SecProbe.io

CORRESP
1
filename1.htm

June 1, 2005

Isa Farhat

U.S. Securities and Exchange Commission

100 F Street, NE

Washington, D.C.  20549

Re:                               SEC Comment Letter dated
May 19, 2005

Fulton Bancshares Corporation

Our File No.: 634-95

Dear Mr. Farhat:

This letter is being provided to you in
response to your letter dated May 19, 2005 regarding review of and
comments to Fulton Bancshares Corporation Form 10-K for the year ended December 31,
2004, Form 10-Q for the period ended March 31, 2005, and Form 8K
filed March 23, 2005, your file number 33-85626.

Note 1 – Significant Accounting Policies – page 7

1.               Please revise here
and in the Business section, as applicable, to disclose and discuss the
following:

•                  Management’s
policies for and methods used to determine which loans will held for sale; and

•                  How
you considered the requirements of paragraphs 4, 6, 9 and 28 of SFAS 65 in
determining the appropriate accounting for and disclosure of loans held for
sale.

Please see Note 1, page 9, Loans Held
for Sale, of the amended Form 10-K filed on June 2, 2005 which reads
as follows:

Loans Held for Sale

Loans originated and held for sale in the
secondary market or to other parties are carried at the lower of cost or
estimated fair value in the aggregate.
Net realized losses, if any, are recognized through a valuation
allowance by charges to income.

The Corporation sold a portion of its PHEAA
loans in 2003, and sold the remainder of its PHEAA loans in 2004.  However, there were no PHEAA loans held for
sale at December 31, 2003.

From time to time, the Corporation originates
loans with the intent to sell them in the secondary market.  These loans are typically sold concurrent
with the closing of the loan.  In 2004
and 2003 the Corporation originated and sold 4 and 30 loans, respectively, to
FHLB in the secondary market.  There were
no loans held for sale in the secondary market at December 31, 2004 or
2003.

Note 2 – Investments – page 12

2.                    Please revise
here and in your MD&A to disclose how you concluded that December 23,
2004 was the appropriate day on which the loss on FNMA and FHLMC preferred
stock was other than temporary.  Clarify
in your revisions how you considered the market conditions for these securities
in earlier periods and the significant, related unrealized losses that you
reported in prior periods.

Please see Note 2, page 12, third full
paragraph, of the amended Form 10-K filed on June 2, 2005 which reads
as follows:

As a result of an ongoing
internal study and research throughout 2004, including consultations with our
investment advisors, it was determined in the fourth quarter of 2004 that it
was probable the Corporation would be unable to collect the purchase cost of
its preferred stock investments in FNMA and FHLMC.  The Corporation based that judgment on clear
indications that interest rates were likely to continue to increase in the
near-term (these investments are highly interest rate sensitive) and, because
of final regulatory communications from the Office of the Comptroller of
Currency that the Corporation must reduce its holdings of preferred stock, the
Corporation could not hold the investments for a sufficient time to allow for
any recovery in fair value.  In prior
periods, neither the clear indication of rising rates nor the final regulatory
communication from the OCC was present.

Please also see Management’s Discussion and
Analysis, page 32, Other Income and Expenses, of the amended Form 10-K
filed on June 2, 2005 which reads as follows:

As a result of an ongoing
internal study and research throughout 2004, including consultations with our
investment advisors, it was determined in the fourth quarter of 2004 that it
was probable the Corporation would be unable to collect the purchase cost of
its preferred stock investments in FNMA and FHLMC.  The Corporation based that judgment on clear
indications that interest rates were likely to continue to increase in the
near-term (these investments are highly interest rate sensitive) and, because
of final regulatory communications from the

OCC that the Corporation must
reduce its holdings of preferred stock, the Corporation could not hold the
investments for a sufficient time to allow for any recovery in fair value.  In prior periods, neither the clear
indication of rising rates nor the final regulatory communication from the OCC
was present.

Note 14 – Dividends/Regulatory
Matters/Contingencies – page 21

3.               Revise here and in
your MD&A to disclose the specific facts and circumstances resulting in the
Federal Reserve Bank’s classification of your subsidiary as a “troubled” institution.  Include a discussion of all relevant factors,
how they arose and the periods over which they developed.

Please see Note 14, page 22, sixth full
paragraph, of the amended Form 10-K filed on June 2, 2005 which reads
as follows:

Effective March 22, 2005, similar
restrictions have been placed on the holding company, Fulton Bancshares
Corporation, by the Federal Reserve Bank.
By letter dated March 15,
2005 the Corporation was deemed to be in “troubled” condition as that term is
defined in 12C.F.R. 225.71(d) by the Federal Reserve Bank of Philadelphia,
the Corporation’s primary regulator.  The
designation was due to serious concerns in a Federal Reserve Inspection Report
commenced January 31, 2005 and concluded February 17, 2005 and the
Office of the Comptroller of the Currency (OCC) Report of Examination on the
Corporation’s wholly-owned bank subsidiary commenced August 10, 2004 and
received in final form in February, 2005.
The OCC, the Bank’s primary regulator, provided a letter of concern
based on the preliminary findings of the Examination dated November 23,
2004.  The concerns in the OCC Report of
Examination were reflected in the Order referenced above.

Please also see Management’s Discussion and
Analysis, page 42, Capital Funds/Dividends/Regulatory
Matters/Contingencies, of the amended Form 10-K filed on June 2, 2005
which reads as follows:

Effective March 22, 2005, similar restrictions have been placed on
the holding company, Fulton Bancshares Corporation, by the Federal Reserve
Bank.  By letter dated March 15, 2005 the Corporation was deemed to be in “troubled”
condition as that term is defined in 12C.F.R. 225.71(d) by the Federal
Reserve Bank of Philadelphia, the Corporation’s primary regulator.  The designation was due to serious concerns in
a Federal Reserve Inspection Report commenced January 31, 2005 and
concluded February 17, 2005 and the Office of the Comptroller of the
Currency (OCC) Report of Examination on the Corporation’s wholly-owned bank
subsidiary commenced August 10, 2004 and received in final form in
February, 2005.  The OCC, the Bank’s
primary regulator, provided a letter of concern based on the preliminary
findings of the Examination dated

November 23, 2004.  The concerns in the OCC Report of Examination
were reflected in the Order referenced above.

Note 20 – Prior Period Adjustments – page 26

4.               Please move this
note to the front of the footnotes in order to provide the restatement an
appropriate level of prominence.

5.               Please revise here
and in your MD&A to significantly expand your disclosures to include a
discussion of how and when you determined that the previous accounting method
applied was incorrect.  Identify the
method previously applied, the new accounting method, and why the new method is
preferable.

6.               Please revise all
related summaries of financial information, including quarterly information, to
comply with paragraph 39 of APB 20.

Please see Note 1, Prior Period Adjustments, page 7,
of the amended Form 10-K filed on June 2, 2005 which reads as
follows:

Prior Period Adjustments

Management has determined that the accounting
treatment under SFAS 115 applied previously to investments in FNMA and FHLMC
preferred stocks was incorrect.

These investments have a fixed rate of return
and are callable.  Initial evaluation of
these investments indicated that there was an expected call date, and the
characteristics of these investments were similar to debt securities.  Therefore, the securities were treated as
debt securities for accounting purposes, and premiums and discounts were
amortized from the purchase date to the expected call date.

In December 2004, management evaluated these investments for
possible impairment and considered whether to sell them.  During this evaluation process, it was
determined that the earlier interpretation that these equity investments should
be accounted for as debt instruments was incorrect.

Therefore, the treatment as equity securities is preferable, which
eliminates any purchase premiums or discounts, and requires that all unrealized
holding gains and losses, net of tax, be reflected as  a component of “other comprehensive income”.  Consequently, changes were made to the
Corporation’s prior years financial statements to restate them as follows:

  As originally

  reported

  Change

  As restated

  Other
  assets:

  12/31/2003*

  $

  1,563,882

  $

  (174,076

  )

  $

  1,389,806

  Accumulated
  other comprehensive income (loss):

  12/31/2001

  (62,672

  )

  2,101

  (60,571

  )

  12/31/2002

  124,003

  302,296

  426,299

  12/31/2003

  (570,538

  )

  192,895

  (377,643

  )

  Retained
  earnings:

  12/31/2001

  13,035,796

  (29,293

  )

  13,006,503

  12/31/2002

  14,262,722

  (303,917

  )

  13,958,805

  12/31/2003

  14,575,473

  (366,971

  )

  14,208,502

  Interest and
  dividends on preferred stock:

  2002

  1,102,811

  (416,097

  )

  686,714

  2003

  883,930

  (63,053

  )

  820,877

  Income
  taxes:

  2002

  476,878

  (141,473

  )

  335,405

  2003

  (9,977

  )

  0

  (9,977

  )

  Net Income:

  2002

  1,729,552

  (274,624

  )

  1,454,928

  2003

  830,201

  (63,054

  )

  767,147

  Earnings per
  share:

  2002

  3.51

  (0.56

  )

  2.95

  2003

  1.68

  (0.12

  )

  1.56

*                 After reclassification of
$ 4,454 to accrued interest receivable.*

Please also see Management’s Discussion and
Analysis, page 30, Results of Operations, of the amended Form 10-K
filed on June 2, 2005 which reads as follows:

During
the year ended December 31, 2004, changes were made to the Corporation’s
retained earnings to correct errors in the accounting of the amortization and
accretion of premiums and discounts on certain investments.  The prior years’ financial statements were
restated to reflect the effects of the amortization on each year.  Management has determined that the accounting
treatment under SFAS 115 applied previously to investments in FNMA and FHLMC
preferred stocks was incorrect.

These
investments have a fixed rate of return and are callable.

Initial
evaluation of these investments indicated that there was an expected call date,
and the characteristics of these investments were similar to debt securities.

Therefore,
the securities were treated as debt securities for accounting purposes, and premiums
and discounts were amortized from the purchase date to the expected call date.

In December 2004,
management evaluated these investments for possible impairment and considered
whether to sell them.  During this
evaluation process, it was determined that the earlier interpretation that
these equity investments should be accounted for as debt instruments was
incorrect.

Therefore, the treatment as equity securities is preferable, which
eliminates any purchase premiums or discounts, and requires that all unrealized
holding gains and losses, net of tax, be reflected as  a component of “other comprehensive income”.  Consequently, changes were made to the
Corporation’s prior years financial statements.

Summary of Quarterly Financial Data – page 28

7.               Please revise to
describe the effect of unusual or infrequently occurring items recognized in
each full quarter within the two most recent fiscal years.  Refer to Item 302(a)(3) of Regulation
S-K.

Please see Summary of Quarterly Financial
Data, page 27  of the amended Form 10-K
filed on June 2, 2005 which reads as follows:

FULTON BANCSHARES CORPORATION AND
SUBSIDIARIES

SUMMARY OF QUARTERLY FINANCIAL
DATA

The unaudited quarterly results of operations for the years ended December 31,
2004 and 2003 are as follows:

  2004

  Quarter Ended

  2003

  Quarter Ended

  ($ 000 omitted except per

  share)

  Mar. 31

  June 30

  Sept. 30

  Dec. 31

  Mar.

  31

  June 30

  Sept. 30

  Dec. 31

  Interest
  income (1)

  $

  1,915

  $

  1,877

  $

  1,879

  $

  1,884

  $

  2,245

  $

  2,035

  $

  2,114

  $

  1,971

  Interest
  expense

  734

  730

  717

  710

  849

  807

  776

  743

  Net interest
  income

  1,181

  1,147

  1,162

  1,174

  1,396

  1,228

  1,338

  1,228

  Provision
  for loan losses

  0

  261

  (2)

  0

  0

  30

  1,235

  (3)

  0

  0

  Net interest
  income after provision for loan losses

  1,181

  886

  1,162

  1,174

  1,366

  (7

  )

  1,338

  1,228

  Securities
  gains (losses)

  4

  6

  0

  (1,275

  )(4)

  0

  150

  0

  (64

  )

  Other income

  159

  163

  134

  153

  194

  199

  183

  175

  Other expenses

  1,014

  1,089

  1,004

  1,112

  969

  970

  1,002

  1,064

  Operating
  income before income taxes

  330

  (34

  )

  292

  (1,060

  )

  591

  (628

  )

  519

  275

  Applicable
  income taxes

  48

  (7

  )

  (13

  )

  (35

  )

  124

  (230

  )

  70

  (26

  )

  Net income

  $

  282

  $

  (27

  )

  $

  305

  $

  (1,025

  )

  $

  467

  $

  (398

  )

  $

  449

  $

  249

  Net income
  applicable to common stock

  Per share
  data:

  Net income

  $

  0.57

  $

  (0.05

  )

  $

  0.62

  $

  (2.08

  )

  $

  .95

  $

  (0.81

  )

  $

  0.91

  $

  0.51

(1) Restated for correct accounting on certain investment
discounts – See Note 1 Prior Period Adjustment.

(2) The amount and timing of the provision for loan loss was the
result of regulatory examination commenced August 10, 2004.  See Allowance for Loan Losses and Related
Provisions discussion in Management’s Discussion and Analysis.

(3) The amount and timing of the provision for loan loss was the
result of regulatory examination commenced July 14, 2003.  See Allowance for Loan Loss and Related
Provisions discussion in Management’s Discussion and Analysis.

(4) Loss on sale of Preferred Stocks – See Note 2.  Investments and Management’s Discussion and
Analysis – Other Income and Expense.

Management’s Discussion and Analysis of Consolidated
Financial Condition and Results of Operation

Allowance for Loan Losses and Related
Provision – page 36

8.               Please revise to
discuss the specific facts and circumstances resulting in the significant
increase in the provision for loan losses charged to operations and the
allowance for loan losses in 2003 and 2004 versus prior periods.  Include in your revisions a discussion of how
non-accrual loans, impaired loans, and charged-off loans affected the
determination of the provision for loan losses charged to operations and the
allowance for loan losses.

Please see Management’s Discussion and
Analysis, page 37, Allowance for Loan Loss and Related Provisions, of the
amended Form 10-K filed on June 2, 2005 which reads as follows:

The provision
for loans losses was $261,000, $1,265,000 and $255,000 for years ended December 31,
2004, 2003 and 2002, respectively.

The provision
expense increased significantly in 2003 and 2004 from prior years for two
reasons.  First, nonaccrual loans and net
charge-offs increased markedly in 2003 from the two prior years.  Non-accrual loans increased by 161% in 2003
compared to 2002 and charge-offs increased 474% in 2003 compared to 2002.  The increase in non-accrual loans and
charge-offs resulted