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 June 30, 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 – 199,795,000 shares outstanding as of July 29, 2011.

 

 

 


Table of Contents

FULTON FINANCIAL CORPORATION

FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011

INDEX

 

Description

   Page  

PART I. FINANCIAL INFORMATION

  
Item 1. Financial Statements (Unaudited):   
(a)    Consolidated Balance Sheets -
June 30, 2011 and December 31, 2010
     3   
(b)    Consolidated Statements of Income -
Three and Six months ended June 30, 2011 and 2010
     4   
(c)    Consolidated Statements of Shareholders’ Equity and Comprehensive Income -
Six months ended June 30, 2011 and 2010
     5   
(d)    Consolidated Statements of Cash Flows -
Six months ended June 30, 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      34   
Item 3. Quantitative and Qualitative Disclosures about Market Risk      58   
Item 4. Controls and Procedures      65   
PART II. OTHER INFORMATION   
Item 1. Legal Proceedings      66   
Item 1A. Risk Factors      66   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds      66   
Item 3. Defaults Upon Senior Securities      66   
Item 4. Removed and Reserved      66   
Item 5. Other Information      66   
Item 6. Exhibits      66   
Signatures      67   
Exhibit Index      68   
Certifications      69   

 

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Table of Contents

Item 1. Financial Statements

 

FULTON FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

 

(in thousands, except per-share data)

 

     June  30
2011
(unaudited)
    December 31
2010
 

ASSETS

    

Cash and due from banks

   $ 284,691      $ 198,954   

Interest-bearing deposits with other banks

     124,967        33,297   

Loans held for sale

     47,133        83,940   

Investment securities:

    

Held to maturity (estimated fair value of $7,038 in 2011 and $7,818 in 2010)

     6,990        7,751   

Available for sale

     2,656,054        2,853,733   

Loans, net of unearned income

     11,852,491        11,933,307   

Less: Allowance for loan losses

     (266,683     (274,271
                

Net Loans

     11,585,808        11,659,036   

Premises and equipment

     207,177        208,016   

Accrued interest receivable

     51,387        53,841   

Goodwill

     535,798        535,518   

Intangible assets

     10,111        12,461   

Other assets

     457,004        628,707   
                

Total Assets

   $ 15,967,120      $ 16,275,254   
                

LIABILITIES

    

Deposits:

    

Noninterest-bearing

   $ 2,445,008      $ 2,194,988   

Interest-bearing

     9,817,887        10,193,593   
                

Total Deposits

     12,262,895        12,388,581   

Short-term borrowings:

    

Federal funds purchased

     166,179        267,844   

Other short-term borrowings

     380,402        406,233   
                

Total Short-Term Borrowings

     546,581        674,077   

Accrued interest payable

     29,444        33,333   

Other liabilities

     149,354        179,424   

Federal Home Loan Bank advances and long-term debt

     1,025,537        1,119,450   
                

Total Liabilities

     14,013,811        14,394,865   
                

SHAREHOLDERS’ EQUITY

    

Common stock, $2.50 par value, 600 million shares authorized, 215.6 million shares issued in 2011 and 215.4 million shares issued in 2010

     538,923        538,492   

Additional paid-in capital

     1,421,626        1,420,127   

Retained earnings

     210,671        158,453   

Accumulated other comprehensive income:

    

Unrealized gains on investment securities not other-than-temporarily impaired

     37,227        22,354   

Unrealized non-credit related losses on other-than-temporarily impaired debt securities

     (747     (2,355

Unrecognized pension and postretirement plan costs

     (4,438     (4,414

Unamortized effective portions of losses on forward-starting interest rate swaps

     (3,022     (3,090
                

Accumulated Other Comprehensive Income

     29,020        12,495   

Treasury stock, 16.2 million shares in 2011 and 16.3 million shares in 2010, at cost

     (246,931     (249,178
                

Total Shareholders’ Equity

     1,953,309        1,880,389   
                

Total Liabilities and Shareholders’ Equity

   $ 15,967,120      $ 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
June  30
    Six Months Ended
June  30
 
     2011     2010     2011     2010  

INTEREST INCOME

      

Loans, including fees

   $ 149,751      $ 157,628      $ 299,247      $ 315,162   

Investment securities:

      

Taxable

     20,749        25,146        42,556        53,295   

Tax-exempt

     3,146        3,348        6,321        6,943   

Dividends

     696        660        1,379        1,389   

Loans held for sale

     492        667        992        1,223   

Other interest income

     101        231        134        256   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest Income

     174,935        187,680        350,629        378,268   

INTEREST EXPENSE

        

Deposits

     21,775        31,819        45,061        65,557   

Short-term borrowings

     168        390        422        939   

Long-term debt

     12,347        16,313        24,938        34,105   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest Expense

     34,290        48,522        70,421        100,601   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

     140,645        139,158        280,208        277,667   

Provision for credit losses

     36,000        40,000        74,000        80,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income After Provision for Credit Losses

     104,645        99,158        206,208        197,667   

OTHER INCOME

        

Service charges on deposit accounts

     14,332        15,482        27,637        29,749   

Other service charges and fees

     12,709        11,469        24,191        21,634   

Investment management and trust services

     9,638        8,655        18,842        16,743   

Mortgage banking income

     6,049        3,899        11,512        8,048   

Other

     4,979        4,503        9,400        8,317   

Total other-than-temporary impairment losses

     (71     (4,334     (1,092     (9,585

Less: Portion of (gain) loss recognized in other comprehensive income (before taxes)

     (322     836        (592     1,110   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairment losses

     (393     (3,498     (1,684     (8,475

Net gains on sale of investment securities

     58        4,402        3,634        7,156   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment securities gains (losses)

     (335     904        1,950        (1,319
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Income

     47,372        44,912        93,532        83,172   

OTHER EXPENSES

        

Salaries and employee benefits

     56,070        54,654        110,378        106,999   

Net occupancy expense

     10,874        10,519        22,240        22,169   

Equipment expense

     3,377        2,663        6,509        5,754   

FDIC insurance expense

     3,264        5,136        8,018        10,090   

Data processing

     3,214        3,311        6,586        6,728   

Professional fees

     3,102        3,035        5,951        5,581   

Other real estate owned and repossession expense

     2,575        1,876        4,545        4,556   

Software

     1,972        1,706        4,004        3,320   

Marketing

     1,863        2,271        4,699        4,101   

Intangible amortization

     1,172        1,341        2,350        2,655   

Other

     14,995        14,593        28,761        29,174   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Expenses

     102,478        101,105        204,041        201,127   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

     49,539        42,965        95,699        79,712   

Income taxes

     13,154        11,283        25,529        20,550   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

     36,385        31,682        70,170        59,162   

Preferred stock dividends and discount accretion

     0        (5,066     0        (10,131
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Available to Common Shareholders

   $ 36,385      $ 26,616      $ 70,170      $ 49,031   
  

 

 

   

 

 

   

 

 

   

 

 

 

PER COMMON SHARE:

        

Net income (basic)

   $ 0.18      $ 0.14      $ 0.35      $ 0.27   

Net income (diluted)

     0.18        0.14        0.35        0.27   

Cash dividends

     0.05        0.03        0.09        0.06   

 

 

See Notes to Consolidated Financial Statements

 

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FULTON FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2011 AND 2010

 

 

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

                 70,170             70,170   

Other comprehensive income

                   16,525           16,525   
                           

Total comprehensive income

                        86,695   
                           

Stock issued, including related tax benefits

        320         431         398              2,247        3,076   

Stock-based compensation awards

              1,101                1,101   

Common stock cash dividends - $0.09 per share

                 (17,952          (17,952
                                                                     

Balance at June 30, 2011

   $ 0         199,370       $ 538,923       $ 1,421,626       $ 210,671      $ 29,020       $ (246,931   $ 1,953,309   
                                                                     

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

                 59,162             59,162   

Other comprehensive income

                   27,104           27,104   
                           

Total comprehensive income

                        86,266   
                           

Stock issued, including related tax benefits

        22,099         54,879         171,929              2,199        229,007   

Stock-based compensation awards

              611                611   

Preferred stock discount accretion

     719                  (719          0   

Preferred stock cash dividends

                 (9,412          (9,412

Common stock cash dividends - $0.06 per share

                 (11,743          (11,743
                                                                     

Balance at June 30, 2010

   $ 371,009         198,463       $ 537,370       $ 1,430,270       $ 109,287      $ 34,562       $ (251,287   $ 2,231,211   
                                                                     

 

 

See Notes to Consolidated Financial Statements

 

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Table of Contents

FULTON FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

(in thousands)

 

     Six Months Ended
June  30
 
     2011     2010  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net Income

   $ 70,170      $ 59,162   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for credit losses

     74,000        80,000   

Depreciation and amortization of premises and equipment

     10,462        10,261   

Net amortization of investment securities premiums

     1,999        1,187   

Investment securities (gains) losses

     (1,950     1,319   

Net decrease (increase) in loans held for sale

     36,807        (8,120

Amortization of intangible assets

     2,350        2,655   

Stock-based compensation

     1,101        611   

Decrease in accrued interest receivable

     2,454        3,752   

Decrease (increase) in other assets

     22,955        (256

Decrease in accrued interest payable

     (3,889     (3,304

(Decrease) increase in other liabilities

     (11,566     3,236   
                

Total adjustments

     134,723        91,341   
                

Net cash provided by operating activities

     204,893        150,503   

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from sales of securities available for sale

     416,480        276,691   

Proceeds from maturities of securities held to maturity

     160        227   

Proceeds from maturities of securities available for sale

     279,841        388,152   

Purchase of securities held to maturity

     (14     (122

Purchase of securities available for sale

     (356,323     (245,875

Increase in short-term investments

     (91,670     (417,096

Net increase in loans

     (49     (28,136

Net purchases of premises and equipment

     (9,623     (11,357
                

Net cash provided by (used in) investing activities

     238,802        (37,516

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase in demand and savings deposits

     229,071        523,628   

Net decrease in time deposits

     (354,757     (276,070

Decrease in short-term borrowings

     (127,496     (410,606

Additions to long-term debt

     0        45,000   

Repayments of long-term debt

     (93,913     (220,085

Net proceeds from issuance of stock

     3,076        229,007   

Dividends paid

     (13,939     (19,998
                

Net cash used in financing activities

     (357,958     (129,124
                

Net Increase (Decrease) in Cash and Due From Banks

     85,737        (16,137

Cash and Due From Banks at Beginning of Period

     198,954        284,508   
                

Cash and Due From Banks at End of Period

   $ 284,691      $ 268,371   
                

Supplemental Disclosures of Cash Flow Information

    

Cash paid during the period for:

    

Interest

   $ 74,310      $ 103,905   

Income taxes

     7,469        24,039   

 

 

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 and six-month periods ended June 30, 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 June 30, 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
June 30
     Six months ended
June 30
 
     2011      2010      2011      2010  
            (in thousands)         

Weighted average shares outstanding (basic)

     198,772         190,221         198,686         183,236   

Effect of dilutive securities

     755         606         721         557   
                                   

Weighted average shares outstanding (diluted)

     199,527         190,827         199,407         183,793   
                                   

For the three and six months ended June 30, 2011, 4.6 million stock options were excluded from the diluted net income per share computation as their effect would have been anti-dilutive. For the three and six months ended June 30, 2010, 4.9 million and 5.2 million stock options, respectively, were excluded from the diluted net income per share computation as their effects would have been anti-dilutive.

 

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Table of Contents

The following table presents the components of other comprehensive income:

 

     Six months ended
June 30
 
     2011     2010  
     (in thousands)  

Unrealized gain on securities (net of a $9.2 million and $15.2 million tax effect in 2011 and 2010, respectively)

   $ 17,019      $ 28,277   

Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities (net of a $392,000 and $1.2 million tax effect in 2011 and 2010, respectively)

     729        (2,137

Unrealized gain on derivative financial instruments (net of a $36,000 tax effect in 2011 and 2010) (1)

     68        68   

(Accretion)/amortization of net unrecognized pension and postretirement items (net of a $12,000 and $20,000 tax effect in 2011 and 2010, respectively)

     (24     38   

Reclassification adjustment for securities (gains) losses included in net income (net of $682,000 tax expense in 2011 and $461,000 tax benefit in 2010)

     (1,267     858   
                

Other comprehensive income

   $ 16,525      $ 27,104   
                

 

(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 June 30, 2011

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair

Value
 
     (in thousands)  

U.S. Government sponsored agency securities

   $ 6,014       $ 0       $ (7   $ 6,007   

State and municipal securities

     346         0         0        346   

Mortgage-backed securities

     630         55         0        685   
                                  
   $ 6,990       $ 55       $ (7   $ 7,038   
                                  

Available for Sale at June 30, 2011

                          

Equity securities

   $ 126,841       $ 3,761       $ (1,641   $ 128,961   

U.S. Government securities

     1,324         0         0        1,324   

U.S. Government sponsored agency securities

     4,858         135         (1     4,992   

State and municipal securities

     345,942         9,939         (255     355,626   

Corporate debt securities

     131,535         5,689         (8,969     128,255   

Collateralized mortgage obligations

     968,785         25,370         (173     993,982   

Mortgage-backed securities

     753,353         35,163         (744     787,772   

Auction rate securities

     267,339         708         (12,905     255,142   
                                  
   $ 2,599,977       $ 80,765       $ (24,688   $ 2,656,054   
                                  

 

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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 $88.6 million and $96.4 million as of June 30, 2011 and December 31, 2010, respectively.

The amortized cost and estimated fair values of debt securities as of June 30, 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

   $ 6,181       $ 6,174       $ 80,963       $ 81,194   

Due from one year to five years

     179         179         49,609         51,521   

Due from five years to ten years

     0         0         136,802         143,210   

Due after ten years

     0         0         483,624         469,414   
                                   
     6,360         6,353         750,998         745,339   

Collateralized mortgage obligations

     0         0         968,785         993,982   

Mortgage-backed securities

     630         685         753,353         787,772   
                                   
   $ 6,990       $ 7,038       $ 2,473,136       $ 2,527,093   
                                   

 

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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 June 30, 2011:

         

Equity securities

   $ 43       $ 0      $ (34   $ 9   

Debt securities

     16         (1     (359     (344
                                 

Total

   $ 59       $ (1   $ (393   $ (335
                                 

Three months ended June 30, 2010:

         

Equity securities

   $ 14       $ 0      $ (509   $ (495

Debt securities

     4,401         (13     (2,989     1,399   
                                 

Total

   $ 4,415       $ (13   $ (3,498   $ 904   
                                 

Six months ended June 30, 2011:

         

Equity securities

   $ 48       $ 0      $ (331   $ (283

Debt securities

     3,605         (19     (1,353     2,233   
                                 

Total

   $ 3,653       $ (19   $ (1,684   $ 1,950   
                                 

Six months ended June 30, 2010:

         

Equity securities

   $ 850       $ 0      $ (1,333   $ (483

Debt securities

     6,324         (18     (7,142     (836
                                 

Total

   $ 7,174       $ (18   $ (8,475   $ (1,319
                                 

The other-than-temporary impairment charges for equity securities during the three and six months ended June 30, 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 June 30, 2011, after other-than-temporary impairment charges, the financial institutions stock portfolio had a cost basis of $31.2 million and a fair value of $33.3 million.

The credit related other-than-temporary impairment charges for debt securities during the three and six months ended June 30, 2011 and 2010, 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.

 

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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 June 30     Six months ended June 30  
     2011     2010     2011     2010  
     (in thousands)  

Balance of cumulative credit losses on pooled trust preferred securities, beginning of period

   $ (28,517   $ (19,765   $ (27,560   $ (15,612

Additions for credit losses recorded which were not previously recognized as components of earnings

     (359     (2,989     (1,353     (7,142

Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security

     0        0        37        0   
                                

Balance of cumulative credit losses on pooled trust preferred securities, end of period

   $ (28,876   $ (22,754   $ (28,876   $ (22,754
                                

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 June 30, 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

   $ 5,377       $ (7   $ 187       $ (1   $ 5,564       $ (8

State and municipal securities

     31,090         (254     401         (1     31,491         (255

Corporate debt securities

     4,900         (105     46,505         (8,864     51,405         (8,969

Collateralized mortgage obligations

     102,430         (173     0         0        102,430         (173

Mortgage-backed securities

     66,829         (744     0         0        66,829         (744

Auction rate securities

     56,746         (1,550     175,166         (11,355     231,912         (12,905
                                                   

Total debt securities

     267,372         (2,833     222,259         (20,221     489,631         (23,054

Equity securities

     11,584         (1,138     1,690         (503     13,274         (1,641
                                                   
   $ 278,956       $ (3,971   $ 223,949       $ (20,724   $ 502,905       $ (24,695
                                                   

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 June 30, 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.

 

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As of June 30, 2011, approximately $205 million, or 80%, 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 $29 million, or 59%, of the student loans underlying the ARCs have principal payments which are guaranteed by the Federal government. In total, approximately $225 million, or 89%, of the student loans underlying the ARCs have principal payments which are guaranteed by the Federal government. As of June 30, 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 June 30, 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 these investments to be other-than-temporarily impaired as of June 30, 2011.

The following table presents the amortized cost and estimated fair values of corporate debt securities:

 

     June 30, 2011      December 31, 2010  
     Amortized
cost
     Estimated
fair value
     Amortized
cost
     Estimated
fair value
 
     (in thousands)  

Single-issuer trust preferred securities

   $ 87,338       $ 82,785       $ 91,257       $ 81,789   

Subordinated debt

     35,051         37,527         34,995         35,915   

Pooled trust preferred securities

     6,636         5,433         8,295         4,528   
  

 

 

    

 

 

    

 

 

    

 

 

 

Corporate debt securities issued by financial institutions

     129,025         125,745         134,547         122,232   

Other corporate debt securities

     2,510         2,510         2,554         2,554   
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale corporate debt securities

   $ 131,535       $ 128,255       $ 137,101       $ 124,786   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $4.6 million at June 30, 2011. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three or six months ended June 30, 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 $39.8 million at June 30, 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 $11.8 million and an estimated fair value of $10.3 million at June 30, 2011 were not rated by any ratings agency.

The Corporation holds ten pooled trust preferred securities. As of June 30, 2011, nine of these securities, with an amortized cost of $6.0 million and an estimated fair value of $4.9 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

 

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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 38% as of June 30, 2011. The discounted cash flow modeling for pooled trust preferred securities held by the Corporation as of June 30, 2011 assumed, on average, an additional 19% expected deferral rate.

Based on management’s evaluations, corporate debt securities with a fair value of $128.3 million were not subject to any additional other-than-temporary impairment charges as of June 30, 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:

 

     June 30,
2011
    December 31,
2010
 
     (in thousands)  

Real-estate – commercial mortgage

   $ 4,443,025      $ 4,375,980   

Commercial – industrial, financial and agricultural

     3,678,858        3,704,384   

Real-estate – home equity

     1,626,545        1,641,777   

Real-estate – residential mortgage

     1,023,646        995,990   

Real-estate – construction

     681,588        801,185   

Consumer

     330,965        350,161   

Leasing and other

     58,591        61,017   

Overdrafts

     15,657        10,011   
  

 

 

   

 

 

 
     11,858,875        11,940,505   

Unearned income

     (6,384     (7,198
  

 

 

   

 

 

 
   $ 11,852,491      $ 11,933,307   
  

 

 

   

 

 

 

Allowance for Credit Losses

The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet. The allowance for credit losses is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries.

The Corporation’s established methodology for evaluating the adequacy of the allowance for loan losses considers both components of the allowance: (1) specific allowances allocated to loans evaluated individually for impairment under the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) Section 310-10-35, and (2) allowances calculated for pools of loans evaluated collectively for impairment under FASB ASC Subtopic 450-20.

Effective April 1, 2011, the Corporation revised and enhanced its allowance for credit loss methodology. The significant revisions to the methodology were as follows:

 

   

Change in the identification of loans evaluated individually for impairment. – The population of loans evaluated individually for impairment was revised to include only loans on non-accrual status and impaired troubled debt restructurings (Impaired TDRs). Impaired TDRs represent TDRs that: (1) were modified via a change in the interest rate that, at the time of restructuring, was favorable in comparison to rates offered for loans with similar risk characteristics; or (2) were 90 days or more past due according to their modified terms; or (3) were modified in the current year.

 

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Table of Contents

Under the Corporation’s prior methodology, loans evaluated individually for impairment included accruing and non-accrual commercial loans, commercial mortgages and construction loans with risk ratings of substandard or worse and Impaired TDRs.

As of April 1, 2011, the balance of loans evaluated individually for impairment decreased from $525.6 million under the Corporation’s prior methodology to $335.6 million under the new methodology. The allowance allocations for loans evaluated individually for impairment decreased from $106.0 million under the Corporation’s prior methodology to $88.0 million under the new methodology.

 

   

Quarterly evaluations of impaired loans – Due to the reduction in loans evaluated individually for impairment noted above, all loans evaluated individually for impairment are now measured for losses on a quarterly basis. Measurement may be more frequent basis if there is a significant change in the amount or timing of an impaired loan’s expected future cash flows, if actual cash flows are significantly different from the cash flows previously projected, or if the fair value of an impaired loan’s collateral significantly changes. In addition, the Corporation implemented a new appraisal policy which requires that impaired loans secured predominately by real estate have updated certified third-party appraisals, generally every 12 months.

Under the Corporation’s prior methodology, impaired loans were individually evaluated for impairment every 12 months or, if necessary, on a more frequent basis based on significant changes in expected future cash flows or significant changes collateral values. For impaired loans secured predominately by real estate, decisions regarding whether an updated certified appraisal was necessary were made on a loan-by-loan basis.

As of June 30, 2011, approximately 85% of impaired loans with principal balances greater than $1.0 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. In comparison, as of March 31, 2011 and December 31, 2010, approximately 57% and 52%, respectively, 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.

 

   

Change in the determination of allocation needs on loans evaluated collectively for impairment. – Under its new methodology, the Corporation revised and further disaggregated its pools of loans evaluated collectively for impairment. Similar to the prior methodology, pools are segmented by general loan types, and further segmented by collateral types, where appropriate. However, under the new methodology, pools are further disaggregated by internal credit risk ratings for commercial loans, commercial mortgages and construction loans and by delinquency status for residential mortgages, consumer loans and all other loan types.

Allowance allocations for each pool are determined through a regression analysis based on historical losses for the most recent four years. The analysis computes loss rates based on a probability of default (PD) and loss given default (LGD). While the previous methodology utilized the same historical loss period, allowance allocations were computed based on weighted average charge-off rates as opposed to the use of a regression analysis, which computes PDs and LGDs based on historical losses as loans migrate through the various risk rating or delinquency categories.

Under both the current and previous methodologies, loss rates are adjusted to consider qualitative factors such as economic conditions and trends, among others. However, under its new methodology, the Corporation applies a more detailed analysis of qualitative factors that are formally assessed on a quarterly basis by a committee comprised of lending and credit administration personnel.

 

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Table of Contents

As of April 1, 2011, total allocations on $11.5 billion of loans evaluated collectively for impairment under the new methodology were $182.2 million. In comparison, under the Corporation’s previous methodology, total allocations on $11.3 billion of loans evaluated collectively for impairment were $164.2 million.

The Corporation’s conclusion as of March 31, 2011 that its total allowance for credit losses of $271.2 million was sufficient to cover losses inherent in the loan portfolio did not change as a result of its new allowance for credit loss methodology. As noted above, the change in methodology expanded the number of loans evaluated collectively for impairment and reduced the number of loans evaluated individually for impairment. In addition, the change in methodology resulted in shifts in allocations by loan type, as detailed within the tabular information below.

Effective December 31, 2010, the Corporation adopted the provisions of the Financial Accounting Standards FASB 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. In 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 and six months ended June 30, 2011.

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 table under the heading, “Loans, Net of Unearned Income,” above. 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:

 

     June 30,
2011
     December 31,
2010
 
     (in thousands)  

Allowance for loan losses

   $ 266,683       $ 274,271   

Reserve for unfunded lending commitments

     1,950         1,227   
                 

Allowance for credit losses

   $ 268,633       $ 275,498   
                 

The following table presents the activity in the allowance for credit losses for the three and six months ended June 30:

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2011     2010     2011     2010  
     (in thousands)  

Balance at beginning of period

   $ 271,156      $ 269,254      $ 275,498      $ 257,553   

Loans charged off

     (40,675     (31,532     (86,204     (61,524

Recoveries of loans previously charged off

     2,152        2,655        5,339        4,348   
                                

Net loans charged off

     (38,523     (28,877     (80,865     (57,176

Provision for credit losses

     36,000        40,000        74,000        80,000   
                                

Balance at end of period

   $ 268,633      $ 280,377      $ 268,633      $ 280,377   
                                

 

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Table of Contents

The following tables present the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2011:

 

    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     Total  
    (in thousands)  

Three months ended June 30, 2011

                 

Balance at April 1, 2011

  $ 48,558      $ 100,180      $ 5,656      $ 19,575      $ 55,491      $ 4,736      $ 2,576      $ 33,500      $ 270,272   

Loans charged off

    (7,074     (15,406     (1,650     (7,707     (7,468     (681     (689     0        (40,675

Recoveries of loans previously charged off

    191        1,003        2        190        79        433        254        0        2,152   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans charged off

    (6,883     (14,403     (1,648     (7,517     (7,389     (248     (435     0        (38,523

Provision for loan losses

    9,040        10,224        1,862        11,958        7,239        343        590        (6,322     34,934   

Impact of change in allowance methodology

    22,883        (13,388     3,690        7,896        (24,771     (3,076     (944     7,710        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loan losses, including impact of change in allowance methodology (1)

    31,923        (3,164     5,552        19,854        (17,532     (2,733     (354     1,388        34,934   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

  $ 73,598      $ 82,613      $ 9,560      $ 31,912      $ 30,570      $ 1,755      $ 1,787      $ 34,888      $ 266,683   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2011

                 

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

    (17,121     (28,742     (3,118     (12,703     (21,362     (1,972     (1,186     0        (86,204

Recoveries of loans previously charged off

    1,726        1,394        3        234        642        742        598        0        5,339   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans charged off

    (15,395     (27,348     (3,115     (12,469     (20,720     (1,230     (588     0        (80,865

Provision for loan losses

    25,279        21,913        2,531        19,060        17,944        1,392        (521     (14,321     73,277   

Impact of change in allowance methodology

    22,883        (13,388     3,690        7,896        (24,771     (3,076     (944     7,710        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loan losses, including impact of change in allowance methodology (1)

    48,162        8,525        6,221        26,956        (6,827     (1,684     (1,465     (6,611     73,277   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

  $ 73,598      $ 82,613      $ 9,560      $ 31,912      $ 30,570      $ 1,755      $ 1,787      $ 34,888      $ 266,683   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Provision for loan losses is net of a $1.1 million and $723,000 increase in provision applied to unfunded commitments for the three and six months ended June 30, 2011, respectively. The total provision for credit losses, comprised of allocations for both funded and unfunded loans, was $36.0 million and $74.0 million for the three and six months ended June 30, 2011, respectively.

The following tables present loans, net of unearned income and their related allowance for loan losses, by portfolio segment, as of June 30, 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)  

Allowance for loan losses at June 30, 2011:

                 

Evaluated collectively for impairment under FASB ASC Subtopic 450-20

  $ 44,600      $ 53,373      $ 9,560      $ 5,953      $ 18,794      $ 1,597      $ 1,727      $ 34,888      $ 170,492   

Evaluated individually for impairment under FASB ASC Section 310-10-35

    28,998        29,240        0        25,959        11,776        158        60        N/A        96,191   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 73,598      $ 82,613      $ 9,560      $ 31,912      $ 30,570      $ 1,755      $ 1,787      $ 34,888      $ 266,683   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans, net of unearned income at June 30, 2011:

                 

Evaluated collectively for impairment under FASB ASC Subtopic 450-20

  $ 4,329,750      $ 3,587,702      $ 1,626,545      $ 955,863      $ 623,734      $ 330,754      $ 67,773        N/A      $ 11,522,121   

Evaluated individually for impairment under FASB ASC Section 310-10-35

    113,275        91,156        0        67,783        57,854        211        91        N/A        330,370   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,443,025      $ 3,678,858      $ 1,626,545      $ 1,023,646      $ 681,588      $ 330,965      $ 67,864        N/A      $ 11,852,491   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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        N/A        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        N/A      $ 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        N/A        573,606   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,375,980      $ 3,704,384      $ 1,641,777      $ 995,990      $ 801,185      $ 350,161      $ 63,830        N/A      $ 11,933,307   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The Corporation’s unallocated allowance, which was approximately 13% and 15% as of June 30, 2011 and December 31, 2010, respectively, was reasonable and appropriate as the estimates used in the allocation process are inherently imprecise.

N/A – Not applicable

 

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Table of Contents

Impaired Loans

A loan 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.

An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. Impaired loans with balances greater than $1.0 million are evaluated individually for impairment. As of June 30, 2011 and December 31, 2010, substantially all of the Corporation’s individually evaluated 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, construction loans and residential mortgages, or business assets, such as accounts receivable or inventory, in the case of commercial loans. Commercial loans may also be secured by real property.

Impaired loans with balances less than $1.0 million are measured collectively based on a statistical model which applies PDs and LGDs based on historical losses as loans migrate through the various risk rating or delinquency categories.

The following table presents total impaired loans by class segment:

 

    June 30, 2011     Three months ended
June 30, 2011
    Six months ended
June 30, 2011
    December 31, 2010  
    Unpaid
Principal
Balance
    Recorded
Investment
    Related
Allowance
    Average
Recorded
Investment
    Interest
Income
Recognized
(1)
    Average
Recorded
Investment
    Interest
Income
Recognized
    Unpaid
Principal
Balance
    Recorded
Investment
    Related
Allowance
 
    (in thousands)  

With no related allowance recorded:

                   

Real estate - commercial mortgage

  $ 49,335      $ 41,764        N/A      $ 41,139      $ 87      $ 45,510      $ 490      $ 68,583      $ 54,251        N/A   

Commercial - secured

    37,660        35,613        N/A        32,313        15        30,790        161        38,366        27,745        N/A   

Commercial - unsecured

    0        0        N/A        0        0        196        3        710        587        N/A   

Real estate - residential mortgage (2)

    0        0        N/A        0        0        7,071        43        21,598        21,212        N/A   

Construction - commercial residential

    33,882        17,439        N/A        20,322        6        24,333        184        69,624        32,354        N/A   

Construction - commercial

    5,605        3,486        N/A        3,601        1        3,109        21        5,637        2,125        N/A   
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
    126,482        98,302          97,375        109        111,009        902        204,518        138,274     

With a related allowance recorded:

                   

Real estate - commercial mortgage

    92,006        71,511      $ 28,998        70,441        150        81,650        989        111,190        104,069      $ 17,995   

Commercial - secured

    63,700        52,623        26,752        47,747        22        97,723        1,199        202,824        197,674        64,922   

Commercial - unsecured

    3,102        2,920        2,488        3,193        2        4,996        33        8,681        8,603        4,191   

Real estate - residential mortgage (2)

    67,783        67,783        25,959        71,807        487        54,044        577        18,518        18,518        5,950   

Construction - commercial residential

    61,888        34,513        10,530        40,219        13        61,421        448        110,465        103,826        22,155   

Construction - commercial

    303        303        158        313        0        1,089        17        2,642        2,642        715   

Construction - other

    2,113        2,113        1,088        1,687        0        1,124        0        0        0        0   

Consumer - direct

    211        211        158        150        2        100        2        0        0        0   

Leasing and other and overdrafts

    91        91        60        77        0        51        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    291,197        232,068        96,191        235,634        676        302,198        3,265        454,320        435,332        115,928   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 417,679      $ 330,370      $ 96,191      $ 333,009      $ 785      $ 413,207      $ 4,167      $ 658,838      $ 573,606      $ 115,928   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Effective April 1, 2011, all impaired loans, excluding certain accruing Impaired TDRs, were non-accrual loans. Interest income recognized for the three months ended June 30, 2011 represents amounts earned on accruing TDRs.
(2) Impaired residential mortgages include accruing TDRs that were modified in the current calendar year and/or not performing according to their modified terms.

N/A – Not applicable.

As of June 30, 2011 and December 31, 2010, there were $98.3 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.

 

17


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:

 

     June 30, 2011  
     Performing      Delinquent (1)      Non-
performing (2)
     Total  
     (in thousands)  

Real estate - commercial mortgage

   $ 4,314,764       $ 25,537       $ 102,724       $ 4,443,025   

Commercial - secured

     3,333,421         18,699         91,640         3,443,760   

Commercial -unsecured

     230,570         1,313         3,215         235,098   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial - industrial, financial and agricultural

     3,563,991         20,012         94,855         3,678,858   

Real estate - home equity

     1,605,004         12,101         9,440         1,626,545   

Real estate - residential mortgage

     945,952         34,494         43,200         1,023,646   

Construction - commercial residential

     348,197         2,022         52,413         402,632   

Construction - commercial

     223,510         8         3,789         227,307   

Construction - other

     47,305         2,165         2,179         51,649   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Real estate - construction

     619,012         4,195         58,381         681,588   

Consumer - direct

     37,161         496         77         37,734   

Consumer - indirect

     158,988         1,798         89         160,875   

Consumer - other

     128,220         2,212         1,924         132,356   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     324,369         4,506         2,090         330,965   

Leasing and other and overdrafts

     67,344         368         152         67,864   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 11,440,436       $ 101,213       $ 310,842       $ 11,852,491   
  

 

 

    

 

 

    

 

 

    

 

 

 
     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.

 

18


Table of Contents

The following table presents non-performing assets:

 

     June 30,
2011
     December 31,
2010
 
     (in thousands)  

Non-accrual loans

   $ 274,973       $ 280,688   

Accruing loans greater than 90 days past due

     35,869         48,084   
                 

Total non-performing loans

     310,842         328,772   

Other real estate owned (OREO)

     37,493         32,959   
                 

Total non-performing assets

   $ 348,335       $ 361,731   
                 

The following table presents TDRs, by loan type:

 

     June 30,
2011
     December 31,
2010
 
     (in thousands)  

Real-estate – residential mortgage

   $ 37,006       $ 37,826   

Real-estate – commercial mortgage

     30,735         18,778   

Real-estate – construction

     5,589         5,440   

Commercial – industrial, financial and agricultural

     3,055         5,502   

Consumer and home equity

     258         263   
                 

Total accruing TDRs

     76,643         67,809   

Non-accrual TDRs (1)

     44,659         51,175   
                 

Total TDRs

   $ 121,302       $ 118,984   
                 

 

(1) Included within non-accrual loans in table detailing non-performing assets above.

As of June 30, 2011 and December 31, 2010, there were $1.8 million and $1.6 million, respectively, of commitments to lend additional funds to borrowers whose loans were modified under TDRs.

 

19


Table of Contents

The following table presents past due status and non-accrual loans by portfolio segment and class segment:

 

    June 30, 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

  $ 20,376      $ 5,161      $ 5,578      $ 97,146      $ 102,724      $ 128,261      $ 4,314,764      $ 4,443,025   

Commercial - secured

    13,077        5,622        5,892        85,748        91,640        110,339        3,333,421        3,443,760   

Commercial - unsecured

    823        490        295        2,920        3,215        4,528        230,570        235,098   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial - industrial, financial and agricultural

    13,900        6,112        6,187        88,668        94,855        114,867        3,563,991        3,678,858   

Real estate - home equity

    10,112        1,989        9,241        199        9,440        21,541        1,605,004        1,626,545   

Real estate - residential mortgage

    24,031        10,463        12,197        31,003        43,200        77,694        945,952        1,023,646   

Construction - commercial residential

    1,569        453        461        51,952        52,413        54,435        348,197        402,632   

Construction - commercial

    8        0        0        3,789        3,789        3,797        223,510        227,307   

Construction - other

    2,165        0        66        2,113        2,179        4,344        47,305        51,649   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Real estate - construction

    3,742        453        527        57,854        58,381        62,576        619,012        681,588   

Consumer - direct

    343        153        65        12        77        573        37,161        37,734   

Consumer - indirect

    1,489        309        89        0        89        1,887        158,988        160,875   

Consumer - other

    1,226        986        1,924        0        1,924        4,136        128,220        132,356   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer

    3,058        1,448        2,078        12        2,090        6,596        324,369        330,965   

Leasing and other and overdrafts

    339        29        61        91        152        520        67,344        67,864   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 75,558      $ 25,655      $ 35,869      $ 274,973      $ 310,842      $ 412,055      $ 11,440,436      $ 11,852,491   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    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 – Mortgage Servicing Rights

The following table summarizes the changes in mortgage servicing rights (MSRs), which are included in other assets on the consolidated balance sheets:

 

     Three months ended
June 30
    Six months ended
June 30
 
     2011     2010     2011     2010  
     (in thousands)  

Amortized cost:

        

Balance at beginning of period

   $ 32,060      $ 24,517      $ 30,700      $ 23,499   

Originations of mortgage servicing rights

     2,010        1,756        4,668        3,672   

Amortization expense

     (1,261     (946     (2,559     (1,844
                                

Balance at end of period

   $ 32,809      $ 25,327      $ 32,809      $ 25,327   
                                

Valuation allowance:

        

Balance at beginning of period

   $ (1,550   $ (1,000   $ (1,550   $ (1,000

Additions

     0        0        0        0   
                                

Balance at end of period

   $ (1,550   $ (1,000   $ (1,550   $ (1,000
                                

Net MSRs at end of period

   $ 31,259      $ 24,327      $ 31,259      $ 24,327   
                                

MSRs represent the economic value of existing contractual rights to service mortgage loans that have been sold. Accordingly, actual and expected prepayments of the underlying mortgage loans can impact the value of MSRs.

The Corporation estimates the fair value of its MSRs by discounting the estimated cash flows from servicing income, net of expense, over the expected life of the underlying loans at a discount rate commensurate with the risk associated with these assets. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections for mortgage-backed securities with rates and terms comparable to the loans underlying the MSRs.

The Corporation determined that the estimated fair value of MSRs was equal to their book value, net of the valuation allowance, at June 30, 2011. Therefore, no adjustment to the valuation allowance was necessary as of June 30, 2011.

NOTE F – 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 2004 Stock Option and Compensation Plan (Employee 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 June 30     Six months ended June 30  
     2011     2010     2011     2010  
     (in thousands)  

Stock-based compensation expense

   $ 554      $ 318      $ 1,101      $ 611   

Tax benefit

     (119     (66     (255     (128
                                

Stock-based compensation expense, net of tax

   $ 435      $ 252      $ 846      $ 483   
                                

 

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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 Employee Option Plan, result in the acceleration of the vesting of both stock options and restricted stock. As of June 30, 2011, the Employee Option Plan had 13.0 million shares reserved for future grants through 2013. On July 1, 2011, the Corporation granted approximately 616,000 stock options and 267,000 shares of restricted stock under its Employee Option Plan.

On July 1, 2011, the Corporation also granted approximately 11,000 shares of restricted stock to non-employee directors of the holding company under its 2011 Directors’ Equity Participation Plan (Directors’ Plan) that become fully vested after one year. Under the Directors’ Plan, the Corporation can grant equity awards to non-employee holding company and affiliate directors in the form of stock options, restricted stock or common stock. As of June 30, 2011, the Directors’ Plan had 500,000 shares reserved for future grants through 2021.

NOTE G – 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 and six months ended June 30:

 

     Pension Plan  
     Three months ended
June  30
    Six months ended
June 30
 
     2011     2010     2011     2010  
     (in thousands)  

Service cost (1)

   $ 15      $ 26      $ 30      $ 52   

Interest cost

     853        842        1,706        1,684   

Expected return on plan assets

     (837     (802     (1,674     (1,604

Net amortization and deferral

     72        119        144        238   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 103      $ 185      $ 206      $ 370   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The Pension Plan service cost recorded for the three and six months ended June 30, 2011 and 2010, respectively, was related to administrative costs associated with the plan and not due to the accrual of additional participant benefits.

 

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     Postretirement Plan  
     Three months ended
June  30
    Six months ended
June  30
 
     2011     2010     2011     2010  
     (in thousands)  

Service cost

   $ 50      $ 48      $ 101      $ 98   

Interest cost

     107        110        214        220   

Expected return on plan assets

     (1     (1     (2     (2

Net accretion and deferral

     (91     (91     (182     (182
                                

Net periodic benefit cost

   $ 65      $ 66      $ 131      $ 134   
                                

NOTE H – 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:

 

     June 30, 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

   $ 163,795       $ 2,041      $ 140,682       $ 777   

Negative fair values

     3,736         (22     50,527         (760
                      

Net Interest Rate Locks with Customers

        2,019           17   

Forward Commitments:

          

Positive fair values

     49,369         131        558,861         8,479   

Negative fair values

     118,459         (975     0         0   
                      

Net Forward Commitments

        (844        8,479   
                      
      $ 1,175         $ 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 and six months ended June 30:

 

     Three months ended June 30     Six months ended June 30  
     2011     2010     2011     2010  
     (in thousands)  

Interest rate locks with customers (1)

   $ 82      $ 1,499      $ 2,002      $ 2,521   

Forward commitments (1)

     (38     (4,878     (9,323     (6,176
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 44      $ (3,379   $ (7,321   $ (3,655
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Fair value gains and losses recorded as components of mortgage banking income on the consolidated statements of income.