Fulton Financial Corporation -- Form 10-Q
Table of Contents

 

 

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

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant 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 issuer’s 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.

 

 

 


Table of Contents

FULTON FINANCIAL CORPORATION

FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2011

INDEX

 

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   

(c)     Consolidated Statements of Shareholders’ Equity and Comprehensive Income - Three months ended March 31, 2011 and 2010

     5   

(d)     Consolidated Statements of Cash Flows - Three months ended March 31, 2011 and 2010

     6   

(e)    Notes to Consolidated Financial Statements

     7   

Item 2.       Management’s 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   

Signatures

     53   

Exhibit Index

     54   

Certifications

  

 

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Table of Contents

Item 1. Financial Statements

 

FULTON FINANCIAL CORPORATION

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

 

 

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Table of Contents

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

 

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FULTON FINANCIAL CORPORATION

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

 

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FULTON FINANCIAL CORPORATION

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

 

 

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Table of Contents

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 Corporation’s 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 Corporation’s 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.

 

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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   
                                  

 

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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   
                                   

 

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The following table presents information related to the Corporation’s 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 management’s 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
                

 

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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 Corporation’s 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 Corporation’s 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 Corporation’s 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.

 

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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 Corporation’s 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 Corporation’s 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 management’s 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.

 

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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 Board’s (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 Corporation’s 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   
                 

 

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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.

 

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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 Corporation’s impaired loans were measured based on the estimated fair value of each loan’s 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.

 

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Table of Contents

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.

 

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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.

 

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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   
                                                                       

 

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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 Corporation’s 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 Corporation’s 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 Corporation’s 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.

 

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The net periodic benefit cost for the Corporation’s 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   
                      

 

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Table of Contents

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 Corporation’s 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 management’s 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 Corporation’s subsidiary banks. The loans originated and sold are predominantly “prime” loans that conform to published standards of government sponsored agencies. Prior to 2008, the Corporation’s 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.

 

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Table of Contents

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 management’s 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 Corporation’s 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.

 

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Table of Contents

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 Corporation’s fair value measurement disclosures.

Items Measured at Fair Value on a Recurring Basis

The Corporation’s 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:

 

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Table of Contents
   

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 Corporation’s 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 Corporation’s 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 Corporation’s 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

 

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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 Corporation’s 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 Corporation’s 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.

 

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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 Corporation’s assets measured at fair value on a nonrecurring basis and reported on the Corporation’s 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 management’s 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 Corporation’s 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 Corporation’s consolidated balance sheets are excluded. The aggregate fair value amounts presented do not necessarily represent management’s 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 Corporation’s 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 Corporation’s 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 Creditor’s 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 Corporation’s 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) 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. Management’s 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 Corporation’s 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 Corporation’s 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 Management’s Discussion.

The Corporation’s 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 Corporation’s 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