UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011, or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 0-10587
FULTON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA | 23-2195389 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
One Penn Square, P.O. Box 4887, Lancaster, Pennsylvania | 17604 | |
(Address of principal executive offices) | (Zip Code) |
(717) 291-2411
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value 199,263,000 shares outstanding as of April 29, 2011.
FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2011
Description |
Page | |||
PART I. FINANCIAL INFORMATION |
||||
Item 1. Financial Statements (Unaudited): |
||||
(a) Consolidated Balance Sheets - March 31, 2011 and December 31, 2010 |
3 | |||
(b) Consolidated Statements of Income - Three months ended March 31, 2011 and 2010 |
4 | |||
5 | ||||
(d) Consolidated Statements of Cash Flows - Three months ended March 31, 2011 and 2010 |
6 | |||
7 | ||||
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
29 | |||
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
45 | |||
Item 4. Controls and Procedures |
51 | |||
PART II. OTHER INFORMATION |
||||
Item 1. Legal Proceedings |
52 | |||
Item 1A. Risk Factors |
52 | |||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
52 | |||
Item 3. Defaults Upon Senior Securities |
52 | |||
Item 4. Removed and Reserved |
52 | |||
Item 5. Other Information |
52 | |||
Item 6. Exhibits |
52 | |||
53 | ||||
54 | ||||
Certifications |
2
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(in thousands, except per-share data)
March 31 2011 (unaudited) |
December 31 2010 |
|||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 265,353 | $ | 198,954 | ||||
Interest-bearing deposits with other banks |
83,293 | 33,297 | ||||||
Loans held for sale |
30,903 | 83,940 | ||||||
Investment securities: |
||||||||
Held to maturity (estimated fair value of $7,347 in 2011 and $7,818 in 2010) |
7,293 | 7,751 | ||||||
Available for sale |
2,690,141 | 2,853,733 | ||||||
Loans, net of unearned income |
11,873,208 | 11,933,307 | ||||||
Less: Allowance for loan losses |
(270,272 | ) | (274,271 | ) | ||||
Net Loans |
11,602,936 | 11,659,036 | ||||||
Premises and equipment |
208,370 | 208,016 | ||||||
Accrued interest receivable |
52,878 | 53,841 | ||||||
Goodwill |
535,651 | 535,518 | ||||||
Intangible assets |
11,283 | 12,461 | ||||||
Other assets |
473,095 | 628,707 | ||||||
Total Assets |
$ | 15,961,196 | $ | 16,275,254 | ||||
LIABILITIES |
||||||||
Deposits: |
||||||||
Noninterest-bearing |
$ | 2,310,290 | $ | 2,194,988 | ||||
Interest-bearing |
10,098,320 | 10,193,593 | ||||||
Total Deposits |
12,408,610 | 12,388,581 | ||||||
Short-term borrowings: |
||||||||
Federal funds purchased |
8,285 | 267,844 | ||||||
Other short-term borrowings |
406,113 | 406,233 | ||||||
Total Short-Term Borrowings |
414,398 | 674,077 | ||||||
Accrued interest payable |
34,392 | 33,333 | ||||||
Other liabilities |
157,785 | 179,424 | ||||||
Federal Home Loan Bank advances and long-term debt |
1,035,689 | 1,119,450 | ||||||
Total Liabilities |
14,050,874 | 14,394,865 | ||||||
SHAREHOLDERS EQUITY |
||||||||
Common stock, $2.50 par value, 600 million shares authorized, 215.5 million shares issued in 2011 and 215.4 million shares issued in 2010 |
538,669 | 538,492 | ||||||
Additional paid-in capital |
1,420,666 | 1,420,127 | ||||||
Retained earnings |
184,254 | 158,453 | ||||||
Accumulated other comprehensive income: |
||||||||
Unrealized gains on investment securities not other-than-temporarily impaired |
23,791 | 22,354 | ||||||
Unrealized non-credit related losses on other-than-temporarily impaired debt securities |
(1,460 | ) | (2,355 | ) | ||||
Unrecognized pension and postretirement plan costs |
(4,426 | ) | (4,414 | ) | ||||
Unamortized effective portions of losses on forward-starting interest rate swaps |
(3,056 | ) | (3,090 | ) | ||||
Accumulated Other Comprehensive Income |
14,849 | 12,495 | ||||||
Treasury stock, 16.3 million shares in 2011 and 2010, at cost |
(248,116 | ) | (249,178 | ) | ||||
Total Shareholders Equity |
1,910,322 | 1,880,389 | ||||||
Total Liabilities and Shareholders Equity |
$ | 15,961,196 | $ | 16,275,254 | ||||
See Notes to Consolidated Financial Statements
3
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per-share data)
Three Months
Ended March 31 |
||||||||
2011 | 2010 | |||||||
INTEREST INCOME |
||||||||
Loans, including fees |
$ | 149,496 | $ | 157,534 | ||||
Investment securities: |
||||||||
Taxable |
21,807 | 28,149 | ||||||
Tax-exempt |
3,175 | 3,595 | ||||||
Dividends |
683 | 729 | ||||||
Loans held for sale |
500 | 556 | ||||||
Other interest income |
33 | 25 | ||||||
Total Interest Income |
175,694 | 190,588 | ||||||
INTEREST EXPENSE |
||||||||
Deposits |
23,286 | 33,738 | ||||||
Short-term borrowings |
254 | 549 | ||||||
Long-term debt |
12,591 | 17,792 | ||||||
Total Interest Expense |
36,131 | 52,079 | ||||||
Net Interest Income |
139,563 | 138,509 | ||||||
Provision for credit losses |
38,000 | 40,000 | ||||||
Net Interest Income After Provision for Credit Losses |
101,563 | 98,509 | ||||||
OTHER INCOME |
||||||||
Service charges on deposit accounts |
13,305 | 14,267 | ||||||
Other service charges and fees |
11,482 | 10,165 | ||||||
Investment management and trust services |
9,204 | 8,088 | ||||||
Mortgage banking income |
5,463 | 4,149 | ||||||
Other |
4,421 | 3,814 | ||||||
Total other-than-temporary impairment losses |
(1,021 | ) | (5,251 | ) | ||||
Less: Portion of (gain) loss recognized in other comprehensive income (before taxes) |
(270 | ) | 274 | |||||
Net other-than-temporary impairment losses |
(1,291 | ) | (4,977 | ) | ||||
Net gains on sale of investment securities |
3,576 | 2,754 | ||||||
Net investment securities gains (losses) |
2,285 | (2,223 | ) | |||||
Total Other Income |
46,160 | 38,260 | ||||||
OTHER EXPENSES |
||||||||
Salaries and employee benefits |
54,308 | 52,345 | ||||||
Net occupancy expense |
11,366 | 11,650 | ||||||
FDIC insurance expense |
4,754 | 4,954 | ||||||
Data processing |
3,372 | 3,417 | ||||||
Equipment expense |
3,132 | 3,091 | ||||||
Professional fees |
2,849 | 2,546 | ||||||
Marketing |
2,836 | 1,830 | ||||||
Other real estate owned and repossession expense |
1,970 | 2,681 | ||||||
Intangible amortization |
1,178 | 1,314 | ||||||
Other |
15,798 | 16,194 | ||||||
Total Other Expenses |
101,563 | 100,022 | ||||||
Income Before Income Taxes |
46,160 | 36,747 | ||||||
Income taxes |
12,375 | 9,267 | ||||||
Net Income |
33,785 | 27,480 | ||||||
Preferred stock dividends and discount accretion |
0 | (5,065 | ) | |||||
Net Income Available to Common Shareholders |
$ | 33,785 | $ | 22,415 | ||||
PER COMMON SHARE: |
||||||||
Net income (basic) |
$ | 0.17 | $ | 0.13 | ||||
Net income (diluted) |
0.17 | 0.13 | ||||||
Cash dividends |
0.04 | 0.03 |
See Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2011 AND 2010
Preferred Stock |
Common Stock | Additional Paid-in Capital |
Retained Earnings |
Accumulated Other Comprehensive Income |
Treasury Stock |
Total | ||||||||||||||||||||||||||
Shares Outstanding |
Amount | |||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Balance at December 31, 2010 |
$ | 0 | 199,050 | $ | 538,492 | $ | 1,420,127 | $ | 158,453 | $ | 12,495 | $ | (249,178 | ) | $ | 1,880,389 | ||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
33,785 | 33,785 | ||||||||||||||||||||||||||||||
Other comprehensive income |
2,354 | 2,354 | ||||||||||||||||||||||||||||||
Total comprehensive income |
36,139 | |||||||||||||||||||||||||||||||
Stock issued, including related tax benefits |
141 | 177 | (8 | ) | 1,062 | 1,231 | ||||||||||||||||||||||||||
Stock-based compensation awards |
547 | 547 | ||||||||||||||||||||||||||||||
Common stock cash dividends - $0.04 per share |
(7,984 | ) | (7,984 | ) | ||||||||||||||||||||||||||||
Balance at March 31, 2011 |
$ | 0 | 199,191 | $ | 538,669 | $ | 1,420,666 | $ | 184,254 | $ | 14,849 | $ | (248,116 | ) | $ | 1,910,322 | ||||||||||||||||
Balance at December 31, 2009 |
$ | 370,290 | 176,364 | $ | 482,491 | $ | 1,257,730 | $ | 71,999 | $ | 7,458 | $ | (253,486 | ) | $ | 1,936,482 | ||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
27,480 | 27,480 | ||||||||||||||||||||||||||||||
Other comprehensive income |
14,334 | 14,334 | ||||||||||||||||||||||||||||||
Total comprehensive income |
41,814 | |||||||||||||||||||||||||||||||
Stock issued, including related tax benefits |
145 | 185 | (148 | ) | 1,212 | 1,249 | ||||||||||||||||||||||||||
Stock-based compensation awards |
293 | 293 | ||||||||||||||||||||||||||||||
Preferred stock discount accretion |
359 | (359 | ) | 0 | ||||||||||||||||||||||||||||
Preferred stock cash dividends |
(4,706 | ) | (4,706 | ) | ||||||||||||||||||||||||||||
Common stock cash dividends - $0.03 per share |
(5,294 | ) | (5,294 | ) | ||||||||||||||||||||||||||||
Balance at March 31, 2010 |
$ | 370,649 | 176,509 | $ | 482,676 | $ | 1,257,875 | $ | 89,120 | $ | 21,792 | $ | (252,274 | ) | $ | 1,969,838 | ||||||||||||||||
See Notes to Consolidated Financial Statements
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Three Months
Ended March 31 |
||||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net Income |
$ | 33,785 | $ | 27,480 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for credit losses |
38,000 | 40,000 | ||||||
Depreciation and amortization of premises and equipment |
5,104 | 5,163 | ||||||
Net amortization of investment securities premiums |
1,704 | 802 | ||||||
Investment securities (gains) losses |
(2,285 | ) | 2,223 | |||||
Net decrease in loans held for sale |
53,037 | 31,586 | ||||||
Amortization of intangible assets |
1,178 | 1,314 | ||||||
Stock-based compensation |
547 | 293 | ||||||
Decrease (increase) in accrued interest receivable |
963 | (174 | ) | |||||
Decrease in other assets |
14,626 | 4,200 | ||||||
Increase in accrued interest payable |
1,059 | 2,651 | ||||||
(Decrease) increase in other liabilities |
(6,362 | ) | 6,368 | |||||
Total adjustments |
107,571 | 94,426 | ||||||
Net cash provided by operating activities |
141,356 | 121,906 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Proceeds from sales of securities available for sale |
411,196 | 89,647 | ||||||
Proceeds from maturities of securities held to maturity |
92 | 117 | ||||||
Proceeds from maturities of securities available for sale |
161,756 | 167,992 | ||||||
Purchase of securities held to maturity |
(8 | ) | (84 | ) | ||||
Purchase of securities available for sale |
(282,144 | ) | (76,296 | ) | ||||
(Increase) decrease in short-term investments |
(49,996 | ) | 8,749 | |||||
Net decrease (increase) in loans |
17,757 | (20,715 | ) | |||||
Net purchases of premises and equipment |
(5,458 | ) | (5,109 | ) | ||||
Net cash provided by investing activities |
253,195 | 164,301 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Net increase in demand and savings deposits |
210,068 | 214,562 | ||||||
Net decrease in time deposits |
(190,039 | ) | (156,021 | ) | ||||
Decrease in short-term borrowings |
(259,679 | ) | (244,290 | ) | ||||
Additions to long-term debt |
0 | 45,000 | ||||||
Repayments of long-term debt |
(83,761 | ) | (145,018 | ) | ||||
Net proceeds from issuance of stock |
1,231 | 1,249 | ||||||
Dividends paid |
(5,972 | ) | (9,997 | ) | ||||
Net cash used in financing activities |
(328,152 | ) | (294,515 | ) | ||||
Net Increase (Decrease) in Cash and Due From Banks |
66,399 | (8,308 | ) | |||||
Cash and Due From Banks at Beginning of Period |
198,954 | 284,508 | ||||||
Cash and Due From Banks at End of Period |
$ | 265,353 | $ | 276,200 | ||||
Supplemental Disclosures of Cash Flow Information |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 35,072 | $ | 49,428 | ||||
Income taxes |
145 | 37 |
See Notes to Consolidated Financial Statements
6
FULTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A Basis of Presentation
The accompanying unaudited consolidated financial statements of Fulton Financial Corporation (the Corporation) have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission (SEC).
NOTE B Net Income Per Common Share and Other Comprehensive Income
The Corporations basic net income per common share is calculated as net income available to common shareholders divided by the weighted average number of common shares outstanding. Net income available to common shareholders is calculated as net income less accrued dividends and discount accretion related to preferred stock.
For diluted net income per common share, net income available to common shareholders is divided by the weighted average number of common shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporations common stock equivalents consist of outstanding stock options, restricted stock and common stock warrants. As of March 31, 2011, there were no outstanding common stock warrants.
A reconciliation of weighted average common shares outstanding used to calculate basic net income per common share and diluted net income per common share follows.
Three months
ended March 31 |
||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Weighted average shares outstanding (basic) |
198,599 | 176,174 | ||||||
Effect of dilutive securities |
687 | 507 | ||||||
Weighted average shares outstanding (diluted) |
199,286 | 176,681 | ||||||
As of March 31, 2011, 4.6 million stock options were excluded from the diluted net income per share computation as their effect would have been anti-dilutive. As of March 31, 2010, 5.6 million stock options and a 5.5 million share common stock warrant were excluded from the diluted net income per share computation as their effects would have been anti-dilutive.
7
The following table presents the components of other comprehensive income:
Three months ended March 31 |
||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Unrealized gain on securities (net of a $1.9 million and $7.0 million tax effect in 2011 and 2010, respectively) |
$ | 3,568 | $ | 12,927 | ||||
Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities (net of a $134,000 and $49,000 tax effect in 2011 and 2010, respectively) |
249 | (91 | ) | |||||
Unrealized gain on derivative financial instruments (net of an $18,000 tax effect in 2011 and 2010) (1) |
34 | 34 | ||||||
(Accretion)/amortization of net unrecognized pension and postretirement items (net of a $6,000 and $10,000 tax effect in 2011 and 2010, respectively) |
(12 | ) | 19 | |||||
Reclassification adjustment for securities (gains) losses included in net income (net of $800,000 tax expense in 2011 and $778,000 tax benefit in 2010) |
(1,485 | ) | 1,445 | |||||
Other comprehensive income |
$ | 2,354 | $ | 14,334 | ||||
(1) | Amounts represent the amortization of the effective portions of losses on forward-starting interest rate swaps, designated as cash flow hedges and entered into in prior years in connection with the issuance of fixed-rate debt. The total amount recorded as a reduction to accumulated other comprehensive income upon settlement of these derivatives is being amortized to interest expense over the life of the related securities using the effective interest method. The amount of net losses in accumulated other comprehensive income that will be reclassified into earnings during the next twelve months is expected to be approximately $135,000. |
NOTE C Investment Securities
The following tables present the amortized cost and estimated fair values of investment securities:
Held to Maturity at March 31, 2011 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
||||||||||||
(in thousands) | ||||||||||||||||
U.S. Government sponsored agency securities |
$ | 6,249 | $ | 0 | $ | 0 | $ | 6,249 | ||||||||
State and municipal securities |
346 | 0 | 0 | 346 | ||||||||||||
Mortgage-backed securities |
698 | 54 | 0 | 752 | ||||||||||||
$ | 7,293 | $ | 54 | $ | 0 | $ | 7,347 | |||||||||
Available for Sale at March 31, 2011 |
||||||||||||||||
Equity securities |
$ | 130,887 | $ | 4,714 | $ | (932 | ) | $ | 134,669 | |||||||
U.S. Government securities |
1,650 | 0 | 0 | 1,650 | ||||||||||||
U.S. Government sponsored agency securities |
4,856 | 148 | (1 | ) | 5,003 | |||||||||||
State and municipal securities |
356,741 | 6,840 | (1,030 | ) | 362,551 | |||||||||||
Corporate debt securities |
135,996 | 5,051 | (11,911 | ) | 129,136 | |||||||||||
Collateralized mortgage obligations |
957,520 | 18,768 | (2,960 | ) | 973,328 | |||||||||||
Mortgage-backed securities |
800,832 | 29,207 | (2,648 | ) | 827,391 | |||||||||||
Auction rate securities |
267,303 | 808 | (11,698 | ) | 256,413 | |||||||||||
$ | 2,655,785 | $ | 65,536 | $ | (31,180 | ) | $ | 2,690,141 | ||||||||
8
Held to Maturity at December 31, 2010 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
||||||||||||
(in thousands) | ||||||||||||||||
U.S. Government sponsored agency securities |
$ | 6,339 | $ | 0 | $ | (1 | ) | $ | 6,338 | |||||||
State and municipal securities |
346 | 0 | 0 | 346 | ||||||||||||
Mortgage-backed securities |
1,066 | 68 | 0 | 1,134 | ||||||||||||
$ | 7,751 | $ | 68 | $ | (1 | ) | $ | 7,818 | ||||||||
Available for Sale at December 31, 2010 |
||||||||||||||||
Equity securities |
$ | 133,570 | $ | 3,872 | $ | (974 | ) | $ | 136,468 | |||||||
U.S. Government securities |
1,649 | 0 | 0 | 1,649 | ||||||||||||
U.S. Government sponsored agency securities |
4,888 | 172 | (2 | ) | 5,058 | |||||||||||
State and municipal securities |
345,053 | 6,003 | (1,493 | ) | 349,563 | |||||||||||
Corporate debt securities |
137,101 | 3,808 | (16,123 | ) | 124,786 | |||||||||||
Collateralized mortgage obligations |
1,085,613 | 23,457 | (5,012 | ) | 1,104,058 | |||||||||||
Mortgage-backed securities |
843,446 | 31,080 | (3,054 | ) | 871,472 | |||||||||||
Auction rate securities |
271,645 | 892 | (11,858 | ) | 260,679 | |||||||||||
$ | 2,822,965 | $ | 69,284 | $ | (38,516 | ) | $ | 2,853,733 | ||||||||
Available for sale equity securities include restricted investment securities issued by the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank totaling $92.6 million and $96.4 million as of March 31, 2011 and December 31, 2010, respectively.
The amortized cost and estimated fair values of debt securities as of March 31, 2011, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Held to Maturity | Available for Sale | |||||||||||||||
Amortized Cost |
Estimated Fair Value |
Amortized Cost |
Estimated Fair Value |
|||||||||||||
(in thousands) | ||||||||||||||||
Due in one year or less |
$ | 6,416 | $ | 6,416 | $ | 77,576 | $ | 77,478 | ||||||||
Due from one year to five years |
179 | 179 | 58,758 | 61,101 | ||||||||||||
Due from five years to ten years |
0 | 0 | 139,597 | 142,771 | ||||||||||||
Due after ten years |
0 | 0 | 490,615 | 473,403 | ||||||||||||
6,595 | 6,595 | 766,546 | 754,753 | |||||||||||||
Collateralized mortgage obligations |
0 | 0 | 957,520 | 973,328 | ||||||||||||
Mortgage-backed securities |
698 | 752 | 800,832 | 827,391 | ||||||||||||
$ | 7,293 | $ | 7,347 | $ | 2,524,898 | $ | 2,555,472 | |||||||||
9
The following table presents information related to the Corporations gains and losses on the sales of equity and debt securities, and losses recognized for the other-than-temporary impairment of investments:
Gross Realized Gains |
Gross Realized Losses |
Other-than- temporary Impairment Losses |
Net Gains (Losses) |
|||||||||||||
(in thousands) | ||||||||||||||||
Three months ended March 31, 2011: |
||||||||||||||||
Equity securities |
$ | 5 | $ | 0 | $ | (297 | ) | $ | (292 | ) | ||||||
Debt securities |
3,589 | (18 | ) | (994 | ) | 2,577 | ||||||||||
Total |
$ | 3,594 | $ | (18 | ) | $ | (1,291 | ) | $ | 2,285 | ||||||
Three months ended March 31, 2010: |
||||||||||||||||
Equity securities |
$ | 836 | $ | 0 | $ | (824 | ) | $ | 12 | |||||||
Debt securities |
1,923 | (5 | ) | (4,153 | ) | (2,235 | ) | |||||||||
Total |
$ | 2,759 | $ | (5 | ) | $ | (4,977 | ) | $ | (2,223 | ) | |||||
The $297,000 and $824,000 of other-than-temporary impairment charges for equity securities during the three months ended March 31, 2011 and 2010, respectively, were for investments in stocks of financial institutions. Other-than-temporary impairment charges related to financial institution stocks were due to the severity and duration of the declines in fair values of certain bank stock holdings, in conjunction with managements assessment of the near-term prospects of each specific issuer. As of March 31, 2011, after other-than-temporary impairment charges, the financial institutions stock portfolio had a cost basis of $31.3 million and a fair value of $35.1 million.
The $994,000 and $4.2 million of credit related other-than-temporary impairment charges for debt securities during the three months ended March 31, 2011 and 2010, respectively, were for investments in pooled trust preferred securities issued by financial institutions. Other-than-temporary impairment charges related to pooled trust preferred securities were determined based on an expected cash flows model.
The following table presents a summary of the cumulative credit related other-than-temporary impairment charges, recognized as components of earnings, for pooled trust preferred securities still held by the Corporation:
Three months ended March 31 |
||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Balance of cumulative credit losses on pooled trust preferred securities, beginning of period |
$ | (27,560 | ) | $ | (15,612 | ) | ||
Additions for credit losses recorded which were not previously recognized as components of earnings |
(994 | ) | (4,153 | ) | ||||
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security |
37 | 0 | ||||||
Balance of cumulative credit losses on pooled trust preferred securities, end of period |
$ | (28,517 | ) | $ | (19,765 | ) | ||
10
The following table presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2011:
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Estimated Fair Value |
Unrealized Losses |
Estimated Fair Value |
Unrealized Losses |
Estimated Fair Value |
Unrealized Losses |
|||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
U.S. Government sponsored agency securities |
$ | 0 | $ | 0 | $ | 199 | $ | (1 | ) | $ | 199 | $ | (1 | ) | ||||||||||
State and municipal securities |
49,600 | (1,028 | ) | 401 | (2 | ) | 50,001 | (1,030 | ) | |||||||||||||||
Corporate debt securities |
4,735 | (1,583 | ) | 47,828 | (10,328 | ) | 52,563 | (11,911 | ) | |||||||||||||||
Collateralized mortgage obligations |
295,073 | (2,960 | ) | 0 | 0 | 295,073 | (2,960 | ) | ||||||||||||||||
Mortgage-backed securities |
216,733 | (2,648 | ) | 0 | 0 | 216,733 | (2,648 | ) | ||||||||||||||||
Auction rate securities |
57,293 | (1,438 | ) | 173,205 | (10,260 | ) | 230,498 | (11,698 | ) | |||||||||||||||
Total debt securities |
623,434 | (9,657 | ) | 221,633 | (20,591 | ) | 845,067 | (30,248 | ) | |||||||||||||||
Equity securities |
8,434 | (685 | ) | 1,370 | (247 | ) | 9,804 | (932 | ) | |||||||||||||||
$ | 631,868 | $ | (10,342 | ) | $ | 223,003 | $ | (20,838 | ) | $ | 854,871 | $ | (31,180 | ) | ||||||||||
For its investments in equity securities, most notably its investments in stocks of financial institutions, management evaluates the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Corporations ability and intent to hold those investments for a reasonable period of time sufficient for a recovery of fair value, the Corporation does not consider those investments with unrealized holding losses as of March 31, 2011 to be other-than-temporarily impaired.
The unrealized holding losses on investments in student loan auction rate securities, also known as auction rate certificates (ARCs), are attributable to liquidity issues resulting from the failure of periodic auctions. Fulton Financial Advisors (FFA), the investment management and trust division of the Corporations Fulton Bank, N.A. subsidiary, held ARCs for some of its customers accounts. FFA had previously sold ARCs to customers as short-term investments with fair values that could be derived based on periodic auctions under normal market conditions. During 2008 and 2009, the Corporation purchased ARCs from customers due to the failure of these periodic auctions, which made these previously short-term investments illiquid.
As of March 31, 2011, approximately $206 million, or 81%, of the ARCs were rated above investment grade, with approximately $156 million, or 61%, AAA rated. Approximately $50 million, or 20%, of ARCs were rated below investment grade by at least one ratings agency or not rated. Of this amount, approximately $30 million, or 59%, of the student loans underlying the ARCs have principal payments which are guaranteed by the Federal government. In total, approximately $226 million, or 88%, of the student loans underlying the ARCs have principal payments which are guaranteed by the Federal government. As of March 31, 2011, all ARCs were current and making scheduled interest payments. Because the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, the Corporation does not consider these investments to be other-than-temporarily impaired as of March 31, 2011.
The Corporations collateralized mortgage obligations and mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the decline in market value of these securities is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, the Corporation does not consider those investments to be other-than-temporarily impaired as of March 31, 2011.
11
The following table presents the amortized cost and estimated fair values of corporate debt securities:
March 31, 2011 | December 31, 2010 | |||||||||||||||
Amortized cost |
Estimated fair value |
Amortized cost |
Estimated fair value |
|||||||||||||
(in thousands) | ||||||||||||||||
Single-issuer trust preferred securities |
$ | 91,266 | $ | 84,925 | $ | 91,257 | $ | 81,789 | ||||||||
Subordinated debt |
35,023 | 36,841 | 34,995 | 35,915 | ||||||||||||
Pooled trust preferred securities |
7,153 | 4,816 | 8,295 | 4,528 | ||||||||||||
Corporate debt securities issued by financial institutions |
133,442 | 126,582 | 134,547 | 122,232 | ||||||||||||
Other corporate debt securities |
2,554 | 2,554 | 2,554 | 2,554 | ||||||||||||
Available for sale corporate debt securities |
$ | 135,996 | $ | 129,136 | $ | 137,101 | $ | 124,786 | ||||||||
The Corporations investments in single-issuer trust preferred securities had an unrealized loss of $6.3 million at March 31, 2011. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three months ended March 31, 2011 or 2010, respectively. The Corporation held 13 single-issuer trust preferred securities that were rated below investment grade by at least one ratings agency, with an amortized cost of $40.1 million and an estimated fair value of $39.7 million at March 31, 2011. The majority of the single-issuer trust preferred securities rated below investment grade were rated BB or Baa. Single-issuer trust preferred securities with an amortized cost of $10.3 million and an estimated fair value of $8.1 million at March 31, 2011, were not rated by any ratings agency.
The Corporation holds ten pooled trust preferred securities. As of March 31, 2011, nine of these securities, with an amortized cost of $6.4 million and an estimated fair value of $4.1 million, were rated below investment grade by at least one ratings agency, with ratings ranging from C to Ca. For each of the nine pooled trust preferred securities rated below investment grade, the class of securities held by the Corporation is below the most senior tranche, with the Corporations interests being subordinate to other investors in the pool. The Corporation determines the fair value of pooled trust preferred securities based on quotes provided by third-party brokers.
The amortized cost of pooled trust preferred securities is the purchase price of the securities, net of cumulative credit related other-than-temporary impairment charges, determined using an expected cash flows model. The most significant input to the expected cash flows model was the expected payment deferral rate for each pooled trust preferred security. The Corporation evaluates the financial metrics, such as capital ratios and non-performing asset ratios, of the individual financial institution issuers that comprise each pooled trust preferred security to estimate its expected deferral rate. The actual weighted average cumulative defaults and deferrals as a percentage of original collateral were approximately 39% as of March 31, 2011. The discounted cash flow modeling for pooled trust preferred securities held by the Corporation as of March 31, 2011 assumed, on average, an additional 16% expected deferral rate.
Based on managements evaluations, corporate debt securities with a fair value of $129.1 million were not subject to any additional other-than-temporary impairment charges as of March 31, 2011. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be maturity.
12
NOTE D Loans and Allowance for Credit Losses
Loans, net of unearned income
Loans, net of unearned income are summarized as follows:
March 31, 2011 |
December 31, 2010 |
|||||||
(in thousands) | ||||||||
Real-estate commercial mortgage |
$ | 4,392,679 | $ | 4,375,980 | ||||
Commercial industrial, financial and agricultural |
3,692,668 | 3,704,384 | ||||||
Real-estate home equity |
1,620,340 | 1,641,777 | ||||||
Real-estate residential mortgage |
1,022,251 | 995,990 | ||||||
Real-estate construction |
747,806 | 801,185 | ||||||
Consumer |
337,413 | 350,161 | ||||||
Leasing and other |
60,142 | 61,017 | ||||||
Overdrafts |
6,859 | 10,011 | ||||||
11,880,158 | 11,940,505 | |||||||
Unearned income |
(6,950 | ) | (7,198 | ) | ||||
$ | 11,873,208 | $ | 11,933,307 | |||||
Allowance for Credit Losses
Effective December 31, 2010, the Corporation adopted the provisions of the Financial Accounting Standards Boards (FASB) Accounting Standards Codification (ASC) Update 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASC Update 2010-20), for period end disclosures related to the credit quality of loans. Effective March 31, 2011, the Corporation adopted certain additional disclosure requirements of ASC Update 2010-20 related to credit quality activity during a reporting period, or for the three months ended March 31, 2011 for the Corporation.
The development of the Corporations allowance for loan losses is based first, on a segmentation of its loan portfolio by general loan type, or portfolio segments, as presented in the preceding table. Certain portfolio segments are further disaggregated and evaluated collectively for impairment based on class segments, which are largely based on the type of collateral underlying each loan. For commercial loans, class segments include loans secured by collateral and unsecured loans. Construction loan class segments include loans secured by commercial real estate and loans secured by residential real estate. Consumer loan class segments are based on collateral types and include direct consumer installment loans and indirect automobile loans.
The following table presents the components of the allowance for credit losses:
March 31, 2011 |
December 31, 2010 |
|||||||
(in thousands) | ||||||||
Allowance for loan losses |
$ | 270,272 | $ | 274,271 | ||||
Reserve for unfunded lending commitments |
884 | 1,227 | ||||||
Allowance for credit losses |
$ | 271,156 | $ | 275,498 | ||||
13
The following table presents the activity in the allowance for credit losses for the three months ended March 31:
2011 | 2010 | |||||||
(in thousands) | ||||||||
Balance at beginning of period |
$ | 275,498 | $ | 257,553 | ||||
Loans charged off |
(45,529 | ) | (29,992 | ) | ||||
Recoveries of loans previously charged off |
3,187 | 1,693 | ||||||
Net loans charged off |
(42,342 | ) | (28,299 | ) | ||||
Provision for credit losses |
38,000 | 40,000 | ||||||
Balance at end of period |
$ | 271,156 | $ | 269,254 | ||||
The following table presents the activity in the allowance for loan losses for the three months ended March 31, 2011, by portfolio segment. Also presented below are loans, net of unearned income and their related allowance for loan losses, by portfolio segment as of March 31, 2011 and December 31, 2010:
Real Estate - Commercial Mortgage |
Commercial - Industrial, Financial and Agricultural |
Real Estate - Home Equity |
Real Estate - Residential Mortgage |
Real Estate - Construction |
Consumer | Leasing and other and Overdrafts |
Unallocated (1) |
Total | ||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Balance at January 1, 2011 |
$ | 40,831 | $ | 101,436 | $ | 6,454 | $ | 17,425 | $ | 58,117 | $ | 4,669 | $ | 3,840 | $ | 41,499 | $ | 274,271 | ||||||||||||||||||
Loans charged off |
(10,047 | ) | (13,336 | ) | (1,468 | ) | (4,996 | ) | (13,894 | ) | (1,291 | ) | (497 | ) | 0 | (45,529 | ) | |||||||||||||||||||
Recoveries of loans previously charged off |
1,535 | 391 | 1 | 44 | 563 | 309 | 344 | 0 | 3,187 | |||||||||||||||||||||||||||
Net loans charged off |
(8,512 | ) | (12,945 | ) | (1,467 | ) | (4,952 | ) | (13,331 | ) | (982 | ) | (153 | ) | 0 | (42,342 | ) | |||||||||||||||||||
Provision for loan losses (2) |
16,239 | 11,689 | 669 | 7,102 | 10,705 | 1,049 | (1,111 | ) | (7,999 | ) | 38,343 | |||||||||||||||||||||||||
Balance at March 31, 2011 |
$ | 48,558 | $ | 100,180 | $ | 5,656 | $ | 19,575 | $ | 55,491 | $ | 4,736 | $ | 2,576 | $ | 33,500 | $ | 270,272 | ||||||||||||||||||
Allowance for loan losses at March 31, 2011: |
||||||||||||||||||||||||||||||||||||
Evaluated collectively for impairment under FASB ASC Subtopic 450-20 |
$ | 26,327 | $ | 36,709 | $ | 5,656 | $ | 15,288 | $ | 39,448 | $ | 4,736 | $ | 2,576 | $ | 33,500 | $ | 164,240 | ||||||||||||||||||
Evaluated individually for impairment under FASB ASC Section 310-10-35 |
22,231 | 63,471 | 0 | 4,287 | 16,043 | 0 | 0 | NA | 106,032 | |||||||||||||||||||||||||||
$ | 48,558 | $ | 100,180 | $ | 5,656 | $ | 19,575 | $ | 55,491 | $ | 4,736 | $ | 2,576 | $ | 33,500 | $ | 270,272 | |||||||||||||||||||
Loans, net of unearned income at March 31, 2011: |
||||||||||||||||||||||||||||||||||||
Evaluated collectively for impairment under FASB ASC Subtopic 450-20 |
$ | 4,224,868 | $ | 3,472,225 | $ | 1,620,340 | $ | 1,003,323 | $ | 629,359 | $ | 337,413 | $ | 60,051 | NA | $ | 11,347,579 | |||||||||||||||||||
Evaluated individually for impairment under FASB ASC Section 310-10-35 |
167,811 | 220,443 | 0 | 18,928 | 118,447 | 0 | 0 | NA | 525,629 | |||||||||||||||||||||||||||
Total |
$ | 4,392,679 | $ | 3,692,668 | $ | 1,620,340 | $ | 1,022,251 | $ | 747,806 | $ | 337,413 | $ | 60,051 | NA | $ | 11,873,208 | |||||||||||||||||||
Allowance for loan losses at December 31, 2010: |
||||||||||||||||||||||||||||||||||||
Evaluated collectively for impairment under FASB ASC Subtopic 450-20 |
$ | 22,836 | $ | 32,323 | $ | 6,454 | $ | 11,475 | $ | 35,247 | $ | 4,669 | $ | 3,840 | $ | 41,499 | $ | 158,343 | ||||||||||||||||||
Evaluated individually for impairment under FASB ASC Section 310-10-35 |
17,995 | 69,113 | 0 | 5,950 | 22,870 | 0 | 0 | NA | 115,928 | |||||||||||||||||||||||||||
$ | 40,831 | $ | 101,436 | $ | 6,454 | $ | 17,425 | $ | 58,117 | $ | 4,669 | $ | 3,840 | $ | 41,499 | $ | 274,271 | |||||||||||||||||||
Loans, net of unearned income at December 31, 2010: |
||||||||||||||||||||||||||||||||||||
Evaluated collectively for impairment under FASB ASC Subtopic 450-20 |
$ | 4,217,660 | $ | 3,469,775 | $ | 1,641,777 | $ | 956,260 | $ | 660,238 | $ | 350,161 | $ | 63,830 | NA | $ | 11,359,701 | |||||||||||||||||||
Evaluated individually for impairment under FASB ASC Section 310-10-35 |
158,320 | 234,609 | 0 | 39,730 | 140,947 | 0 | 0 | NA | 573,606 | |||||||||||||||||||||||||||
Total |
$ | 4,375,980 | $ | 3,704,384 | $ | 1,641,777 | $ | 995,990 | $ | 801,185 | $ | 350,161 | $ | 63,830 | NA | $ | 11,933,307 | |||||||||||||||||||
(1) | The Corporation maintains an unallocated allowance for factors or conditions that exist at the balance sheet date, but are not specifically identifiable. Management believes such an unallocated allowance, which was approximately 12% and 15% as of March 31, 2011 and December 31, 2010, respectively, was reasonable and appropriate as the estimates used in the allocation process are inherently imprecise. |
(2) | Provision for loan losses is gross of a $343,000 reduction in provision applied to unfunded commitments. The total provision for credit losses, comprised of allocations for both funded and unfunded loans, was $38.0 million at March 31, 2011. |
N/A Not applicable
Impaired Loans
A loan evaluated individually for impairment is considered to be impaired if the Corporation believes it is probable that all amounts will not be collected according to the contractual terms of the loan agreement.
14
The Corporation uses an internal risk rating process for its commercial loans, commercial mortgages and construction loans, consisting of nine general classifications ranging from excellent to loss. Generally, all non-accrual commercial loans, commercial mortgages and construction loans with risk ratings of substandard or lower are individually reviewed for impairment under FASB ASC Section 310-10-35. Certain accruing commercial loans, commercial mortgages and construction loans are also reviewed individually for impairment if the Corporation believes they meet the definition of impaired.
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. As of March 31, 2011 and December 31, 2010, substantially all of the Corporations impaired loans were measured based on the estimated fair value of each loans collateral. Collateral could be in the form of real estate in the case of impaired commercial mortgages and construction loans, or business assets, such as accounts receivable or inventory, in the case of commercial loans. Commercial loans may also be secured by real property.
As of March 31, 2011 and December 31, 2010, respectively, approximately 57% and 52% of impaired loans with principal balances greater than $1 million, whose primary collateral is real estate, were measured at estimated fair value using certified third-party appraisals that had been updated within the preceding 12 months.
The following table presents total impaired loans by class segment:
March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||
Unpaid Principal Balance |
Recorded Investment |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
Unpaid Principal Balance |
Recorded Investment |
Related Allowance |
|||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||||||||||
Real estate - commercial mortgage |
$ | 70,166 | $ | 54,440 | N/A | $ | 54,346 | $ | 403 | $ | 68,583 | $ | 54,251 | N/A | ||||||||||||||||||
Commercial - secured |
31,985 | 23,788 | N/A | 25,767 | 146 | 38,366 | 27,745 | N/A | ||||||||||||||||||||||||
Commercial - unsecured |
595 | 469 | N/A | 528 | 3 | 710 | 587 | N/A | ||||||||||||||||||||||||
Real estate - residential mortgage (1) |
6,505 | 6,118 | N/A | 13,665 | 43 | 21,598 | 21,212 | N/A | ||||||||||||||||||||||||
Construction - commercial residential |
61,884 | 32,457 | N/A | 32,406 | 178 | 69,624 | 32,354 | N/A | ||||||||||||||||||||||||
Construction - commercial |
5,561 | 3,692 | N/A | 2,909 | 20 | 5,637 | 2,125 | N/A | ||||||||||||||||||||||||
176,696 | 120,964 | 129,621 | 793 | 204,518 | 138,274 | |||||||||||||||||||||||||||
With a related allowance recorded: |
||||||||||||||||||||||||||||||||
Real estate - commercial mortgage |
123,071 | 113,371 | $ | 22,231 | 108,720 | 839 | 111,190 | 104,069 | $ | 17,995 | ||||||||||||||||||||||
Commercial - secured |
203,975 | 191,226 | 59,240 | 194,450 | 1,177 | 202,824 | 197,674 | 64,922 | ||||||||||||||||||||||||
Commercial - unsecured |
4,989 | 4,960 | 4,231 | 6,782 | 31 | 8,681 | 8,603 | 4,191 | ||||||||||||||||||||||||
Real estate - residential mortgage (1) |
12,809 | 12,810 | 4,287 | 15,664 | 90 | 18,518 | 18,518 | 5,950 | ||||||||||||||||||||||||
Construction - commercial residential |
81,840 | 79,138 | 15,239 | 91,482 | 435 | 110,465 | 103,826 | 22,155 | ||||||||||||||||||||||||
Construction - commercial |
3,160 | 3,160 | 804 | 2,901 | 17 | 2,642 | 2,642 | 715 | ||||||||||||||||||||||||
429,844 | 404,665 | 106,032 | 419,999 | 2,589 | 454,320 | 435,332 | 115,928 | |||||||||||||||||||||||||
Total |
$ | 606,540 | $ | 525,629 | $ | 106,032 | $ | 549,620 | $ | 3,382 | $ | 658,838 | $ | 573,606 | $ | 115,928 | ||||||||||||||||
(1) | Impaired residential mortgages represent loans modified under troubled debt restructurings in the current calendar year and/or not performing according to their modified terms. |
N/A | Not applicable. |
As of March 31, 2011 and December 31, 2010 there were $121.0 million and $138.3 million, respectively, of impaired loans that did not have a related allowance for loan loss. The estimated fair values of the collateral for these loans exceeded the carrying amount of the loans and, accordingly, no specific valuation allowance was considered to be necessary.
For 2010, the total average recorded investment in impaired loans was approximately $772.3 million. The Corporation generally applies all payments received on non-accruing impaired loans to principal until such time as the principal is paid off, after which time any additional payments received are recognized as interest income. For 2010, the Corporation recognized interest income of approximately $27.4 million on impaired loans.
15
Credit Quality Indicators and Non-performing Assets
The following table presents a summary of delinquency and non-performing status by portfolio segment and class segment:
March 31, 2011 | ||||||||||||||||
Performing | Delinquent (1) | Non- performing (2) |
Total | |||||||||||||
(in thousands) | ||||||||||||||||
Real estate - commercial mortgage |
$ | 4,266,531 | $ | 28,843 | $ | 97,305 | $ | 4,392,679 | ||||||||
Commercial - secured |
3,366,849 | 17,496 | 82,426 | 3,466,771 | ||||||||||||
Commercial -unsecured |
221,243 | 1,030 | 3,624 | 225,897 | ||||||||||||
Total Commercial - industrial, financial and agricultural |
3,588,092 | 18,526 | 86,050 | 3,692,668 | ||||||||||||
Real estate - home equity |
1,599,010 | 12,016 | 9,314 | 1,620,340 | ||||||||||||
Real estate - residential mortgage |
936,767 | 35,486 | 49,998 | 1,022,251 | ||||||||||||
Construction - commercial residential |
413,497 | 3,467 | 66,686 | 483,650 | ||||||||||||
Construction - commercial |
206,630 | 83 | 4,040 | 210,753 | ||||||||||||
Construction - other |
50,613 | 636 | 2,154 | 53,403 | ||||||||||||
Total Real estate - construction |
670,740 | 4,186 | 72,880 | 747,806 | ||||||||||||
Consumer - direct |
35,967 | 2,658 | 2,075 | 40,700 | ||||||||||||
Consumer - indirect |
165,265 | 1,573 | 159 | 166,997 | ||||||||||||
Consumer - other |
129,544 | 148 | 24 | 129,716 | ||||||||||||
Total Consumer |
330,776 | 4,379 | 2,258 | 337,413 | ||||||||||||
Leasing and other and overdrafts |
59,208 | 610 | 233 | 60,051 | ||||||||||||
$ | 11,451,124 | $ | 104,046 | $ | 318,038 | $ | 11,873,208 | |||||||||
December 31, 2010 | ||||||||||||||||
Real estate - commercial mortgage |
$ | 4,257,871 | $ | 24,389 | $ | 93,720 | $ | 4,375,980 | ||||||||
Commercial - secured |
3,373,651 | 12,111 | 85,536 | 3,471,298 | ||||||||||||
Commercial -unsecured |
229,985 | 1,182 | 1,919 | 233,086 | ||||||||||||
Total Commercial - industrial, financial and agricultural |
3,603,636 | 13,293 | 87,455 | 3,704,384 | ||||||||||||
Real estate - home equity |
1,619,684 | 11,905 | 10,188 | 1,641,777 | ||||||||||||
Real estate - residential mortgage |
909,247 | 36,331 | 50,412 | 995,990 | ||||||||||||
Construction - commercial residential |
409,190 | 7,273 | 76,436 | 492,899 | ||||||||||||
Construction - commercial |
239,150 | 0 | 5,287 | 244,437 | ||||||||||||
Construction - other |
60,956 | 0 | 2,893 | 63,849 | ||||||||||||
Total Real estate - construction |
709,296 | 7,273 | 84,616 | 801,185 | ||||||||||||
Consumer - direct |
45,942 | 935 | 212 | 47,089 | ||||||||||||
Consumer - indirect |
166,531 | 2,275 | 290 | 169,096 | ||||||||||||
Consumer - other |
129,911 | 2,413 | 1,652 | 133,976 | ||||||||||||
Total Consumer |
342,384 | 5,623 | 2,154 | 350,161 | ||||||||||||
Leasing and other and overdrafts |
63,087 | 516 | 227 | 63,830 | ||||||||||||
$ | 11,505,205 | $ | 99,330 | $ | 328,772 | $ | 11,933,307 | |||||||||
(1) | Includes all accruing loans 30 days to 89 days past due. |
(2) | Includes all accruing loans 90 days or more past due and all non-accrual loans. |
16
The following table presents non-performing assets:
March 31, 2011 |
December 31, 2010 |
|||||||
(in thousands) | ||||||||
Non-accrual loans |
$ | 280,270 | $ | 280,688 | ||||
Accruing loans greater than 90 days past due |
37,768 | 48,084 | ||||||
Total non-performing loans |
318,038 | 328,772 | ||||||
Other real estate owned (OREO) |
37,044 | 32,959 | ||||||
Total non-performing assets |
$ | 355,082 | $ | 361,731 | ||||
The following table presents loans whose terms were modified under troubled debt restructurings:
March 31, 2011 |
December 31, 2010 |
|||||||
(in thousands) | ||||||||
Real-estate residential mortgage |
$ | 39,558 | $ | 37,826 | ||||
Real-estate commercial mortgage |
31,967 | 18,778 | ||||||
Real-estate construction |
5,440 | 5,440 | ||||||
Commercial industrial, financial and agricultural |
4,074 | 5,502 | ||||||
Consumer and home equity |
260 | 263 | ||||||
Total accruing troubled debt restructurings |
81,299 | 67,809 | ||||||
Non-accrual troubled debt restructurings (1) |
56,128 | 51,175 | ||||||
Total troubled debt restructurings |
$ | 137,427 | $ | 118,984 | ||||
(1) | Included within non-accrual loans in table detailing non-performing assets above. |
As of March 31, 2011 and December 31, 2010, there were $2.7 million and $1.6 million, respectively, of commitments to lend additional funds to borrowers whose loans were modified under troubled debt restructurings.
17
The following table presents past due status and non-accrual loans by portfolio segment and class segment:
March 31, 2011 | ||||||||||||||||||||||||||||||||
31-59 Days Past Due |
60-89 Days Past Due |
³ 90 Days Past Due and Accruing |
Non- accrual |
Total ³ 90 Days |
Total Past Due |
Current | Total | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Real estate - commercial mortgage |
$ | 19,307 | $ | 9,536 | $ | 3,678 | $ | 93,627 | $ | 97,305 | $ | 126,148 | $ | 4,266,531 | $ | 4,392,679 | ||||||||||||||||
Commercial - secured |
13,071 | 4,425 | 6,771 | 75,655 | 82,426 | 99,922 | 3,366,849 | 3,466,771 | ||||||||||||||||||||||||
Commercial - unsecured |
839 | 191 | 159 | 3,465 | 3,624 | 4,654 | 221,243 | 225,897 | ||||||||||||||||||||||||
Total Commercial - industrial, financial and agricultural |
13,910 | 4,616 | 6,930 | 79,120 | 86,050 | 104,576 | 3,588,092 | 3,692,668 | ||||||||||||||||||||||||
Real estate - home equity |
9,326 | 2,690 | 9,240 | 74 | 9,314 | 21,330 | 1,599,010 | 1,620,340 | ||||||||||||||||||||||||
Real estate - residential mortgage |
26,604 | 8,882 | 13,133 | 36,865 | 49,998 | 85,484 | 936,767 | 1,022,251 | ||||||||||||||||||||||||
Construction - commercial residential |
3,028 | 439 | 1,480 | 65,206 | 66,686 | 70,153 | 413,497 | 483,650 | ||||||||||||||||||||||||
Construction - commercial |
0 | 83 | 0 | 4,040 | 4,040 | 4,123 | 206,630 | 210,753 | ||||||||||||||||||||||||
Construction - other |
248 | 388 | 894 | 1,260 | 2,154 | 2,790 | 50,613 | 53,403 | ||||||||||||||||||||||||
Total Real estate - construction |
3,276 | 910 | 2,374 | 70,506 | 72,880 | 77,066 | 670,740 | 747,806 | ||||||||||||||||||||||||
Consumer - direct |
1,920 | 738 | 2,060 | 15 | 2,075 | 4,733 | 35,967 | 40,700 | ||||||||||||||||||||||||
Consumer - indirect |
1,307 | 266 | 159 | 0 | 159 | 1,732 | 165,265 | 166,997 | ||||||||||||||||||||||||
Consumer - other |
41 | 107 | 24 | 0 | 24 | 172 | 129,544 | 129,716 | ||||||||||||||||||||||||
Total Consumer |
3,268 | 1,111 | 2,243 | 15 | 2,258 | 6,637 | 330,776 | 337,413 | ||||||||||||||||||||||||
Leasing and other and overdrafts |
355 | 255 | 170 | 63 | 233 | 843 | 59,208 | 60,051 | ||||||||||||||||||||||||
$ | 76,046 | $ | 28,000 | $ | 37,768 | $ | 280,270 | $ | 318,038 | $ | 422,084 | $ | 11,451,124 | $ | 11,873,208 | |||||||||||||||||
December 31, 2010 | ||||||||||||||||||||||||||||||||
Real estate - commercial mortgage |
$ | 15,898 | $ | 8,491 | $ | 6,744 | $ | 86,976 | $ | 93,720 | $ | 118,109 | $ | 4,257,871 | $ | 4,375,980 | ||||||||||||||||
Commercial - secured |
5,274 | 6,837 | 13,374 | 72,162 | 85,536 | 97,647 | 3,373,651 | 3,471,298 | ||||||||||||||||||||||||
Commercial - unsecured |
629 | 553 | 731 | 1,188 | 1,919 | 3,101 | 229,985 | 233,086 | ||||||||||||||||||||||||
Total Commercial - industrial, financial and agricultural |
5,903 | 7,390 | 14,105 | 73,350 | 87,455 | 100,748 | 3,603,636 | 3,704,384 | ||||||||||||||||||||||||
Real estate - home equity |
8,138 | 3,767 | 10,024 | 164 | 10,188 | 22,093 | 1,619,684 | 1,641,777 | ||||||||||||||||||||||||
Real estate - residential mortgage |
24,237 | 12,094 | 13,346 | 37,066 | 50,412 | 86,743 | 909,247 | 995,990 | ||||||||||||||||||||||||
Construction - commercial residential |
3,872 | 3,401 | 884 | 75,552 | 76,436 | 83,709 | 409,190 | 492,899 | ||||||||||||||||||||||||
Construction - commercial |
0 | 0 | 195 | 5,092 | 5,287 | 5,287 | 239,150 | 244,437 | ||||||||||||||||||||||||
Construction - other |
0 | 0 | 491 | 2,402 | 2,893 | 2,893 | 60,956 | 63,849 | ||||||||||||||||||||||||
Total Real estate - construction |
3,872 | 3,401 | 1,570 | 83,046 | 84,616 | 91,889 | 709,296 | 801,185 | ||||||||||||||||||||||||
Consumer - direct |
707 | 228 | 212 | 0 | 212 | 1,147 | 45,942 | 47,089 | ||||||||||||||||||||||||
Consumer - indirect |
1,916 | 359 | 290 | 0 | 290 | 2,565 | 166,531 | 169,096 | ||||||||||||||||||||||||
Consumer - other |
1,751 | 662 | 1,638 | 14 | 1,652 | 4,065 | 129,911 | 133,976 | ||||||||||||||||||||||||
Total Consumer |
4,374 | 1,249 | 2,140 | 14 | 2,154 | 7,777 | 342,384 | 350,161 | ||||||||||||||||||||||||
Leasing and other and overdrafts |
473 | 43 | 155 | 72 | 227 | 743 | 63,087 | 63,830 | ||||||||||||||||||||||||
$ | 62,895 | $ | 36,435 | $ | 48,084 | $ | 280,688 | $ | 328,772 | $ | 428,102 | $ | 11,505,205 | $ | 11,933,307 | |||||||||||||||||
18
NOTE E Stock-Based Compensation
The fair value of equity awards granted to employees is recognized as compensation expense over the period during which employees are required to provide service in exchange for such awards. The Corporation grants equity awards to employees, consisting of stock options and restricted stock, under its Stock Option and Compensation Plan (Option Plan). In addition, employees may purchase stock under the Corporations Employee Stock Purchase Plan.
The following table presents compensation expense and the related tax benefits for equity awards recognized in the consolidated statements of income:
Three months ended March 31 |
||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Stock-based compensation expense |
$ | 547 | $ | 293 | ||||
Tax benefit |
(136 | ) | (62 | ) | ||||
Stock-based compensation expense, net of tax |
$ | 411 | $ | 231 | ||||
Stock option exercise prices are equal to the fair value of the Corporations stock on the date of grant, and carry terms of up to ten years. Restricted stock fair values are equal to the average trading price of the Corporations stock on the date of grant. Restricted stock awards earn dividends during the vesting period, which are forfeitable if the awards do not vest. Stock options and restricted stock are typically granted annually on July 1st and become fully vested over or after a three-year vesting period. Certain events, as defined in the Option Plan, result in the acceleration of the vesting of both stock options and restricted stock. As of March 31, 2011, the Option Plan had 13.0 million shares reserved for future grants through 2013.
NOTE F Employee Benefit Plans
The Corporation maintains a defined benefit pension plan (Pension Plan) for certain employees. Contributions to the Pension Plan are actuarially determined and funded annually, if required. Pension Plan assets are invested in: money markets; fixed income securities, including corporate bonds, U.S. Treasury securities and common trust funds; and equity securities, including common stocks and common stock mutual funds. Effective January 1, 2008, the Pension Plan was curtailed.
The Corporation currently provides medical and life insurance benefits under a postretirement benefits plan (Postretirement Plan) to certain retired full-time employees who were employees of the Corporation prior to January 1, 1998. Certain full-time employees may become eligible for these discretionary benefits if they reach retirement age while working for the Corporation.
The Corporation recognizes the funded status of its Pension Plan and Postretirement Plan on the consolidated balance sheets and recognizes the changes in that funded status through other comprehensive income.
19
The net periodic benefit cost for the Corporations Pension Plan and Postretirement Plan, as determined by consulting actuaries, consisted of the following components for the three months ended March 31:
Pension Plan | Postretirement Plan | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | ||||||||||||||||
Service cost (1) |
$ | 15 | $ | 26 | $ | 51 | $ | 50 | ||||||||
Interest cost |
853 | 842 | 107 | 110 | ||||||||||||
Expected return on plan assets |
(837 | ) | (802 | ) | (1 | ) | (1 | ) | ||||||||
Net amortization (accretion) |
72 | 119 | (91 | ) | (91 | ) | ||||||||||
Net periodic benefit cost |
$ | 103 | $ | 185 | $ | 66 | $ | 68 | ||||||||
(1) | Pension Plan service cost for the three months ended March 31, 2011 and 2010 was related to administrative costs associated with the plan and was not due to the accrual of additional participant benefits. |
NOTE G Derivative Financial Instruments
In connection with its mortgage banking activities, the Corporation enters into commitments to originate fixed-rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation enters into forward commitments for the future sale or purchase of mortgage-backed securities to or from third-party investors to hedge the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans at a fixed price on a future date. Both the interest rate locks and the forward commitments are accounted for as derivative financial instruments and are carried at fair value, determined as the amount that would be necessary to settle each derivative financial instrument at the balance sheet date. The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. Gross derivative assets and liabilities are recorded within other assets and other liabilities, respectively, on the consolidated balance sheets.
The following table presents a summary of the notional amounts and fair values of derivative financial instruments recorded on the consolidated balance sheets, none of which have been designated as hedging instruments:
March 31, 2011 | December 31, 2010 | |||||||||||||||
Notional Amount |
Asset (Liability) Fair Value |
Notional Amount |
Asset (Liability) Fair Value |
|||||||||||||
(in thousands) | ||||||||||||||||
Interest Rate Locks with Customers: |
||||||||||||||||
Positive fair values |
$ | 136,163 | $ | 2,033 | $ | 140,682 | $ | 777 | ||||||||
Negative fair values |
8,093 | (96 | ) | 50,527 | (760 | ) | ||||||||||
Net Interest Rate Locks with Customers |
1,937 | 17 | ||||||||||||||
Forward Commitments: |
||||||||||||||||
Positive fair values |
22,100 | 56 | 558,861 | 8,479 | ||||||||||||
Negative fair values |
117,583 | (862 | ) | 0 | 0 | |||||||||||
Net Forward Commitments |
(806 | ) | 8,479 | |||||||||||||
$ | 1,131 | $ | 8,496 | |||||||||||||
20
The following table presents a summary of the fair value gains and losses on derivative financial instruments for the three months ended March 31:
Fair Value Gains (Losses) | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Interest rate locks with customers |
$ | 1,920 | $ | 1,022 | ||||
Forward commitments |
(9,285 | ) | (1,298 | ) | ||||
$ | (7,365 | ) | $ | (276 | ) | |||
Fair value gains and losses represent the changes in the fair values of derivative financial instruments during the period and are recognized on the consolidated statements of income as components of mortgage banking income. The other components of mortgage banking income are gains and losses on sales of mortgage loans, gains and losses on the settlement of forward commitments, and net servicing income. Total mortgage banking income, including fair value adjustments on derivative financial instruments, was $5.5 million and $4.1 million for the three months ended March 31, 2011 and 2010, respectively.
NOTE H Commitments and Contingencies
Commitments
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. Those financial instruments include commitments to extend credit and letters of credit, which involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the Corporations consolidated balance sheets. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the outstanding amount of those instruments.
The outstanding amounts of commitments to extend credit and letters of credit were as follows:
March 31, 2011 |
December 31, 2010 |
|||||||
(in thousands) | ||||||||
Commitments to extend credit |
$ | 3,770,364 | $ | 3,780,824 | ||||
Standby letters of credit |
477,212 | 489,097 | ||||||
Commercial letters of credit |
29,266 | 31,388 |
The Corporation records a reserve for unfunded lending commitments, which represents managements estimate of losses associated with unused commitments to extend credit on loans impaired under FASB ASC Section 310-10-35. See Note D, Loans and Allowance for Credit Losses for additional details.
Residential Lending
Residential mortgages are originated and sold by the Corporation through Fulton Mortgage Company, which operates as a division of each of the Corporations subsidiary banks. The loans originated and sold are predominantly prime loans that conform to published standards of government sponsored agencies. Prior to 2008, the Corporations former Resource Bank subsidiary operated a national wholesale mortgage lending operation which originated and sold non-prime loans from the time the Corporation acquired Resource Bank in 2004 through 2007.
Beginning in 2007, Resource Bank experienced an increase in requests from secondary market purchasers to repurchase non-prime loans sold to those investors. These repurchase requests resulted in the Corporation recording charges representing the write-downs that were necessary to reduce the loan balances to their estimated net realizable values, based on valuations of the underlying properties, as adjusted for market factors and other considerations. Many of the loans the Corporation repurchased were delinquent and were settled through foreclosure and sale of the underlying collateral.
21
As of March 31, 2011, the reserve for losses on the potential repurchase of loans with principal balances totaling approximately $3.3 million was $2.4 million. As of December 31, 2010, the reserve for losses on the potential repurchase of loans with principal balances totaling approximately $8.1 million was $3.3 million.
Management believes that the reserves recorded as of March 31, 2011 are adequate for the known potential repurchases. However, continued declines in collateral values or the identification of additional loans to be repurchased could necessitate additional reserves in the future.
Other Contingencies
From time to time, the Corporation and its subsidiary banks may be defendants in legal proceedings relating to the conduct of their business. Most of such legal proceedings are a normal part of the banking business and, in managements opinion, the financial position and results of operations and cash flows of the Corporation would not be affected materially by the outcome of such legal proceedings.
NOTE I Fair Value Option
FASB ASC Subtopic 825-10 permits entities to measure many financial instruments and certain other items at fair value and requires certain disclosures for amounts for which the fair value option is applied. The Corporation has elected to measure mortgage loans held for sale at fair value to more accurately reflect the financial performance of its mortgage banking activities in its consolidated financial statements. Derivative financial instruments related to these activities are also recorded at fair value, as noted within Note G, Derivative Financial Instruments. The Corporation determines fair value for its mortgage loans held for sale based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. Changes in fair value during the period are recorded as components of mortgage banking income on the consolidated statements of income. Interest income earned on mortgage loans held for sale is recorded within interest income on the consolidated statements of income.
The following table presents a summary of the Corporations mortgage loans held for sale:
March 31, 2011 |
December 31, 2010 |
|||||||
(in thousands) | ||||||||
Cost |
$ | 30,331 | $ | 84,604 | ||||
Fair value |
30,903 | 83,940 |
During the three months ended March 31, 2011 and 2010, the Corporation recorded gains related to changes in fair values of mortgage loans held for sale of $1.2 million and $391,000, respectively.
NOTE J Fair Value Measurements
FASB ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three categories (from highest to lowest priority):
| Level 1 Inputs that represent quoted prices for identical instruments in active markets. |
| Level 2 Inputs that represent quoted prices for similar instruments in active markets, or quoted prices for identical instruments in non-active markets. Also includes valuation techniques whose inputs are derived principally from observable market data other than quoted prices, such as interest rates or other market-corroborated means. |
| Level 3 Inputs that are largely unobservable, as little or no market data exists for the instrument being valued. |
22
The Corporation has categorized all assets and liabilities measured at fair value on both a recurring and nonrecurring basis into the above three levels.
In January 2010, the FASB issued ASC Update No. 2010-06, Improving Disclosures About Fair Value Measurements (ASC Update 2010-06). Among other provisions which were adopted by the Corporation on March 31, 2010, ASC Update 2010-06 also requires companies to reconcile changes in Level 3 assets and liabilities by separately providing information about Level 3 purchases, sales, issuances and settlements on a gross basis. This provision of ASC Update 2010-06 was effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years, or March 31, 2011 for the Corporation. The adoption of this provision did not impact the Corporations fair value measurement disclosures.
Items Measured at Fair Value on a Recurring Basis
The Corporations assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets were as follows:
March 31, 2011 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Mortgage loans held for sale |
$ | 0 | $ | 30,903 | $ | 0 | $ | 30,903 | ||||||||
Available for sale investment securities: |
||||||||||||||||
Equity securities |
42,116 | 0 | 0 | 42,116 | ||||||||||||
U.S. Government securities |
0 | 1,650 | 0 | 1,650 | ||||||||||||
U.S. Government sponsored agency securities |
0 | 5,003 | 0 | 5,003 | ||||||||||||
State and municipal securities |
0 | 362,551 | 0 | 362,551 | ||||||||||||
Corporate debt securities |
0 | 116,226 | 12,910 | 129,136 | ||||||||||||
Collateralized mortgage obligations |
0 | 973,328 | 0 | 973,328 | ||||||||||||
Mortgage-backed securities |
0 | 827,391 | 0 | 827,391 | ||||||||||||
Auction rate securities |
0 | 0 | 256,413 | 256,413 | ||||||||||||
Total available for sale investments |
42,116 | 2,286,149 | 269,323 | 2,597,588 | ||||||||||||
Other financial assets |
13,899 | 2,089 | 0 | 15,988 | ||||||||||||
Total assets |
$ | 56,015 | $ | 2,319,141 | $ | 269,323 | $ | 2,644,479 | ||||||||
Other financial liabilities |
$ | 13,899 | $ | 958 | $ | 0 | $ | 14,857 | ||||||||
December 31, 2010 | ||||||||||||||||
Mortgage loans held for sale |
$ | 0 | $ | 83,940 | $ | 0 | $ | 83,940 | ||||||||
Available for sale investment securities: |
||||||||||||||||
Equity securities |
40,070 | 0 | 0 | 40,070 | ||||||||||||
U.S. Government securities |
0 | 1,649 | 0 | 1,649 | ||||||||||||
U.S. Government sponsored agency securities |
0 | 5,058 | 0 | 5,058 | ||||||||||||
State and municipal securities |
0 | 349,563 | 0 | 349,563 | ||||||||||||
Corporate debt securities |
0 | 111,675 | 13,111 | 124,786 | ||||||||||||
Collateralized mortgage obligations |
0 | 1,104,058 | 0 | 1,104,058 | ||||||||||||
Mortgage-backed securities |
0 | 871,472 | 0 | 871,472 | ||||||||||||
Auction rate securities |
0 | 0 | 260,679 | 260,679 | ||||||||||||
Total available for sale investments |
40,070 | 2,443,475 | 273,790 | 2,757,335 | ||||||||||||
Other financial assets |
13,582 | 9,256 | 0 | 22,838 | ||||||||||||
Total assets |
$ | 53,652 | $ | 2,536,671 | $ | 273,790 | $ | 2,864,113 | ||||||||
Other financial liabilities |
$ | 13,582 | $ | 760 | $ | 0 | $ | 14,342 | ||||||||
The valuation techniques used to measure fair value for the items in the tables above are as follows:
23
| Mortgage loans held for sale This category consists of mortgage loans held for sale that the Corporation has elected to measure at fair value. Fair values as of March 31, 2011 and December 31, 2010 were measured as the price that secondary market investors were offering for loans with similar characteristics. |
| Available for sale investment securities Included within this asset category are both equity and debt securities: |
| Equity securities Equity securities consist of stocks of financial institutions ($35.1 million at March 31, 2011 and $33.1 million at December 31, 2010) and other equity investments ($7.0 million at March 31, 2011 and December 31, 2010). These Level 1 investments are measured at fair value based on quoted prices for identical securities in active markets. Restricted equity securities issued by the FHLB and Federal Reserve Bank ($92.6 million at March 31, 2011 and $96.4 million at December 31, 2010) have been excluded from the above table. |
| U.S. Government securities/U.S. Government sponsored agency securities/State and municipal securities/Collateralized mortgage obligations/Mortgage-backed securities These debt securities are classified as Level 2 investments. Fair values are determined by a third-party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. The pricing data and market quotes the Corporation obtains from outside sources are reviewed internally for reasonableness. |
| Corporate debt securities This category includes subordinated debt issued by financial institutions ($36.8 million at March 31, 2011 and $35.9 million at December 31, 2010), single-issuer trust preferred securities issued by financial institutions ($84.9 million at March 31, 2011 and $81.8 million at December 31, 2010), pooled trust preferred securities issued by financial institutions ($4.8 million at March 31, 2011 and $4.5 million at December 31, 2010) and other corporate debt issued by non-financial institutions ($2.6 million at March 31, 2011 and December 31, 2010). |
Classified as Level 2 investments are the Corporations subordinated debt, other corporate debt issued by non-financial institutions and $76.8 million and $73.2 million of single-issuer trust preferred securities held at March 31, 2011 and December 31, 2010, respectively. These corporate debt securities are measured at fair value by a third-party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. As with the debt securities described above, an active market presently exists for securities similar to these corporate debt security holdings.
Classified as Level 3 assets are the Corporations investments in pooled trust preferred securities and certain single-issuer trust preferred securities ($8.1 million at March 31, 2011 and $8.6 million at December 31, 2010). The fair values of these securities were determined based on quotes provided by third-party brokers who determined fair values based predominantly on internal valuation models which were not indicative prices or binding offers. The Corporations third-party pricing service cannot derive fair values for these securities primarily due to inactive market transactions for similar investments.
| Auction rate securities Due to their illiquidity, ARCs are classified as Level 3 investments and are valued through the use of an expected cash flows model prepared by a third-party valuation expert. The assumptions used in preparing the expected cash flows model include |
24
estimates for coupon rates, time to maturity and market rates of return. The expected cash flows model the Corporation obtains from the outside source is reviewed internally for reasonableness. |
| Other financial assets Included within this asset category are: Level 1 assets, consisting of mutual funds that are held in trust for employee deferred compensation plans and measured at fair value based on quoted prices for identical securities in active markets; and Level 2 assets, representing the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors. The fair value of the Corporations interest rate locks and forward commitments are determined as the amounts that would be required to settle the derivative financial instruments at the balance sheet date. See Note G, Derivative Financial Instruments, for additional information. |
| Other financial liabilities Included within this category are: Level 1 employee deferred compensation liabilities which represent amounts due to employees under the deferred compensation plans described under the heading Other financial assets above and Level 2 mortgage banking derivatives, described under the heading Other financial assets above. |
The following tables present the changes in the Corporations assets and liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3) for the three months ended March 31, 2011 and 2010:
2011 | ||||||||||||
Available for Sale Investment Securities | ||||||||||||
Pooled Trust Preferred Securities |
Single-issuer Trust Preferred Securities |
ARC Investments |
||||||||||
(in thousands) | ||||||||||||
Balance, December 31, 2010 |
$ | 4,528 | $ | 8,583 | $ | 260,679 | ||||||
Transfer from Level 3 to Level 2 (1) |
(800 | ) | ||||||||||
Realized adjustment to fair value (2) |
(994 | ) | 0 | 0 | ||||||||
Unrealized adjustment to fair value (3) |
1,430 | 312 | (5,219 | ) | ||||||||
Redemptions |
(147 | ) | 0 | (227 | ) | |||||||
(Premium amortization)/discount accretion (4) |
(1 | ) | (1 | ) | 1,180 | |||||||
Balance, March 31, 2011 |
$ | 4,816 | $ | 8,094 | $ | 256,413 | ||||||
2010 | ||||||||||||
Balance, December 31, 2009 |
$ | 4,979 | $ | 6,981 | $ | 289,203 | ||||||
Realized adjustment to fair value (2) |
(4,153 | ) | 0 | 0 | ||||||||
Unrealized adjustment to fair value (3) |
4,079 | 154 | (1,266 | ) | ||||||||
Redemptions |
0 | 0 | (1,140 | ) | ||||||||
(Premium amortization)/discount accretion (4) |
(5 | ) | 1 | 1,336 | ||||||||
Balance, March 31, 2010 |
$ | 4,900 | $ | 7,136 | $ | 288,133 | ||||||
(1) | During the three months ended March 31, 2011, one single-issuer trust preferred security with a fair value of $800,000 as of December 31, 2010 was reclassified as a Level 2 asset. As of March 31, 2011 the fair value of this security was measured at fair value by a third-party pricing service using both quoted prices for similar assets and model-based valuation techniques that derived fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. As of December 31, 2010, the fair value of this security was determined based on quotes provided by third-party brokers who determined its fair value based predominantly on an internal valuation model. |
(2) | For pooled trust preferred securities, realized adjustments to fair value represent credit related other-than-temporary impairment charges that were recorded as a reduction to investment securities gains on the consolidated statements of income. |
(3) | Pooled trust preferred securities, single-issuer trust preferred securities, and ARCs are classified as available for sale investment securities; as such, the unrealized adjustment to fair value was recorded as an unrealized holding gain (loss) and included as a component of available for sale investment securities on the consolidated balance sheet. |
(4) | Included as a component of net interest income on the consolidated statements of income. |
25
Items Measured at Fair Value on a Nonrecurring Basis
Certain financial assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value measurement in certain circumstances, such as upon their acquisition or when there is evidence of impairment.
The Corporations assets measured at fair value on a nonrecurring basis and reported on the Corporations consolidated balance sheets were as follows:
March 31, 2011 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Net loans |
$ | 0 | $ | 0 | $ | 419,597 | $ | 419,597 | ||||||||
Other financial assets |
0 | 0 | 67,554 | 67,554 | ||||||||||||
Total assets |
$ | 0 | $ | 0 | $ | 487,151 | $ | 487,151 | ||||||||
Reserve for unfunded commitments |
$ | 0 | $ | 0 | $ | 884 | $ | 884 | ||||||||
December 31, 2010 | ||||||||||||||||
Net loans |
$ | 0 | $ | 0 | $ | 457,678 | $ | 457,678 | ||||||||
Other financial assets |
0 | 0 | 62,109 | 62,109 | ||||||||||||
Total assets |
$ | 0 | $ | 0 | $ | 519,787 | $ | 519,787 | ||||||||
Reserve for unfunded commitments |
$ | 0 | $ | 0 | $ | 1,227 | $ | 1,227 | ||||||||
The valuation techniques used to measure fair value for the items in the tables above are as follows:
| Net loans This category consists of loans that were individually evaluated for impairment under FASB ASC Section 310-10-35 and have been classified as Level 3 assets. Impaired loans are generally measured at the fair value of their underlying collateral. An allowance for loan losses is allocated to an impaired loan if its carrying value exceeds the estimated fair value. The amount shown is the balance of impaired loans, net of the related allowance for loan losses. See Note D, Loans and Allowance for Credit Losses for additional details. |
| Other financial assets This category includes OREO ($37.0 million at March 31, 2011 and $33.0 million at December 31, 2010) and mortgage servicing rights (MSRs), net of the MSR valuation reserve ($30.6 million at March 31, 2011 and $29.1 million at December 31, 2010), both classified as Level 3 assets. |
Fair values for OREO were based on estimated selling prices less estimated selling costs for similar assets in active markets.
MSRs are initially recorded at fair value upon the sale of residential mortgage loans, which the Corporation continues to service, to secondary market investors. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are evaluated for impairment by comparing the carrying amount to estimated fair value. Fair value is determined at the end of each quarter through a discounted cash flows valuation. Significant inputs to the valuation include expected net servicing income, the discount rate and the expected life of the underlying loans.
| Reserve for unfunded commitments This liability, included as a Level 3 liability above, represents managements estimate of losses associated with unused commitments to extend credit on loans which are impaired under FASB ASC Section 310-10-35. The reserve for unfunded commitments represents the shortfall between the estimated commitment to extend credit on |
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impaired loans in comparison to the fair value of their underlying collateral. See Note D, Loans and Allowance for Credit Losses for additional details. |
As required by FASB ASC Section 825-10-50, the following table details the book values and estimated fair values of the Corporations financial instruments as of March 31, 2011 and December 31, 2010. In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.
Fair values of financial instruments are significantly affected by assumptions used, principally the timing of future cash flows and discount rates. Because assumptions are inherently subjective in nature, the estimated fair values cannot be substantiated by comparison to independent market quotes and, in many cases, the estimated fair values could not necessarily be realized in an immediate sale or settlement of the instrument. Further, certain financial instruments and all non-financial instruments not measured at fair value on the Corporations consolidated balance sheets are excluded. The aggregate fair value amounts presented do not necessarily represent managements estimate of the underlying value of the Corporation.
March 31, 2011 | December 31, 2010 | |||||||||||||||
FINANCIAL ASSETS |
Book Value | Estimated Fair Value |
Book Value | Estimated Fair Value |
||||||||||||
(in thousands) | ||||||||||||||||
Cash and due from banks |
$ | 265,353 | $ | 265,353 | $ | 198,954 | $ | 198,954 | ||||||||
Interest-bearing deposits with other banks |
83,293 | 83,293 | 33,297 | 33,297 | ||||||||||||
Loans held for sale (1) |
30,903 | 30,903 | 83,940 | 83,940 | ||||||||||||
Securities held to maturity |
7,293 | 7,347 | 7,751 | 7,818 | ||||||||||||
Securities available for sale (1) |
2,690,141 | 2,690,141 | 2,853,733 | 2,853,733 | ||||||||||||
Loans, net of unearned income (1) |
11,873,208 | 11,903,824 | 11,933,307 | 11,909,539 | ||||||||||||
Accrued interest receivable |
52,878 | 52,878 | 53,841 | 53,841 | ||||||||||||
Other financial assets (1) |
131,790 | 131,790 | 230,044 | 230,044 | ||||||||||||
FINANCIAL LIABILITIES |
||||||||||||||||
Demand and savings deposits |
$ | 7,968,681 | $ | 7,968,681 | $ | 7,758,613 | $ | 7,758,613 | ||||||||
Time deposits |
4,439,929 | 4,482,247 | 4,629,968 | 4,677,494 | ||||||||||||
Short-term borrowings |
414,398 | 414,398 | 674,077 | 674,077 | ||||||||||||
Accrued interest payable |
34,392 | 34,392 | 33,333 | 33,333 | ||||||||||||
Other financial liabilities (1) |
66,763 | 66,763 | 80,551 | 80,551 | ||||||||||||
Federal Home Loan Bank advances and long-term debt |
1,035,689 | 1,003,197 | 1,119,450 | 1,077,724 |
(1) | Description of fair value determinations for these financial instruments, or certain financial instruments within these categories, measured at fair value on the Corporations consolidated balance sheets, are disclosed above. |
For short-term financial instruments, defined as those with remaining maturities of 90 days or less and excluding those recorded at fair value on the Corporations consolidated balance sheets, book value was considered to be a reasonable estimate of fair value.
The following instruments are predominantly short-term:
Assets |
Liabilities | |
Cash and due from banks | Demand and savings deposits | |
Interest bearing deposits | Short-term borrowings | |
Federal funds sold | Accrued interest payable | |
Accrued interest receivable | Other financial liabilities |
For those financial instruments within the above-listed categories with remaining maturities greater than 90 days, fair values were determined by discounting contractual cash flows using rates which could be earned
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for assets with similar remaining maturities and, in the case of liabilities, rates at which the liabilities with similar remaining maturities could be issued as of the balance sheet date.
The estimated fair values of securities held to maturity as of March 31, 2011 and December 31, 2010 were based on quoted market prices, broker quotes or dealer quotes.
For short-term loans and variable rate loans that reprice within 90 days, the book value was considered to be a reasonable estimate of fair value. For other types of loans and time deposits, fair value was estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
The fair value of FHLB advances and long-term debt was estimated by discounting the remaining contractual cash flows using a rate at which the Corporation could issue debt with a similar remaining maturity as of the balance sheet date. The fair values of commitments to extend credit and standby letters of credit, included within other financial liabilities above, are estimated to equal their carrying amounts.
NOTE K New Accounting Standard
In April 2011, the FASB issued ASC Update 2011-02, A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring (ASC Update 2011-02). ASC Update 2011-02 provides clarifying guidance for creditors when evaluating whether a restructuring constitutes a troubled debt restructuring. ASC Update 2011-02 provides additional guidance for when a creditor has granted a concession and whether a debtor is experiencing financial difficulty. This standards update is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For the Corporation, this standards update is effective in connection with its September 30, 2011 interim filing on Form 10-Q. The adoption of ASC Update 2011-02 is not expected to materially impact the Corporations financial statements.
NOTE L Reclassifications
Certain amounts in the 2010 consolidated financial statements and notes have been reclassified to conform to the 2011 presentation.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations (Managements Discussion) relates to Fulton Financial Corporation (the Corporation), a financial holding company registered under the Bank Holding Company Act and incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly owned subsidiaries. Managements discussion should be read in conjunction with the consolidated financial statements and notes presented in this report.
FORWARD-LOOKING STATEMENTS
The Corporation has made, and may continue to make, certain forward-looking statements with respect to its financial conditions and results of operations. Many factors could affect future financial results including, without limitation: the impact of adverse changes in the economy and real estate markets; increases in non-performing assets which may reduce the level of the earning assets and require the Corporation to increase the allowance for credit losses, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets; acquisition and growth strategies; market risk; changes or adverse developments in political or regulatory conditions; a disruption in or abnormal functioning of credit and other markets, including the lack of or reduced access to markets for mortgages and other asset-backed securities and for commercial paper and other short-term borrowings; changes in the levels of, or methodology for determining, FDIC deposit insurance premiums and assessments; the effect of competition and interest rates on net interest margin and net interest income; investment strategy and other income growth; investment securities gains and losses; declines in the value of securities which may result in charges to earnings; changes in rates of deposit and loan growth or a decline in loans originated; relative balances of rate-sensitive assets to rate-sensitive liabilities; salaries and employee benefits and other expenses; amortization of intangible assets; goodwill impairment; capital and liquidity strategies, and other financial and business matters for future periods. Do not unduly rely on forward-looking statements. Forward-looking statements can be identified by the use of words such as may, should, will, could, estimates, predicts, potential, continue, anticipates, believes, plans, expects, future, intends and similar expressions which are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks and uncertainties, some of which are beyond the Corporations control and ability to predict, that could cause actual results to differ materially from those expressed in the forward-looking statements. The Corporation undertakes no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
RESULTS OF OPERATIONS
Summary Financial Results
The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and/or maintaining or increasing the net interest margin, which is net interest income (fully taxable-equivalent, or FTE) as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various services and products offered to its customers and through sales of assets, such as loans, investments or properties. Offsetting these revenue sources are provisions for credit losses on loans, operating expenses and income taxes.
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The following table presents a summary of the Corporations earnings and selected performance ratios:
As of or for the Three months ended March 31 |
||||||||
2011 | 2010 | |||||||
Net income available to common shareholders (in thousands) |
$ | 33,785 | $ | 22,415 | ||||
Income before income taxes (in thousands) |
$ | 46,160 | $ | 36,747 | ||||
Diluted net income per share (1) |
$ | 0.17 | $ | 0.13 | ||||
Return on average assets |
0.85 | % | 0.68 | % | ||||
Return on average common equity (2) |
7.21 | % | 5.73 | % | ||||
Return on average tangible common equity (3) |
10.36 | % | 9.13 | % | ||||
Net interest margin (4) |
3.91 | % | 3.78 | % | ||||
Non-performing assets to total assets |
2.22 | % | 1.90 | % | ||||
Net charge-offs to average loans (annualized) |
1.42 | % | 0.95 | % |
(1) | Net income available to common shareholders divided by diluted weighted average common shares outstanding. |
(2) | Net income available to common shareholders divided by average common shareholders equity. |
(3) | Net income available to common shareholders, as adjusted for intangible asset amortization (net of tax), divided by average common shareholders equity, net of goodwill and intangible assets. |
(4) | Presented on an FTE basis, using a 35% Federal tax rate and statutory interest expense disallowances. See also the Net Interest Income section of Managements Discussion. |
The Corporations income before income taxes for the first quarter of 2011 increased $9.4 million, or 25.6%, in comparison to the first quarter of 2010, due to the net effect of the following significant items:
| Increase in investment securities gains (losses) of $4.5 million. The increase in investment securities gains (losses) was primarily due to reduced other-than-temporary impairment charges of $3.2 million and $527,000 for pooled trust preferred securities issued by financial institutions and stocks of financial institutions, respectively. The performance of financial institutions has generally improved, resulting in lower charges for these debt and equity investments. |
| Increase in other income, excluding investment securities gains (losses), of $3.4 million, or 8.4%. During the first quarter of 2011, the Corporation experienced growth in a number of other income categories, including mortgage banking income and investment management and trust services. The increase in mortgage banking income was due to an increase in volumes, while the improvement in investment management and trust services income resulted from improved market conditions and the Corporations focus on increasing recurring revenues in the brokerage business. Also contributing to the growth in other income was increased debit card fees, merchant fees and foreign currency processing revenues, all resulting from higher transaction volumes. |
| Decrease in the provision for credit losses of $2.0 million, or 5.0%. During the first quarter of 2011, the Corporation experienced improved credit quality metrics as the level of non-performing loans and charge-offs of loans decreased in comparison to the prior quarter-end. While these metrics were higher than the first quarter of 2010, allocations of the allowance for credit losses were sufficient. |
| Increase in net interest income of $1.1 million, or 0.8%. The increase in net interest income was a result of a 13 basis point increase in the net interest margin as funding costs decreased due to the repricing of time deposits and long-term debt, in addition to a change in the funding mix to lower cost demand and savings deposits. The positive impact of the increase in net interest margin was partially offset by a $376.6 million, or 2.5%, decrease in interest-earning assets. |
| Partially offsetting the impact of the above items, other expenses increased $1.5 million. While the Corporation continues to control discretionary spending, certain expense categories increased, including salaries and employee benefits and marketing expenses. The increase in salaries and |
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employee benefits was primarily a result of normal merit increases, higher incentive compensation expense and increased stock-based compensation expense. The increase in marketing expense was primarily due to an increase in promotional campaigns. |
As a result of the continued growth in earnings, the Corporation increased its dividend to common shareholders to $0.04 cents per share, a one cent, or 33.3%, increase in comparison to both the first and fourth quarters of 2010.
Quarter Ended March 31, 2011 compared to the Quarter Ended March 31, 2010
Net Interest Income
FTE net interest income increased $1.1 million, or 0.8%, from $142.4 million in the first quarter of 2010 to $143.5 million in the first quarter of 2011. This increase was the net result of a $14.8 million decrease in FTE interest income and a $15.9 million decrease in interest expense.
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The following table provides a comparative average balance sheet and net interest income analysis for the first quarter of 2011 as compared to the same period in 2010. Interest income and yields are presented on an FTE basis, using a 35% Federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts. All dollar amounts are in thousands.
Three months ended March 31 | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
ASSETS |
Average Balance |
Interest (1) | Yield/ Rate |
Average Balance |
Interest (1) | Yield/ Rate |
||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans, net of unearned income (2) |
$ | 11,921,442 | $ | 151,686 | 5.15 | % | $ | 11,971,786 | $ | 159,424 | 5.39 | % | ||||||||||||
Taxable investment securities (3) |
2,331,323 | 21,807 | 3.75 | 2,663,127 | 28,149 | 4.23 | ||||||||||||||||||
Tax-exempt investment securities (3) |
344,457 | 4,885 | 5.67 | 387,971 | 5,531 | 5.70 | ||||||||||||||||||
Equity securities (3) |
132,841 | 752 | 2.28 | 141,896 | 809 | 2.29 | ||||||||||||||||||
Total investment securities |
2,808,621 | 27,444 | 3.91 | 3,192,994 | 34,489 | 4.33 | ||||||||||||||||||
Loans held for sale |
45,418 | 500 | 4.41 | 42,938 | 556 | 5.18 | ||||||||||||||||||
Other interest-earning assets |
66,381 | 33 | 0.20 | 10,793 | 25 | 0.95 | ||||||||||||||||||
Total interest-earning assets |
14,841,862 | 179,663 | 4.90 | % | 15,218,511 | 194,494 | 5.17 | % | ||||||||||||||||
Noninterest-earning assets: |
||||||||||||||||||||||||
Cash and due from banks |
260,395 | 263,147 | ||||||||||||||||||||||
Premises and equipment |
207,389 |