FULT 9.30.2011 10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459 

FORM 10-Q 

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 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  ý    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  ý    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
 
ý
  
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  ý

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 – 200,013,000 shares outstanding as of October 31, 2011.
FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
INDEX
 
Description
 
Page
 
 
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
(a)
 
 
 
 
 
(b)
 
 
 
 
 
(c)
 
 
 
 
 
(d)
 
 
 
 
 
(e)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Item 1. Financial Statements
 
 
FULTON FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS 
 
(in thousands, except per-share data)
 
September 30,
2011
 
December 31,
2010
 
(unaudited)
 
ASSETS
 
 
 
Cash and due from banks
$
291,870

 
$
198,954

Interest-bearing deposits with other banks
256,360

 
33,297

Loans held for sale
63,554

 
83,940

Investment securities:
 
 
 
Held to maturity (estimated fair value of $6,774 in 2011 and $7,818 in 2010)
6,734

 
7,751

Available for sale
2,769,823

 
2,853,733

Loans, net of unearned income
11,895,655

 
11,933,307

Less: Allowance for loan losses
(266,978
)
 
(274,271
)
Net Loans
11,628,677

 
11,659,036

Premises and equipment
206,170

 
208,016

Accrued interest receivable
52,460

 
53,841

Goodwill
535,940

 
535,518

Intangible assets
9,158

 
12,461

Other assets
475,105

 
628,707

Total Assets
$
16,295,851

 
$
16,275,254

LIABILITIES
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
2,535,744

 
$
2,194,988

Interest-bearing
10,101,880

 
10,193,593

Total Deposits
12,637,624

 
12,388,581

Short-term borrowings:
 
 
 
Federal funds purchased
75,962

 
267,844

Other short-term borrowings
372,993

 
406,233

Total Short-Term Borrowings
448,955

 
674,077

Accrued interest payable
27,678

 
33,333

Other liabilities
171,430

 
179,424

Federal Home Loan Bank advances and long-term debt
1,025,505

 
1,119,450

Total Liabilities
14,311,192

 
14,394,865

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $2.50 par value, 600 million shares authorized, 216.0 million shares issued in 2011 and 215.4 million shares issued in 2010
540,000

 
538,492

Additional paid-in capital
1,423,149

 
1,420,127

Retained earnings
239,986

 
158,453

Accumulated other comprehensive income:
 
 
 
Unrealized gains on investment securities not other-than-temporarily impaired
35,414

 
22,354

Unrealized non-credit related losses on other-than-temporarily impaired debt securities
(1,064
)
 
(2,355
)
Unrecognized pension and postretirement plan costs
(4,451
)
 
(4,414
)
Unamortized effective portions of losses on forward-starting interest rate swaps
(2,988
)
 
(3,090
)
Accumulated Other Comprehensive Income
26,911

 
12,495

Treasury stock, 16.1 million shares in 2011 and 16.3 million shares in 2010, at cost
(245,387
)
 
(249,178
)
Total Shareholders’ Equity
1,984,659

 
1,880,389

Total Liabilities and Shareholders’ Equity
$
16,295,851

 
$
16,275,254

 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 

3
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
(in thousands, except per-share data)
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2011
 
2010
 
2011
 
2010
INTEREST INCOME
 
 
 
 
 
 
 
Loans, including fees
$
149,460

 
$
158,060

 
$
448,707

 
$
473,222

Investment securities:
 
 
 
 
 
 
 
Taxable
20,166

 
22,363

 
62,722

 
75,658

Tax-exempt
2,896

 
3,226

 
9,217

 
10,169

Dividends
698

 
686

 
2,077

 
2,075

Loans held for sale
425

 
919

 
1,417

 
2,142

Other interest income
91

 
102

 
225

 
358

Total Interest Income
173,736

 
185,356

 
524,365

 
563,624

INTEREST EXPENSE
 
 
 
 
 
 
 
Deposits
19,684

 
29,755

 
64,745

 
95,312

Short-term borrowings
151

 
267

 
573

 
1,206

Long-term debt
12,408

 
15,148

 
37,346

 
49,253

Total Interest Expense
32,243

 
45,170

 
102,664

 
145,771

Net Interest Income
141,493

 
140,186

 
421,701

 
417,853

Provision for credit losses
31,000

 
40,000

 
105,000

 
120,000

Net Interest Income After Provision for Credit Losses
110,493

 
100,186

 
316,701

 
297,853

OTHER INCOME
 
 
 
 
 
 
 
Service charges on deposit accounts
15,164

 
14,752

 
42,801

 
44,501

Other service charges and fees
12,507

 
11,540

 
36,698

 
33,174

Investment management and trust services
8,914

 
8,604

 
27,756

 
25,347

Mortgage banking income
7,942

 
12,399

 
19,454

 
20,447

Other
4,777

 
3,877

 
14,177

 
12,194

Total other-than-temporary impairment losses
(509
)
 
(2,428
)
 
(1,601
)
 
(12,013
)
Less: Portion of (gain) loss recognized in other comprehensive income (before taxes)
(80
)
 
(387
)
 
(672
)
 
723

Net other-than-temporary impairment losses
(589
)
 
(2,815
)
 
(2,273
)
 
(11,290
)
Net gains on sale of investment securities
146

 
4,641

 
3,780

 
11,797

Net investment securities gains (losses)
(443
)
 
1,826

 
1,507

 
507

Total Other Income
48,861

 
52,998

 
142,393

 
136,170

OTHER EXPENSES
 
 
 
 
 
 
 
Salaries and employee benefits
58,948

 
54,533

 
169,326

 
161,532

Net occupancy expense
10,790

 
10,519

 
33,030

 
32,688

FDIC insurance expense
3,732

 
4,709

 
11,750

 
14,799

Data processing
3,473

 
3,187

 
10,059

 
9,915

Other real estate owned and repossession expense
3,270

 
2,620

 
7,815

 
7,176

Professional fees
3,247

 
3,040

 
9,198

 
8,621

Equipment expense
3,032

 
2,956

 
9,541

 
8,710

Software
2,142

 
2,039

 
6,146

 
5,359

Marketing
1,923

 
2,601

 
6,622

 
6,702

Intangible amortization
953

 
1,293

 
3,303

 
3,948

Other
15,079

 
15,214

 
43,840

 
44,388

Total Other Expenses
106,589

 
102,711

 
310,630

 
303,838

Income Before Income Taxes
52,765

 
50,473

 
148,464

 
130,185

Income taxes
13,441

 
12,793

 
38,970

 
33,343

Net Income
39,324

 
37,680

 
109,494

 
96,842

Preferred stock dividends and discount accretion
—

 
(6,172
)
 
—

 
(16,303
)
Net Income Available to Common Shareholders
$
39,324

 
$
31,508

 
$
109,494

 
$
80,539

 
 
 
 
 
 
 
 
PER COMMON SHARE:
 
 
 
 
 
 
 
Net income (basic)
$
0.20

 
$
0.16

 
$
0.55

 
$
0.43

Net income (diluted)
0.20

 
0.16

 
0.55

 
0.43

Cash dividends
0.05

 
0.03

 
0.14

 
0.09

See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 


4
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
 

 
 
 
Common Stock
 
 
 
Retained
Earnings
 
 
 
Treasury
Stock
 
Total
 
Preferred
Stock
 
Shares
Outstanding
 
Amount
 
Additional Paid-in
Capital
 
Accumulated
Other Comprehensive
Income
 
 
(in thousands)
December 31, 2010
$
—

 
199,050

 
$
538,492

 
$
1,420,127

 
$
158,453

 
$
12,495

 
$
(249,178
)
 
$
1,880,389

Comprehensive income:

 

 

 

 

 

 

 
 
Net income

 

 

 

 
109,494

 

 

 
109,494

Other comprehensive income

 

 

 

 

 
14,416

 

 
14,416

Total comprehensive income

 

 

 

 

 

 

 
123,910

Stock issued, including related tax benefits

 
841

 
1,508

 
(451
)
 

 

 
3,791

 
4,848

Stock-based compensation awards

 

 

 
3,473

 

 

 

 
3,473

Common stock cash dividends - $0.14 per share

 

 

 

 
(27,961
)
 

 

 
(27,961
)
September 30, 2011
$
—

 
199,891

 
$
540,000

 
$
1,423,149

 
$
239,986

 
$
26,911

 
$
(245,387
)
 
$
1,984,659

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 

 

 

 
96,842

 

 

 
96,842

Other comprehensive income

 

 

 

 

 
28,332

 

 
28,332

Total comprehensive income

 

 

 

 

 

 

 
125,174

Stock issued, including related tax benefits

 
22,519

 
55,751

 
171,205

 

 

 
3,283

 
230,239

Stock-based compensation awards

 

 

 
1,428

 

 

 

 
1,428

Redemption of preferred stock and repurchase of common stock warrant
(376,500
)





(10,800
)








(387,300
)
Preferred stock discount accretion
6,210

 

 

 

 
(6,210
)
 

 

 
—

Preferred stock cash dividends

 

 

 

 
(12,498
)
 

 

 
(12,498
)
Common stock cash dividends - $0.09 per share

 

 

 

 
(17,215
)
 

 

 
(17,215
)
September 30, 2010
$
—

 
198,883

 
$
538,242

 
$
1,419,563

 
$
132,918

 
$
35,790

 
$
(250,203
)
 
$
1,876,310

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

5
FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(in thousands)
 
Nine Months Ended
September 30
 
2011
 
2010
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
109,494

 
$
96,842

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

 

Provision for credit losses
105,000

 
120,000

Depreciation and amortization of premises and equipment
15,824

 
15,371

Net amortization of investment securities premiums
2,596

 
2,916

Investment securities gains
(1,507
)
 
(507
)
Net decrease (increase) in loans held for sale
20,386

 
(17,856
)
Amortization of intangible assets
3,303

 
3,948

Stock-based compensation
3,473

 
1,428

Decrease in accrued interest receivable
1,381

 
3,348

Decrease (increase) in other assets
13,599

 
(9,424
)
Decrease in accrued interest payable
(5,655
)
 
(11,194
)
Decrease in other liabilities
(18,862
)
 
(17,527
)
Total adjustments
139,538

 
90,503

Net cash provided by operating activities
249,032

 
187,345

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of securities available for sale
419,803

 
401,518

Proceeds from maturities of securities held to maturity
388

 
382

Proceeds from maturities of securities available for sale
440,475

 
567,825

Purchase of securities held to maturity
(28
)
 
(194
)
Purchase of securities available for sale
(616,586
)
 
(467,698
)
Increase in short-term investments
(223,063
)
 
(176,830
)
Net increase in loans
(74,029
)
 
(70,873
)
Net purchases of premises and equipment
(13,978
)
 
(15,169
)
Net cash (used in) provided by investing activities
(67,018
)
 
238,961

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in demand and savings deposits
728,652

 
892,809

Net decrease in time deposits
(479,609
)
 
(422,606
)
Decrease in short-term borrowings
(225,122
)
 
(397,859
)
Additions to long-term debt
—

 
47,900

Repayments of long-term debt
(93,945
)
 
(389,160
)
Net proceeds from issuance of stock
4,848

 
230,239

Redemption of preferred stock and common stock warrant
—

 
(387,300
)
Dividends paid
(23,922
)
 
(29,037
)
Net cash used in financing activities
(89,098
)
 
(455,014
)
 
 
 
 
Net Increase (Decrease) in Cash and Due From Banks
92,916

 
(28,708
)
Cash and Due From Banks at Beginning of Period
198,954

 
284,508

Cash and Due From Banks at End of Period
$
291,870

 
$
255,800

 
 
 
 
Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
108,319

 
$
156,965

Income taxes
21,216

 
41,018

See Notes to Consolidated Financial Statements
 
 
 
 

6
FULTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE A – Basis of Presentation
The accompanying unaudited consolidated financial statements of Fulton Financial Corporation (the Corporation) have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 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 September 30, 2011 and September 30, 2010, 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
September 30
 
Nine Months Ended
September 30
 
2011
 
2010
 
2011
 
2010
 
 
 
(in thousands)
 
 
Weighted average shares outstanding (basic)
199,028

 
198,282

 
198,801

 
188,306

Effect of dilutive securities
786

 
510

 
743

 
529

Weighted average shares outstanding (diluted)
199,814

 
198,792

 
199,544

 
188,835

For the three and nine months ended September 30, 2011, 5.8 million and 5.0 million stock options, respectively, were excluded from the diluted net income per share computation as their effect would have been anti-dilutive. For the three and nine months ended September 30, 2010, 5.8 million and 5.4 million stock options, respectively, were excluded from the diluted net income per share computation as their effects would have been anti-dilutive.

7

The following table presents the components of other comprehensive income: 
 
Nine Months Ended
September 30
 
2011
 
2010
 
(in thousands)
Unrealized gain on securities (net of an $8.2 million and $16.4 million tax effect in 2011 and 2010, respectively)
$
15,143

 
$
30,390

Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities (net of a $100,000 and $1.0 million tax effect in 2011 and 2010, respectively)
187

 
(1,886
)
Unrealized gain on derivative financial instruments (net of a $55,000 tax effect in 2011 and 2010) (1)
102

 
102

(Accretion) amortization of net unrecognized pension and postretirement items (net of a $19,000 and $30,000 tax effect in 2011 and 2010, respectively)
(37
)
 
55

Reclassification adjustment for securities gains included in net income (net of a $527,000 and $177,000 tax effect in 2011 and 2010, respectively)
(979
)
 
(329
)
Other comprehensive income
$
14,416

 
$
28,332

 
(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 September 30, 2011
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(in thousands)
U.S. Government sponsored agency securities
$
5,987

 
$
—

 
$
(7
)
 
$
5,980

State and municipal securities
179

 
—

 
—

 
179

Mortgage-backed securities
568

 
47

 
—

 
615

 
$
6,734

 
$
47

 
$
(7
)
 
$
6,774

Available for Sale at September 30, 2011
 
 
 
 
 
 
 
Equity securities
$
123,483

 
$
2,291

 
$
(5,408
)
 
$
120,366

U.S. Government securities
1,325

 
—

 
—

 
1,325

U.S. Government sponsored agency securities
4,735

 
110

 
(1
)
 
4,844

State and municipal securities
320,969

 
13,091

 
—

 
334,060

Corporate debt securities
130,455

 
4,892

 
(12,912
)
 
122,435

Collateralized mortgage obligations
1,078,396

 
29,212

 
(353
)
 
1,107,255

Mortgage-backed securities
802,142

 
36,763

 
(69
)
 
838,836

Auction rate securities
255,472

 
283

 
(15,053
)
 
240,702

 
$
2,716,977

 
$
86,642

 
$
(33,796
)
 
$
2,769,823


8
Held to Maturity at December 31, 2010
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(in thousands)
U.S. Government sponsored agency securities
$
6,339

 
$
—

 
$
(1
)
 
$
6,338

State and municipal securities
346

 
—

 
—

 
346

Mortgage-backed securities
1,066

 
68

 
—

 
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

 
—

 
—

 
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

Securities carried at $1.9 billion as of September 30, 2011 and December 31, 2010 were pledged as collateral to secure public and trust deposits and customer repurchase agreements. Available for sale equity securities include restricted investment securities issued by the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank totaling $85.4 million and $96.4 million as of September 30, 2011 and December 31, 2010, respectively.
The amortized cost and estimated fair values of debt securities as of September 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
$
6,052

 
$
6,045

 
$
70,852

 
$
71,305

Due from one year to five years
114

 
114

 
46,088

 
47,500

Due from five years to ten years
—

 
—

 
127,391

 
135,592

Due after ten years
—

 
—

 
468,625

 
448,969

 
6,166

 
6,159

 
712,956

 
703,366

Collateralized mortgage obligations
—

 
—

 
1,078,396

 
1,107,255

Mortgage-backed securities
568

 
615

 
802,142

 
838,836

 
$
6,734

 
$
6,774

 
$
2,593,494

 
$
2,649,457


9
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 September 30, 2011
 
 
 
 
 
 
 
Equity securities
$
146

 
$
—

 
$
(244
)
 
$
(98
)
Debt securities
—

 
—

 
(345
)
 
(345
)
Total
$
146

 
$
—

 
$
(589
)
 
$
(443
)
Three months ended September 30, 2010:
 
 
 
 
 
 
 
Equity securities
$
601

 
$
(391
)
 
$
(480
)
 
$
(270
)
Debt securities
4,485

 
(54
)
 
(2,335
)
 
2,096

Total
$
5,086

 
$
(445
)
 
$
(2,815
)
 
$
1,826

Nine months ended September 30, 2011
 
 
 
 
 
 
 
Equity securities
$
194

 
$
—

 
$
(575
)
 
$
(381
)
Debt securities
3,605

 
(19
)
 
(1,698
)
 
1,888

Total
$
3,799

 
$
(19
)
 
$
(2,273
)
 
$
1,507

Nine months ended September 30, 2010:
 
 
 
 
 
 
 
Equity securities
$
1,451

 
$
(391
)
 
$
(1,813
)
 
$
(753
)
Debt securities
10,809

 
(72
)
 
(9,477
)
 
1,260

Total
$
12,260

 
$
(463
)
 
$
(11,290
)
 
$
507

The other-than-temporary impairment charges for equity securities during the three and nine months ended September 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 September 30, 2011, after other-than-temporary impairment charges, the financial institutions stock portfolio had a cost basis of $31.1 million and a fair value of $27.9 million.
The credit related other-than-temporary impairment charges for debt securities during the three and nine months ended September 30, 2011, included $53,000 and $1.4 million, respectively, for investments in pooled trust preferred securities issued by financial institutions. In addition, during the third quarter of 2011, the Corporation recorded $292,000 of other-than-temporary impairment charges for investments in student loan auction rate securities, also known as auction rate certificates (ARCs). The credit related other-than-temporary impairment charges for debt securities during the three and nine months ended September 30, 2010 were for investments in pooled trust preferred securities issued by financial institutions. Other-than-temporary impairment charges related to debt securities were determined based on expected cash flows models.
The following table presents a summary of the cumulative credit related other-than-temporary impairment charges, recognized as components of earnings, for debt securities still held by the Corporation:
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2011
 
2010
 
2011
 
2010
 
(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period
$
(28,876
)
 
$
(22,754
)
 
$
(27,560
)
 
$
(15,612
)
Additions for credit losses recorded which were not previously recognized as components of earnings
(345
)
 
(2,335
)
 
(1,698
)
 
(9,477
)
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security
40

 
21

 
77

 
21

Balance of cumulative credit losses on debt securities, end of period
$
(29,181
)
 
$
(25,068
)
 
$
(29,181
)
 
$
(25,068
)

10
The following table presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 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
$
5,401

 
$
(7
)
 
$
175

 
$
(1
)
 
$
5,576

 
$
(8
)
Corporate debt securities
16,909

 
(1,060
)
 
41,371

 
(11,852
)
 
58,280

 
(12,912
)
Collateralized mortgage obligations
101,324

 
(353
)
 
—

 
—

 
101,324

 
(353
)
Mortgage-backed securities
26,100

 
(69
)
 
—

 
—

 
26,100

 
(69
)
Auction rate securities
37,059

 
(1,915
)
 
182,341

 
(13,138
)
 
219,400

 
(15,053
)
Total debt securities
186,793

 
(3,404
)
 
223,887

 
(24,991
)
 
410,680

 
(28,395
)
Equity securities
13,747

 
(4,951
)
 
1,316

 
(457
)
 
15,063

 
(5,408
)
 
$
200,540

 
$
(8,355
)
 
$
225,203

 
$
(25,448
)
 
$
425,743

 
$
(33,803
)
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 September 30, 2011 to be other-than-temporarily impaired.
The unrealized holding losses on 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 noted above, during the three months ended September 30, 2011, the Corporation recorded $292,000 of other-than-temporary impairment charges for two individual ARCs based on an expected cash flows model. After other-than-temporary impairment charges, the two other-than-temporarily impaired ARCs had a cost basis of $1.6 million and a fair value of $1.1 million. These other-than-temporarily impaired ARCs have principal payments supported by non-guaranteed private student loans, as opposed to Federally guaranteed student loans. In addition, the student loans underlying these other-than-temporarily impaired ARCs had actual defaults of approximately 16%, resulting in an erosion of parity levels, or the ratio of total underlying ARC collateral to total bond values, to approximately 85% as of September 30, 2011. 
As of September 30, 2011, approximately $192 million, or 80%, of the ARCs were rated above investment grade, with approximately $144 million, or 60%, AAA rated. Approximately $49 million, or 20%, of ARCs were rated below investment grade by at least one ratings agency or were not rated. Of this amount, approximately $28 million, or 58%, of the student loans underlying the ARCs have principal payments which are guaranteed by the Federal government. In total, approximately $214 million, or 89%, of the student loans underlying the ARCs have principal payments which are guaranteed by the Federal government. As of September 30, 2011, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with a fair value of $241 million were not subject to any additional other-than-temporary impairment charges as of September 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.
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 September 30, 2011.

11
The following table presents the amortized cost and estimated fair values of corporate debt securities:
 
September 30, 2011
 
December 31, 2010
 
Amortized
cost
 
Estimated
fair value
 
Amortized
cost
 
Estimated
fair value
 
(in thousands)
Single-issuer trust preferred securities
$
86,366

 
$
77,861

 
$
91,257

 
$
81,789

Subordinated debt
35,080

 
36,754

 
34,995

 
35,915

Pooled trust preferred securities
6,464

 
5,275

 
8,295

 
4,528

Corporate debt securities issued by financial institutions
127,910

 
119,890

 
134,547

 
122,232

Other corporate debt securities
2,545

 
2,545

 
2,554

 
2,554

Available for sale corporate debt securities
$
130,455

 
$
122,435

 
$
137,101

 
$
124,786


The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $8.5 million at September 30, 2011. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three or nine months ended September 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 $42.1 million and an estimated fair value of $38.7 million at September 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 $10.8 million and an estimated fair value of $9.0 million at September 30, 2011 were not rated by any ratings agency.
The Corporation holds ten pooled trust preferred securities. As of September 30, 2011, nine of these securities, with an amortized cost of $5.8 million and an estimated fair value of $4.7 million, were rated below investment grade by at least one ratings agency, with ratings ranging from C to Ca. For each of the nine pooled trust preferred securities rated below investment grade, the class of securities held by the Corporation is below the most senior tranche, with the Corporation’s interests being subordinate to other investors in the pool. The Corporation determines the fair value of pooled trust preferred securities based on quotes provided by third-party brokers.
The amortized cost of pooled trust preferred securities is the purchase price of the securities, net of cumulative credit related other-than-temporary impairment charges, determined using an expected cash flows model. The most significant input to the expected cash flows model was the expected payment deferral rate for each pooled trust preferred security. The Corporation evaluates the financial metrics, such as capital ratios and non-performing asset ratios, of the individual financial institution issuers that comprise each pooled trust preferred security to estimate its expected deferral rate. The actual weighted average cumulative defaults and deferrals as a percentage of original collateral were approximately 39% as of September 30, 2011. The discounted cash flow modeling for pooled trust preferred securities held by the Corporation as of September 30, 2011 assumed, on average, an additional 19% expected deferral rate.
Based on management’s evaluations, corporate debt securities with a fair value of $122.4 million were not subject to any additional other-than-temporary impairment charges as of September 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.



12

NOTE D – Loans and Allowance for Credit Losses
Loans, Net of Unearned Income
Loans, net of unearned income are summarized as follows:
 
September 30, 2011
 
December 31, 2010
 
(in thousands)
Real-estate – commercial mortgage
$
4,491,155

 
$
4,375,980

Commercial – industrial, financial and agricultural
3,690,164

 
3,704,384

Real-estate – home equity
1,630,880

 
1,641,777

Real-estate – residential mortgage
1,041,463

 
995,990

Real-estate – construction
648,398

 
801,185

Consumer
327,054

 
350,161

Leasing and other
59,337

 
61,017

Overdrafts
13,646

 
10,011

Loans, gross of unearned income
11,902,097

 
11,940,505

Unearned income
(6,442
)
 
(7,198
)
Loans, net of unearned income
$
11,895,655

 
$
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 were: (1)  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) 90 days or more past due according to their modified terms; or (3) 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 on a 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.

13

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 in 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 September 30, 2011, approximately 83% 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 $1.0 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.
•
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. 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 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, in this case for the three and nine months ended September 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.

14
The following table presents the components of the allowance for credit losses:
 
September 30,
2011
 
December 31,
2010
 
(in thousands)
Allowance for loan losses
$
266,978

 
$
274,271

Reserve for unfunded lending commitments
1,839

 
1,227

Allowance for credit losses
$
268,817

 
$
275,498

The following table presents the activity in the allowance for credit losses for the three and nine months ended September 30:
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2011
 
2010
 
2011
 
2010
 
(in thousands)
Balance at beginning of period
$
268,633

 
$
280,377

 
$
275,498

 
$
257,553

Loans charged off
(32,897
)
 
(38,797
)
 
(119,101
)
 
(100,321
)
Recoveries of loans previously charged off
2,081

 
3,294

 
7,420

 
7,642

Net loans charged off
(30,816
)
 
(35,503
)
 
(111,681
)
 
(92,679
)
Provision for credit losses
31,000

 
40,000

 
105,000

 
120,000

Balance at end of period
$
268,817

 
$
284,874

 
$
268,817

 
$
284,874


The following tables present the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 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 September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at July 1, 2011
$
73,598

 
$
82,613

 
$
9,560

 
$
31,912

 
$
30,570

 
$
1,755

 
$
1,787

 
$
34,888

 
$
266,683

Loans charged off
(5,730
)
 
(14,840
)
 
(1,158
)
 
(1,514
)
 
(8,535
)
 
(634
)
 
(486
)
 
—

 
(32,897
)
Recoveries of loans previously charged off
249

 
695

 
23

 
36

 
595

 
291

 
192

 
—

 
2,081

Net loans charged off
(5,481
)
 
(14,145
)
 
(1,135
)
 
(1,478
)
 
(7,940
)
 
(343
)
 
(294
)
 
—

 
(30,816
)
Provision for loan losses (1)
13,066

 
11,669

 
1,418

 
2,902

 
10,415

 
2,990

 
768

 
(12,117
)
 
31,111

Balance at September 30, 2011
$
81,183

 
$
80,137

 
$
9,843

 
$
33,336

 
$
33,045

 
$
4,402

 
$
2,261

 
$
22,771

 
$
266,978

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 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
(22,851
)
 
(43,582
)
 
(4,276
)
 
(14,217
)
 
(29,897
)
 
(2,606
)
 
(1,672
)
 
—

 
(119,101
)
Recoveries of loans previously charged off
1,975

 
2,089

 
26

 
270

 
1,237

 
1,033

 
790

 
—

 
7,420

Net loans charged off
(20,876
)
 
(41,493
)
 
(4,250
)
 
(13,947
)
 
(28,660
)
 
(1,573
)
 
(882
)
 
—

 
(111,681
)
Provision for loan losses
38,345

 
33,582

 
3,949

 
21,962

 
28,359

 
4,382

 
247

 
(26,438
)
 
104,388

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)
61,228

 
20,194

 
7,639

 
29,858

 
3,588

 
1,306

 
(697
)
 
(18,728
)
 
104,388

Balance at September 30, 2011
$
81,183

 
$
80,137

 
$
9,843

 
$
33,336

 
$
33,045

 
$
4,402

 
$
2,261

 
$
22,771

 
$
266,978

 
(1)
Provision for loan losses is net of a $111,000 decrease and $612,000 increase in provision applied to unfunded commitments for the three and nine months ended September 30, 2011, respectively. The total provision for credit losses, comprised of allocations for both funded and unfunded loans, was $31.0 million and $105.0 million for the three and nine months ended September 30, 2011, respectively.

15
The following tables present loans, net of unearned income and their related allowance for loan losses, by portfolio segment, as of September 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 September 30, 2011:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Evaluated collectively for impairment under FASB ASC Subtopic 450-20
$
47,914

 
$
51,510

 
$
9,843

 
$
7,142

 
$
20,480

 
$
1,773

 
$
2,205

 
$
22,771

 
$
163,638

Evaluated individually for impairment under FASB ASC Section 310-10-35
33,269

 
28,627

 
—

 
26,194

 
12,565

 
2,629

 
56

 
N/A

 
103,340

 
$
81,183

 
$
80,137

 
$
9,843

 
$
33,336

 
$
33,045

 
$
4,402

 
$
2,261

 
$
22,771

 
$
266,978

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net of unearned income at September 30, 2011:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Evaluated collectively for impairment under FASB ASC Subtopic 450-20
$
4,377,383

 
$
3,603,914

 
$
1,630,880

 
$
975,463

 
$
596,581

 
$
322,113

 
$
66,455

 
N/A

 
$
11,572,789

Evaluated individually for impairment under FASB ASC Section 310-10-35
113,772

 
86,250

 
—

 
66,000

 
51,817

 
4,941

 
86

 
N/A

 
322,866

 
$
4,491,155

 
$
3,690,164

 
$
1,630,880

 
$
1,041,463

 
$
648,398

 
$
327,054

 
$
66,541

 
N/A

 
$
11,895,655

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
—

 
5,950

 
22,870

 
—

 
—

 
N/A

 
115,928