Edgar Filing: FULTON FINANCIAL CORP

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Fulton Financial Corporation -- Form 10-Q

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.

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.

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

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

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

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
	Preferred Stock		Shares Outstanding		Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Treasury Stock			Total
	(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

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

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.

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

State and municipal securities

346

Mortgage-backed securities

698

752

7,293

7,347

Available for Sale at March 31, 2011

Equity securities

130,887

4,714

(932

)

134,669

U.S. Government securities

1,650

U.S. Government sponsored agency securities

4,856

148

)

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


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

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	)

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.

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.

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

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.

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

710

587

N/A

Real estate - residential mortgage (1)

6,505

6,118

N/A

13,665

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

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

8,681

8,603

4,191

Real estate - residential mortgage (1)

12,809

12,810

4,287

15,664

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

804

2,901

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.

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.

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.

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

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.

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

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.

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.

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:

•

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

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.

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

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

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.

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.

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

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.

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company