclassification  adjustment for gains (losses) included in net income |       | 0        |       | 4        |       |
|                                                                   |       |     |       |     |       |
| Comprehensive  income (loss)                                           |       | $        | (227       | )        | $          | 752 |   |

 

**Notes to the Condensed Consolidated Financial Statements are anintegral part of these statements.**

 

6

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FULTON BANCSHARES, CORPORATIONAND ITS WHOLLY-OWNED SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

ThreeMonths Ended March 31, 2005 and 2004

(UNAUDITED)

($000omitted)

 
| ** **                                                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flows  from operating activities:                                                   |       |     |       |     |       |
| Net Income                                                                               |       | $        | 60         |     | $          | 283 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:       |       |     |       |     |       |
| Depreciation  and amortization                                                           |       | 86       |       | 108      |       |
| Provision  for loan losses                                                               |       | 70       |       | 0        |       |
| (Increase)  decrease in accrued interest receivable                                      |       | 95       |       | (71      | )          |
| Decrease in  accrued interest payable                                                    |       | (3       | )          | (89      | )          |
| Increase in  CSV-Life Insurance                                                          |       | (47      | )          | (52      | )          |
| Gain on sale  - Securities                                                               |       | 0        |       | (4       | )          |
| Gain on sale  - OREO                                                                     |       | (19      | )          | (4       | )          |
| Gain on sale  of loans                                                                   |       | 0        |       | (13      | )          |
| Other - Net                                                                              |       | (213     | )          | 75       |       |
|                                                                                     |       |     |       |     |       |
| Net cash  provided by operating activities                                               |       | 29       |       | 233      |       |
|                                                                                     |       |     |       |     |       |
| Cash flows  from investing activities:                                                   |       |     |       |     |       |
| Purchase of  investment securities - Available-for-sale                                  |       | (10,055  | )          | (3,523   | )          |
| Net  redemption of Federal Home Loan Bank Stock                                          |       | 229      |       | 115      |       |
| Sales of  available-for-sale securities                                                  |       | 0        |       | 1,004    |       |
| Maturities  of available-for-sale securities                                             |       | 421      |       | 2,213    |       |
| Net decrease  in loans                                                                   |       | 2,175    |       | 1,455    |       |
| Proceeds  from sale of OREO                                                              |       | 749      |       | 27       |       |
| Purchases of  & deposits on bank premises and equipment                              |       | (46      | )          | (18      | )          |
|                                                                                     |       |     |       |     |       |
| Net cash  provided (used) by investing activities                                        |       | (6,527   | )          | 1,273    |       |
|                                                                                     |       |     |       |     |       |
| Cash flows  from financing activities:                                                   |       |     |       |     |       |
| Net increase  (decrease) in deposits                                                     |       | (629     | )          | 1,679    |       |
| Dividends  paid                                                                          |       | 0        |       | (113     | )          |
| Net increase  (decrease) in other borrowed money                                         |       | 0        |       | (1,675   | )          |
|                                                                                     |       |     |       |     |       |
| Net cash  provided (used) by financing activities                                        |       | (629     | )          | (109     | )          |
|                                                                                     |       |     |       |     |       |
| Net increase  (decrease) in cash and cash equivalents                                    |       | (7,127   | )          | 1,397    |       |
|                                                                                     |       |     |       |     |       |
| Cash and  cash equivalents, beginning balance                                            |       | 16,364   |       | 3,853    |       |
|                                                                                     |       |     |       |     |       |
| Cash and  cash equivalents, ending balance                                               |       | $        | 9,237      |     | $          | 5,250 |   |
|                                                                                     |       |     |       |     |       |
| Supplemental  disclosure of cash flows information:                                      |       |     |       |     |       |
| Cash paid  during the period for:                                                        |       |     |       |     |       |
| Interest                                                                                 |       | $        | 699        |     | $          | 823 |   |
| Income taxes                                                                             |       | 0        |       | 0        |       |
|                                                                                     |       |     |       |     |       |
| Supplemental  schedule of noncash investing and financing activities:               |       |     |       |     |       |
| Change in  net unrealized gain on investments available for sale (net of deferred taxes) |       | (287     | )          | 465      |       |

 

**Notes to the Condensed Consolidated Financial Statements are anintegral part of these statements.**

 

7

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NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

March 31, 2005

 

(UNAUDITED)

 

Review of Interim FinancialStatements

 

The condensed consolidatedfinancial statements as of and for the three months ended March 31, 2005and 2004 have been reviewed by independent certified public accountants. Theirreport on the review is attached as Exhibit 99 to the 10-Q filing.

 

Note 1. Basis ofPresentation

 

The financial informationpresented at and for the three months ended March 31, 2005 and 2004 isunaudited. Information presented at December 31, 2004 is condensed fromaudited year-end financial statements. However, unaudited information reflectsall adjustments (consisting solely of normal recurring adjustments) that are,in the opinion of management, necessary for a fair presentation of thefinancial position, results of operations and cash flows for the interimperiod.

 

The accompanying unauditedconsolidated financial statements have been prepared in accordance withgenerally accepted accounting principles in the United States of America forinterim financial information. Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. In the opinion of management, alladjustments considered necessary for a fair presentation have been included andare of a normal, recurring nature. Operating results for the three month periodended March 31, 2005, are not necessarily indicative of the results thatmay be expected for the year ending December 31, 2005. These statementsshould be read in conjunction with notes to the financial statements containedin the 2004 Annual Report to Stockholders.

 

In addition to historicalinformation, this Form 10-Q Report contains forward-looking statements. Theforward-looking statements contained herein are subject to certain risks anduncertainties that could cause actual results to differ materially from thoseprojected in the forward-looking statements. Important factors that might causesuch differences include, but are not limited to, those discussed in the section entitled“Management’s Discussion and Analysis of Financial Condition and Results ofOperations”. Readers are cautioned not to place undue reliance on theseforward-looking statements, which reflect management’s analysis only as of thedate hereof. Readers should carefully review the risk factors described inother documents the Fulton Bancshares Corporation files from time to time withthe Securities and Exchange Commission.

 

Note 2. Principles ofConsolidation

 

The consolidated financialstatements include the accounts of the Fulton Bancshares Corporation and itswholly-owned subsidiaries, Fulton County National Bank & Trust Company andthe Fulton County Community Development Corporation (together, the “Corporation”).All significant intercompany transactions and accounts have been eliminated.

 

Note 3. Cash Flows

 

For purposes of thestatements of cash flows, the corporation has defined cash and cash equivalentsas those amounts included in the balance sheet captions “cash and due frombanks” and “federal funds sold”. As permitted by Statement of FinancialAccounting Standards No. 104, the corporation has elected to present the netincrease or decrease in deposits in banks, loans and time deposits in thestatements of cash flows.

 

8

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Note 4. Federal Income Taxes

 

For financial reportingpurposes the provision for loan losses charged to operating expense is based onmanagement’s judgment, whereas for federal income tax purposes, the amountallowable under present tax law is deducted. Additionally, certain expenses arecharged to operating expense in the period the liability is incurred forfinancial reporting purposes, whereas for federal income tax purposes, theseexpenses are deducted when paid. As a result of these timing differences,deferred income taxes are provided in the financial statements. Federal incometaxes were computed after reducing pretax accounting income for nontaxablemunicipal and loan income.

 

Note 5. Other Commitments

 

In the normal course ofbusiness, the Corporation makes various commitments and incurs certaincontingent liabilities which are not reflected in the accompanying financialstatements. These commitments include various guarantees and commitments toextend credit and the Corporation does not anticipate any losses as a result ofthese transactions.

 

Note 6. InvestmentSecurities

 

The carrying amounts ofinvestment securities and their approximate fair values at March 31, 2005were as follows:

 
| **($ 000 omitted)**                   | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|--------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
|                                       |       |                |       |                         |       |                          |       |            |       |
| Investment  securities available for sale: |       |                |       |                         |       |                          |       |            |       |
|                                       |       |                |       |                         |       |                          |       |            |       |
| State &  Municipal Securities          |       | $                   | 5,395      |                         | $          | 30                            |       | $               | (48        | ) | $ | 5,377 |   |
|                                       |       |                |       |                         |       |                          |       |            |       |
| U.S.  Government Agencies                  |       | 8,235               |       | 0                            |       | (125                          | )          | 8,110           |       |
|                                       |       |                |       |                         |       |                          |       |            |       |
| Mortgage-backed  Securities                |       | 14,897              |       | 15                           |       | (275                          | )          | 14,637          |       |
|                                       |       |                |       |                         |       |                          |       |            |       |
| Equity  securities                         |       | 59                  |       | 0                            |       | (2                            | )          | 57              |       |
|                                       |       |                |       |                         |       |                          |       |            |       |
|                                       |       | $                   | 28,586     |                         | $          | 45                            |       | $               | (450       | ) | $ | 28,181 |   |

 

There were no securitiescategorized “Held-to-maturity” or “Trading” at March 31, 2005.

 

Note 7. Comprehensive Income

 

Comprehensive income isdefined as the change in equity from transactions and other events fromnonowner sources. It includes all changes in equity except those resulting frominvestments by owners and distributions to owners. Consequently, a “Statementof Comprehensive Income” has been included in this filing.

 

Note 8. Earnings per Share

 

Earnings per common sharewere computed based on the weighted average of shares of common stockoutstanding, which was 492,790 shares.

 

9

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Note 9. Regulatory and OtherMatters

 

FultonCounty National Bank and Trust Company, as a National Bank, is subject to thedividend restrictions set forth by the Comptroller of the Currency.  The Corporation is also subject to variousregulatory capital requirements administered by federal banking agencies.  Failure to meet minimum capital requirementscan initiate certain mandatory, and possibly additional discretionary actionsby regulators that, if undertaken, could have a direct material effect on theCorporation’s financial statements.

 

OnMarch 23, 2005, the Bank’s Board of Directors entered into a “Stipulationand Consent to the Issuance of a Consent Order” (the “Consent Order”) with theOffice of the Comptroller of the Currency (OCC).  The Consent Order requires the Bank toimplement and improve operating procedures and processes within stipulatedtimeframes. Under the Consent Order, the Bank is required prospectively tomaintain higher minimum capital ratios than the normal industry minimums.  Under the Consent Order, the Bank must obtainOCC approval before any executive officers or directors can be added to theBank’s management.  The payment ofdividends has also been temporarily suspended without prior OCC approval.

 

Similarrestrictions have been placed on the holding company, Fulton BancsharesCorporation, by the Federal Reserve Bank. The Corporation is considered to be in “troubled” condition, as thatterm is defined in Regulation Y, 12 C.F.R.225.71(d).  Thedesignation was due to serious concerns in a Federal Reserve Inspection Reportcommenced January 31, 2005 and concluded February 17, 2005 and the Office ofthe Comptroller of the Currency (OCC) Report of Examination on theCorporation's wholly-owned bank subsidiary commenced August 10, 2004 andreceived in the final form in February, 2005. The OCC, the Bank's primary regulator, provided a letter of concernbased on the preliminary findings of the Examination dated November 23,2004.  The concerns in the OCC Report ofExamination were reflected in the Order referenced above.  On May 9, 2005 the Board of Directors of theCorporation signed a Memorandum of Understanding (“MOU”) dated May 9, 2005issued by Federal Reserve Bank (“Reserve Bank”).  The principle elements of the MOU are asfollows:  The Corporation may not issuedividends not incur debt not in the ordinary course of business withoutapproval of the Reserve Bank, the Corporation may not repurchase it’s own stockwithout approval of the Reserve Bank, the Corporation must appoint a compliancecommittee and conduct an assessment of the external audit firm’s ability toaudit an organization, such as the Corporation, which is subject to theSarbanes Oxley Act and the Corporation is required to ensure that its whollyowned subsidiary, The Fulton County National Bank & Trust Company, complieswith the supervisory actions imposed by the Office of the Comptroller of theCurrency.

 

TheOCC has also informed the Bank of possible violations of laws and regulationswith regard to the Bank Secrecy Act, the Truth-In-Lending Act, and the RealEstate Settlement Procedures Act which could result in future fines andpenalties to the Bank and possible reimbursements.  The amount of any future fines orreimbursements cannot be reasonably estimated at March 31, 2005.

 

Because of the possibleregulatory violations and other OCC scrutiny, the Bank’s FDIC insurancepremiums and OCC assessment fees will increase by approximately $ 168,000in 2005.  Other costs of compliance withthe Consent Order cannot be reasonably estimated at this time.

 

Inaddition, on March 4, 2005, the Bank terminated its President.  While no litigation has been initiatedthrough May 9, 2005, litigation may ensue if certain matters are not amicablyresolved between the Bank and its former President.

 

10

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FULTON BANCSHARES CORPORATION MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

Net after tax income for thefirst three months of 2005 was $60,000 compared to $283,000 for the same periodin 2004, representing a decrease of $223,000, or 79%. Net income on an adjustedper share basis for the first three months of 2005 was $.12 compared to $.57per share realized during the first three months ended March 31, 2004.

 

RESULTS OF OPERATIONS

 

First Quarter 2005 vs. FirstQuarter 2004

 

Interest income for thefirst quarter of 2004 was $1,784,000 compared to $1,916,000 earned during thesame period in 2004, for a decrease of $132,000, or 7%. The decrease was dueprimarily to a decrease in the average balance of loans and investments in2005.  Loans have declined on average by9% as a focus was to work out of problem credits.  Interest income also decreased due to ahigher mix of liquid assets being held to allow for lowered overnight borrowingcapacity at Federal Home Loan Bank of Pittsburgh.  Interest expense for the first quarter of2005 was $696,000, a decrease of $38,000, or 5% compared to the first quarterof 2004. The decrease was due primarily to a decrease in the average balance ofdeposits and borrowings that offset higher deposit rates paid in 2005.  Due to higher Bank capital ratio requirementsin the OCC Consent Order signed on March 23, 2005 and related borrowingrestrictions, asset growth is constrained and more liquid assets will need tobe maintained. Net interest income before the provision for loan losses for thefirst quarter of 2005 totaled $1,088,000, down $94,000, or 8%, from the firstquarter of 2004.

 

Net interest income is thedifference between total interest income and total interest expense. Interestincome is generated through earning assets, which include loans, deposits withother banks, and investments. Interest income is dependent on many factorsincluding the volume of earning assets; level of interest rates; changes ininterest rates; and volumes of nonperforming loans. The cost of funds varieswith the volume of funds necessary to support earning assets; rates paid tomaintain deposits; rates paid on borrowed funds; and level of interest-freedeposits.

 

NET INTEREST MARGIN

 

The net interest margin forthe first three months of 2005 was 3.52% compared to 3.56% for the first threemonths of 2004. Liquidity and interest rate risk are monitored through assetliability management modeling. Management protects its net interest margin bycompetitively pricing its loans and deposits and by structuringinterest-earning assets and liabilities so they can be repriced in response tochanges in market interest rates.

 

NONINTEREST INCOME

 

First Quarter 2005 vs. FirstQuarter 2004

 

First quarter 2005noninterest income increased $9,000 to $172,000 from $163,000, or 6%. Servicecharges on deposits decreased $7,000, or 16%, primarily due to a decrease inoverdraft charges. Other fee income increased $21,000, or 67.0%, primarily dueto a reversal of insurance income in 2004 and miscellaneous income related toOREO properties in 2005.  Net gains onsales of OREO property increased $15,000 in 2005.

 

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NONINTEREST EXPENSE

 

First Quarter of 2005 vs.First Quarter 2004

 

First quarter 2005 noninterestexpenses totaled $1,147,000, an increase of $133,000, or 13%, over the$1,014,000 for the first quarter of 2004. Salaries and employee-relatedexpenses increased $7,000, or 2%, primarily due to increased salaries offset bya reduction in profit-sharing expense. Fixed asset expenses decreased $5,000,or 2%, primarily due to lower equipment/building maintenance and suppliescosts. Professional expenses increased by $108,000 or 235% due to consultantand professional engagement necessitated by compliance with the Consent Orderand other regulatory requirements.  FDICinsurance premiums increased 11 fold to $50,000 for the first three months of2005 due to the regulatory ratings. Other noninterest expenses decreased by $22,000, or 6%, primarily due tolower discretionary spending.

 

INCOME TAXES

 

The income tax benefit forthe first three months of 2005 was $(17,000) compared to a provision expense of$48,000 for the first three months of 2004. Effective tax rates (compared tothe marginal federal income tax bracket of 34% applicable to each period) weredifferent for each period primarily due to the relationship of non taxableinvestment security income to total taxable income.

 

PROVISION FOR LOAN LOSSES

 

Provisionfor loans losses was $70,000 for the first three months of 2005 compared with$0 for the first three months of 2004.

 

The provision expense increased in 2005 compared to2004 due to the increased amount of the classified loans between the twoperiods which increased the Bank's risk-based allowance on such loans.  The additional classified loans were testedfor impairment and a higher provision was necessary in 2005 compared to 2004,based on management's evaluation of the adequacy of the allowance for possibleloan losses at March 31, 2005 and 2004 and represents amounts deemed necessaryto maintain the allowance at the appropriate level.  A regulatory examination conducted in 2004and subsequent independent loan review conducted in the first quarter of 2005adversely classified additional loans primarily because of structuralweaknesses and lack of adequate financial analysis in underwriting new loansand renewing existing loans.  Theexamination and review also cited weaknesses in credit risk practices, changesin lending philosophy and unreliable historical loss trends as reason for acontinued higher allowance despite the decrease in the amount of nonaccrualloans between the two periods.A summary of the allowance for loan losses is as follows: 

 
| ** **                                       | ** ** | **Three Months Ended**   | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|
| ** **                                       | ** ** | **March 31,  2005** | ** ** | **March 31,  2004** | ** ** |
|                                             |       |                     |       |   |   |
| Beginning of  period                             |       | $                        | 1,821      |   | $ | 1,900 |   |
|                                             |       |                     |       |   |   |
| Loans  charged-off during the period:            |       |                     |       |   |   |
| Real estate  loans                               |       | 0                        |       | 0 |   |
| Installment  loans                               |       | 8                        |       | 12 |   |
| Commercial  and all other loans                  |       | 0                        |       | 0 |   |
| Total  charge-offs                               |       | 8                        |       | 12 |   |
|                                             |       |                     |       |   |   |
| Recoveries  of Loans previously charged-off:     |       |                     |       |   |   |
| Real estate  loans                               |       | 1                        |       | 1 |   |
| Installment  loans                               |       | 1                        |       | 4 |   |
| Commercial  and all other loans                  |       | 0                        |       | 0 |   |
| Total  charge-offs                               |       | 2                        |       | 5 |   |
|                                             |       |                     |       |   |   |
| Net loans  (charged off) recovered               |       | (6                       | )          | (7 | ) |
|                                             |       |                     |       |   |   |
| Provision  for loan losses charged to operations |       | 70                       |       | 0 |   |
|                                             |       |                     |       |   |   |
| Allowance  for loan losses- end of period        |       | $                        | 1,885      |   | $ | 1,893 |   |

 

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Loans 90 days or more pastdue (still accruing interest) and those on nonaccrual status were as follows atMarch 31: 

 
| ** **                    | ** ** | **90 Days or More Past Due** | ** ** | **Nonaccrual Status** | ** ** |
|-------------------------------|------------|------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2005**                     | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Loans  secured by real estate |       | $                            | 0          |                  | $          | 182 |   | $ | 693 |   | $ | 3,289 |   |
|                          |       |                         |       |                  |       |   |   |   |   |
| Personal  loans               |       | 0                            |       | 0                     |       | 0 |   | 75 |   |
|                          |       |                         |       |                  |       |   |   |   |   |
| Commercial  and other loans   |       | 0                            |       | 0                     |       | 774 |   | 771 |   |
| Total                         |       | $                            | 0          |                  | $          | 182 |   | $ | 1,467 |   | $ | 4,135 |   |

 

The Corporation utilizes asystematic review of its loan portfolio on a quarterly basis in order todetermine the adequacy of the allowance for loan losses.  The allowance for loan losses consists of acomponent for individual loan impairment primarily based on the loan’scollateral fair value and other observable data.   A watch list of loans is identified forevaluation based on regulatory examinations and internal and external loangrading and reviews.  Loans other thanthose determined to be impaired are grouped into pools of loans with similarcredit risk characteristics.  These loansare evaluated as groups with allocations made to the allowance based onhistorical loss experience adjusted for current trends in delinquencies, trendsin underwriting and oversight, concentrations of credit and general economicconditions within the Corporation’s trading area.

 

FINANCIAL CONDITION

 

Assets

 

Total assets on March 31,2005 were $140,878,000 compared to $141,757,000 at December 31, 2004, adecrease of 1%. Net loans on March 31, 2005 stood at $90,405,000, adecrease of 2% from $92,649,000 on December 31, 2004. The loan decreasewas due to payoffs from workouts of classified loans and loan refinancingelsewhere due to competitive rate and structure factors.  Investments securities increased and cashdecreased from December 31, 2004 as proceeds from a late 2004 securitysale was reemployed in investment securities in early 2005.

 

Liabilities

 

Total deposits decreased 1%to $108,992,000 as of March 31, 2005 compared with $109,621,000 at December 31,2004. Noninterest-bearing demand deposits decreased 5% mainly due to thevarying cash flow needs of business customers between the two dates.   Interest-bearing deposits were similar atthe end of each period.

 

Off-Balance Sheet Items

 

The Corporation is a partyto financial instruments with off-balance-sheet risk in the normal course ofbusiness to meet the financial needs of its customers. These financialinstruments include commitments to extend credit and standby letters of credit.Those instruments involve, to varying degrees, elements of credit and interestrate risk in excess of the amount recognized in the balance sheet. The contractamounts of those instruments reflect the extent of involvement the Corporationhas in particular classes of financial

 

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instruments. The Corporation’sexposure to credit loss in the event of nonperformance by the other party tothe financial instrument for commitments to extend credit and standby lettersof credit and financial guarantees written is represented by the contractualamounts of those instruments. The Corporation uses the same credit policies inmaking commitments and conditional obligations as it does for on- balance-sheetinstruments.

 

Financial Instruments whosecontract amounts represent credit risk at March 31, 2005 are:

 

| ** **                                                  | ** ** | **Contract or  Notional Amount** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|
|                                                        |       |                             |       |
| Commitments  to extend credit                               |       | $                                | 11,029,000 |   |
| Standby  letters of credit and financial guarantees written |       | $                                | 128,000    |   |

 

Commitments to extend creditare agreements to lend to a customer as long as there is no violation of anycondition established in the contract. Commitments generally have fixedexpiration dates or other termination clauses and may require payment of a fee.Since many of the commitments are expected to expire without being drawn upon,the total commitment amounts do not necessarily represent future cashrequirements. The Corporation evaluates each customer’s credit worthiness on acase-by-case basis. The amount of collateral obtained, if deemed necessary by theCorporation upon extension of credit, is based on management’s creditevaluation of the customer. Collateral held varies but may include accountsreceivable, inventory, real estate, equipment, and income- producing commercialproperties. Standby letters of credit and financial guarantees written areconditional commitments issued by the Corporation to guarantee the performanceof a customer to a first party. Those guarantees are primarily issued tosupport public and private borrowing arrangements. The credit risk involved inissuing letters of credit is essentially the same as that involved in extendingloans to customers. The Corporation holds collateral supporting thosecommitments when deemed necessary by management.

 

Liquidity and Interest RateSensitivity

 

Liquidity and interest ratesensitivity are related to, but distinctly different from one another.Liquidity involves the bank’s ability to meet cash withdrawal needs ofcustomers and their credit needs in the form of loans. Liquidity is provided bycash on hand and transaction balances held at correspondent banks. Adequateliquidity to meet credit demands and/or adverse deposit flows is also madeavailable from sales or maturities of short-term assets. Additional sources offunds to meet credit needs have traditionally been provided by access to themarketplace to obtain interest-bearing deposits and other borrowings, includingsignificant borrowing capacity available through Federal Home Loan Bank. At March 31,2005, the Bank had borrowings of $15,000,000 at Federal Home Loan Bank,representing no change from December 31, 2004. On March 29, 2005, theBank was requested to identify and deliver specific investment securities andloans to collateralize this borrowing. Because of rules on collateral eligibility, this requirementsignificantly reduced additional borrowing capacity at the Federal Home LoanBank for the time being.  The bankresponded by establishing new unsecured and collateralized borrowing lines ofcredit at other banks totaling $ 4,000,000.  Management measures liquidity ratios andbalance sheet trends on a frequent basis to measure and control liquidity risk.

 

Interest rate sensitivity isthe matching or mismatching of the maturity and rate structure of theinterest-bearing assets and liabilities. It is the objective of management tocontrol the difference in the timing of the rate changes for these assets andliabilities to preserve a satisfactory net interest margin. Management modelsnet interest income at risk in various interest rate environments as itsprimary method of measuring interest rate risk and developing balance sheetmanagement strategies to minimize this risk.

 

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Capital

 

Stockholders’ equity was$15,291,000 at March 31, 2005 compared with $15,518,000 at December 31,2004, a decrease of 1%. Accumulated earnings were offset by an unfavorable$287,000 increase in net unrealized losses (net of tax effect) for the firstthree months of 2005. Total stockholders’ equity represented 10.85% of totalassets at March 31, 2005. In compliance with regulatory restrictions, nocash dividends were paid the first three months of 2005, while $.23 per sharewere paid for the first three months of 2004. On July 20, 2000, the Boardof Directors announced the approval of a plan to purchase, in open market andprivately negotiated transactions, up to 2% of its shares of outstanding commonstock. Additionally, on December 18, 2003, the company announced theapproval of a plan to purchase, in open market and privately negotiatedtransactions, up to 1,000 shares of outstanding common stock. As of March 31,2005, the company had repurchased 2,210 shares, representing 0.45% of itsshares of outstanding common stock. As a condition of the March 23, 2005Consent Order and the May 9, 2005 Memorandum of Understanding with the FederalReserve Bank, the Company has agreed to not declare dividends without the priorwritten approval of these regulators and to terminate the stock repurchaseplans.  The Company’s stock purchase planwas terminated by the Board of Directors on April 11, 2005.

 

REGULATORY CAPITAL

 

The Consent Order requiresthe Company to maintain capital ratios that are well above the capital levelsnormally required by federal regulatory authorities, including risk-basedcapital guidelines. A comparison of Fulton Bancshares Corporation’s capitalratios to regulatory minimum requirements at March 31, 2005 is as follows:

 
| ** **                                                                 | ** ** | **Fulton  Bancshares  Corporation** | ** ** | **Regulatory  Minimum  Requirements** | ** ** | **Increased Regulatory  Bank Minimum Requirement  By Consent Order** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|----------------------------------------------------------------------|------------|
|                                                                       |       |                                |       |                                  |       |                                                                 |       |
| Leverage  ratio                                                            |       | 11.14                               | %          | 4.00                                  | %          | 10.00                                                                | %          |
|                                                                       |       |                                |       |                                  |       |                                                                 |       |
| Risk-based  capital ratios:                                                |       |                                |       |                                  |       |                                                                 |       |
|                                                                       |       |                                |       |                                  |       |                                                                 |       |
| Tier I (core  capital)                                                     |       | 17.26                               | %          | 4.00                                  | %          | 14.00                                                                | %          |
|                                                                       |       |                                |       |                                  |       |                                                                 |       |
| Combined  Tier I and Tier II (core capital plus allowance for loan losses) |       | 18.52                               | %          | 8.00                                  | %          |                                                                 |       |

 

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BALANCE SHEET ANALYSIS

 

The following tablehighlights the changes in the balance sheet. Because quarter end balances canbe distorted by one-day fluctuations, an analysis of changes in the quarterlyaverages is provided to show balance sheet trends.

 

BALANCE SHEET ANALYSIS

(in 000’s)

Balance Sheets Condensed

Average

 
| ** **                                        | ** ** | **First  Quarter 2005** | ** ** | **First  Quarter 2004** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
|                                              |       |                    |       |                    |       |
| ASSETS                                            |       |                    |       |                    |       |
| Federal Funds  Sold                               |       | $                       | 4,369      |                    | $          | 0 |   |
| Securities  Available for Sale /Other Investments |       | 27,563                  |       | 31,865                  |       |
| Loans                                             |       | 93,443                  |       | 102,726                 |       |
| Total  interest-earning assets                    |       | 125,375                 |       | 134,591                 |       |
|                                              |       |                    |       |                    |       |
| Cash and Due  from Banks                          |       | 3,441                   |       | 4,200                   |       |
| Bank  Premises and Equipment                      |       | 3,579                   |       | 3,734                   |       |
| All Other  Assets                                 |       | 8,193                   |       | 6,468                   |       |
| Allowance  for Loan Losses                        |       | (1,827                  | )          | (1,901                  | )          |
| Total Assets                                      |       | $                       | 138,761    |                    | $          | 147,092 |   |
|                                              |       |                    |       |                    |       |
| LIABILITIES                                       |       |                    |       |                    |       |
| Interest-bearing  deposits                        |       | $                       | 91,953     |                    | $          | 97,426 |   |
| Federal  Funds Purchased                          |       | 7                       |       | 250                     |       |
| Other  Short-term Borrowings                      |       | 15,000                  |       | 18,714                  |       |
| Total  interest-bearing liabilities               |       | 106,960                 |       | 116,390                 |       |
|                                              |       |                    |       |                    |       |
| Non-interest  bearing deposits                    |       | 15,495                  |       | 13,675                  |       |
| All Other  Liabilities                            |       | 738                     |       | 426                     |       |
| Total  Liabilities                                |       | 123,193                 |       | 130,491                 |       |
|                                              |       |                    |       |                    |       |
| STOCKHOLDERS’  EQUITY                        |       |                    |       |                    |       |
| Common  Stockholders’ Equity                 |       | 15,667                  |       | 16,923                  |       |
| Net  unrealized holding losses, net of tax        |       | (99                     | )          | (322                    | )          |
| Total  Stockholders’ Equity                  |       | 15,568                  |       | 16,601                  |       |
|                                              |       |                    |       |                    |       |
| Total  Liabilities and Stockholders’ Equity  |       | $                       | 138,761    |                    | $          | 147,092 |   |

 

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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been no materialchanges to the quantitative and qualitative disclosures made in the Corporation’sAnnual Report on Form 10-K for the year ended December 31, 2004. SeeManagement’s Discussion and Analysis for further discussion of market risk.

 

ITEM4 - CONTROLS AND PROCEDURES

 

The company’s ChiefExecutive Officer and Chief Financial Officer have evaluated the effectivenessof the Corporation’s disclosure controls and procedures (as such term isdefined in Rules 13a-14(c) under the Securities Exchange Act of 1934, asamended (the “Exchange Act”)) as of March 31, 2005. Based on suchevaluation, such officers have concluded that, as of March 31, 2005, theCorporation’s disclosure controls and procedures are effective in alerting themon a timely basis to material information relating to the Corporation(including its consolidated subsidiaries) required to be included in theCorporation’s periodic filings under the Exchange Act. There have not been anysignificant changes in the Corporation’s internal control over financialreporting or in other factors that could significantly affect such controlduring the first quarter of 2005.

 

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PART II - OTHER INFORMATION

 

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PART II - OTHER INFORMATION

 

Item1 - Legal Proceedings

 

In the opinion of themanagement of the Corporation, there are no material pending legal proceedingsother than ordinary routine litigation incidental to the business, to which theCorporation or its subsidiary are a party or to which their property issubject.

 

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

 

Not applicable

 

Item 3 - Defaults Upon Senior Securities

 

Not applicable

 

Item 4 - Submission of Matters to a Vote of Security Holders

 

Not applicable

 

Item5 - Other Information

 

Not applicable

 

Item 6 –Exhibits

 

(a)  Exhibits:

 

ExhibitNumber Referred to Item 601 of Regulation S-K: Description of Exhibit:

 

3(i)Articles of Incorporation. Incorporated by reference to registrant’s Form 10-Kfiled with the Securities and Exchange Commission for the year ended December 31,2004.

 

3(ii)By-laws. Incorporated by reference to registrant’s Form 10-K filed with theSecurities and Exchange Commission for the year ended December 31, 2004.

 

10.1Salary Continuation Agreement and Second Amendment - Chief Executive Officer.Incorporated by reference to registrant’s Form 10-K filed with the Securitiesand Exchange Commission for the year ended December 31, 2002.

 

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|   | 10.2 Director Deferred  Compensation Plan Incorporated by reference to registrant’s Form 10-K filed  with the Securities and Exchange Commission for the year ended December 31,  2002.     |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                  |
|   | 10.3 Director Emeritus  Retirement Agreement Incorporated by reference to registrant’s Form 10-K  filed with the Securities and Exchange Commission for the year ended December 31,  2002.  |
|   |                                                                                                                                                                                                  |
|   | 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                                                                                                                                  |
|   |                                                                                                                                                                                                  |
|   | 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: June 2, 2005                                                                                                                                                                                    | By: | /s/David W. Cathell |   |
|   |                                                                                                                                                                                                  | David W. Cathell , |
|   |                                                                                                                                                                                                  | Acting President and Chief  Executive Officer |
|   |                                                                                                                                                                                                  |   |
|   | Date: June 2, 2005                                                                                                                                                                                    | By: | /s/David W. Cathell |   |
|   |                                                                                                                                                                                                  | David W. Cathell , |
|   |                                                                                                                                                                                                  | Senior Vice President and  Chief Financial Officer |

 

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