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 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.

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.

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

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

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

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		Retained Earnings			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										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

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

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.

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

)

6,007

State and municipal securities

346

Mortgage-backed securities

630

685

6,990

)

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

U.S. Government sponsored agency securities

4,858

135

)

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


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

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.

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.

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

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.

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.

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

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

)

(40,675

)

Recoveries of loans previously charged off

191

1,003

190

433

254

2,152

Net loans charged off

(6,883

)

(14,403

)

(1,648

)

(7,517

)

(7,389

)

(248

)

(435

)

(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

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

)

(86,204

)

Recoveries of loans previously charged off

1,726

1,394

234

642

742

598

5,339

Net loans charged off

(15,395

)

(27,348

)

(3,115

)

(12,469

)

(20,720

)

(1,230

)

(588

)

(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

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

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.

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.

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.

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

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

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.


	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

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.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company